Why High Tax Rates Lose Revenue

Senate Democratic Leader Tom Daschle, D-S.D., says he thinks “the Bush economic plan is a stimulus for the rich and a sedative for the rest.” This flippant statement is exactly what you would expect from the class warriors of the left.

When Sen. John McCain, R-Ariz., opposes President Bush’s tax reforms because he says they would mostly benefit the wealthiest Americans and explode the deficit, not only is he wrong, he also gives the left enormous leverage and great political cover.

I would expect this sort of rhetoric from Daschle, but from McCain it is an embarrassment to the party of Lincoln, Reagan and Bush. It was Lincoln, after all, who said, “I don’t believe in laws to prevent men from getting rich.”

What Republicans should be saying today is we want every American to have an opportunity to become rich. Bush is asking Congress to accelerate the five-year phase-in of the income tax rate reductions enacted in 2001 and to make them fully effective retroactive to Jan. 1, 2003.

He is also proposing to end the double taxation of dividends paid to stockholders by corporations and to increase the amount of investment in plant and equipment that small businesses can write off in the first year. These are all long-term tax reforms that will increase economic growth and create more jobs for people at the bottom of the economic ladder.

McCain, unfortunately, doesn’t seem to understand the president’s economic strategy. Not only does he think the president’s proposal is unfair, he also told NBC’s Chris Matthews recently that he thinks it is not the best way to get the economy moving again because it focuses on removing disincentives to invest rather than stimulating short-term consumption. McCain makes the same mistake Keynesians always make in believing the government can stimulate the economy by giving people more money to spend.

The Bush strategy understands that people cannot consume until they first produce.

People can’t produce without investment to provide them the tools and wherewithal to be productive, and as I was always taught by my father, a truck driver’s wages are higher when he has a truck to drive. What currently holds back investment are high marginal tax rates and other disincentives in the tax code combined with regulatory impediments that Bush has pledged to remove.

Bush got it exactly right in his Chicago speech last week: “Government spends a lot of money, but it doesn’t build factories, it doesn’t invest in companies or do the work that makes the economy go. The role of government is not to manage or control the economy from Washington, D.C., but to remove obstacles standing in the way for faster economic growth. That’s our role.”

And that is exactly what the president’s economic growth and jobs package will do – help remove impediments to growth.

Concern over the deficit is also misplaced. The fact is, we had a relatively small budget deficit of $157 billion last year, only 1.5 percent of GDP, which most agree was caused by the economic downturn and not by the tax cuts. During the next decade, GDP is expected to total more than $139 trillion, while even the most pessimistic deficit forecasts show deficits of about $1.8 trillion, or only about 1.3 percent of GDP.

Moreover, the static revenue loss estimates that produce these deficit projections, which assume no change in economic performance as a result of the Bush tax reforms, are ludicrous.

Preliminary estimates by the Heritage Foundation’s Tax Policy Center are that the president’s tax-reform package can be expected to raise economic growth by an average of 0.5 percent a year during the next 10 years, which is consistent with the estimates made by the President’s Council of Economic Advisers. With economic growth higher by about a half-point a year, the “revenue loss” will be cut at least in half – from $674 to no more than $335 billion – and over the long run revenues will actually increase beyond what they would have been in the absence of the tax reforms.

Making the income tax rate reductions completely effective retroactive to Jan. 1, 2003, will complete the job that Bush asked Congress to do in 2001. My hope is that the other tax reforms proposed by the president will mark just the beginning of a process of tax reform that will put our economy on a higher growth path and create more and better jobs for all Americans, especially those struggling to get a leg up on the ladder of opportunity.