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Press Release

    The Economic Justification for Tax Cuts

    03/03/2001

    Copley News Service, 03/04/2001

    Reporters routinely trap Republican candidates into answering the political equivalent of the question "When did you stop beating your wife?": "What's more important, saving Social Security or cutting tax rates?" The proper response is, the only way to save Social Security is to cut tax rates.

    Republicans get trapped because they never seem to learn the simple yet profound truth expounded by President John F. Kennedy in 1961: "It is a paradoxical truth that tax rates are too high today and tax revenues are too low."

    Sen. John McCain repeatedly falls into the trap and chooses Social Security over tax rate reductions, whereas a true Reaganite would understand that the two are not mutually exclusive. George Bush believes it is possible to do both because he understands the proposition put forth by President Kennedy and confirmed by Ronald Reagan: "The purpose of cutting taxes now is . . . to achieve a more prosperous, expanding economy" and "the soundest way to raise the revenues in the long run is to cut the rates now."

    Tax revenues are too low today and always will be under the current tax code because they are insufficient to make good on our $5 trillion unfunded Social Security liability. Retiring the national debt will do nothing to change that fact. Tax rates are too high because they are draining away too large a share of our economic output and preventing our future standard of living from rising to its highest achievable level.

    Many Americans are enjoying incredible prosperity, but the pervasive fear is that sooner or later the prosperity will end and it won't reach to the lowest rungs of the economic ladder before the crunch comes. There is also a growing awareness that even if the crunch doesn't come sooner from a policy mistake by Congress or the Fed, it will come later when the baby-boom generation begins to retire and the unfunded Social Security system hits the wall.

    Even though tax revenues as a percent of GDP are at 20.5 percent, near an all-time high, and will continue to hover in the stratosphere above 20 percent for years to come unless tax rates are reduced, and even though there is universal agreement that the federal tax code is an abomination and Social Security is approaching bankruptcy, public opinion polls are routinely trotted out to demonstrate that people prefer the federal government to keep tax rates high so it can retire public debt. This result is guaranteed by the way the question is asked. First, pollsters fallaciously identify debt retirement with "saving Social Security," and then they routinely ask people to choose between the false dichotomy of saving Social Security or cutting tax rates.

    By relying on these polls, the political establishment is misreading the electorate completely. Voters have given up on politicians when it comes to seriously cutting tax rates, overhauling the tax code and fixing Social Security. They are no longer taken in by the offers of ersatz tax cuts and the schemes that purport to fix Social Security by raiding Social Security taxes to pay down public debt while allowing the unfunded Social Security liability to mount. Therefore, it is not surprising that voters acquiesce to using budget surpluses for debt retirement because the Republican Party has failed to offer a better alternative.

    The better alternative is to replace this tax code with a simple, pro-growth, low-tax-rate, capital-friendly system that will lengthen, strengthen and broaden the economic expansion indefinitely into the future. Cutting tax rates substantially across the board today is the only way to increase future tax revenues above current projections at the same time the tax burden (revenues as a share of gross domestic product) is reduced. Then, sufficient revenues will be generated to ensure that current retirees receive every penny they have coming in Social Security benefits while retirement for tomorrow's retirees is funded by allowing workers to put their payroll tax contributions into personal retirement accounts.

    I have made a career of urging Congress and the president to cut tax rates, and I believe people will support tax rate reductions if the reason for cutting them is explained. As it stands, Republicans have promoted tax rate reductions as just another means of government putting money in people's pockets, not as a means to achieve a larger worthy national objective. Voters are plenty interested in tax cuts as a means to a larger end. Conservatives must begin explaining to the American public that tax and monetary policies have to be directed at saving Social Security and Medicare by increasing the amount of capital available to workers so they can continuously become more productive.

    Jack Kemp is co-director of Empower America and Distinguished Fellow of the Competitive Enterprise Institute.