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Press Release

The Case for Budget Deficits


“This nation can afford to reduce taxes - we can afford a temporary deficit - but we cannot afford to do nothing. For on the strength of our free economy rests the hope of all free men. We shall not fail their faith - and God willing, free men and free nations shall prosper and prevail.”
John F. Kennedy - December 14,1962 speech to the Economic Club of NY.

John F. Kennedy was right about tax cuts back in 1962, and a lot of today’s elected leaders would do well to heed his advice today. After the Kennedy tax cuts, federal tax revenues climbed from $94 billion in 1961 to $153 billion in 1968, an increase of 33 percent after adjusting for inflation.

Compared to 1962, the U.S. tax burden is higher and vastly more complicated today. That makes the case for tax cuts even stronger: simplification and marginal rate tax relief will most certainly boost revenues over the medium term.

The Return of the Budget Deficit

So, what stands in the way? Unfortunately, among political elites and the media, there’s increasing concern about the size of the budget deficit, which will soar past $300 billion in 2003, and our ability to “afford” the Bush tax cut plan.

Many of these same tax cut naysayers also happen to be some biggest spenders in Washington. That’s irony, or maybe hypocrisy. The folks arguing that the Bush tax cut proposal is “too large, reckless, and we can’t afford it” are simultaneously working on a spending binge that is truly reckless and unsustainable— in fact, they’ve managed to grow government spending by 22% in the last two years alone!

Indeed, as the chart above shows, government spending has grown faster than Yao Ming over the past decade. There’s a budget deficit alright, and it is largely the result of unsustainable spending growth, and a soft economy. As the White House Budget Director Mitch Daniels says, “It’s now clear that the unexpected surge in revenues toward the end of the last decade was temporary, and that revenues are returning to historic levels… it is absolutely essential that we set aside business as usual and keep tight control over all other spending.” Spending is simply too high, and unchecked spending is the primary cause of all this new red ink.

Liberals ignore this evidence and instead claim that the Bush tax cuts from 2001 are the cause of the current red ink. That claim is wrong. According to the U.S. Treasury Department, the 2001 tax cut accounted for less than ten percent of the shift from surplus in FY 2001 to deficits in FY 2002. By comparison, lower revenues from the weak economy and the sudden drop in capital gains tax revenues (due to the bursting of the stock market bubble) accounted for roughly two-thirds of the swing. The remainder of the shift was due to increased spending for national priorities such as national defense and homeland security. It’s the spending, spending, spending!

The fix to the soft economy and to the budget deficit is President Bush’s proposed tax relief plan. The tax code’s complexity and high rates are a major drag on our economy. That’s especially true for the high taxes on savings and investment—especially the double taxation of capital formation found in the death tax, the capital gains tax, and the dividend tax. Americans pay taxes when we earn money; we should not be forced to pay additional taxes when we invest that money in businesses that create jobs and grow the economy. All forms of double taxation should be repealed.
Full repeal is exactly what President Bush wants to do for the tax on dividends. That may increase the deficit in the near term, but it will spark new investment and long-term economic growth.
New Treasury Secretary John Snow is carrying this message to Capitol Hill and elsewhere. On Tuesday, he told the House Ways and Means Committee, “It was a surplus on paper, it was never there in reality…[Deficits] don't disrupt financial markets, they don't lead to higher interest rates and they're clearly manageable. The fact of the matter is a lot of people…don't want the [President’s tax] plan, and the deficit is an argument that is convenient but it's not a substantive attack on the merits of the plan."

Secretary Snow address another common argument in Washington: that budget deficits will drive up interest rates, because the government is competing for scarce capital. Since interest rates are just a measure of the price of money, more demand for money by the federal government will drive up interest rates.

While this relationship is a staple of Economics 101, the United States is very lucky because interest rates are determined by the global capital market. Fortunately, there are plenty of foreign investors willing to buy our government bonds and invest in the United States. In fact, foreign investors hold more than thirty percent of U.S. government debt. Further, a recent paper by the U.S. Department of Treasury found that “International evidence shows no relationship between government debt and interest rates.”

Of course, my own belief is that the budget should be balanced. As a matter of moral principle, the government shouldn’t spend more than it takes from taxpayers every year. We shouldn’t push the burden of today’s spending on future generations. I’d love to pass the Bush tax plan and still balance the budget by cutting spending. Unfortunately, Congress is not prepared to take that step. So the only option is running a relatively short-term budget deficit in order to pass tax relief and tax reform. Because of the long-term economic growth that will result, the deficits caused by passing the Bush tax plan are a deal worth making.

As President Bush says, “I do not accept the assumption that it is somehow ‘risky’ to let taxpayers keep more of their own money.” Let’s work hard and get this tax package passed, and get the economy growing again.