We Can Afford a Much Bigger Tax Cut

Copley News Service, 02/21/2001

WASHINGTON — Circumstances have changed dramatically since President Bush first proposed his tax cut last year. The economy has slowed down, with recession a distinct possibility. But in the long term, official budget surplus projections have risen from $3 trillion to almost $6 trillion.

In fact, if the Congressional Budget Office were not using overly pessimistic assumptions about revenue growth, surplus projections would actually be about one-third larger, or more than $8 trillion over the coming decade. The additional $2 trillion of surplus revenue would therefore easily accommodate a substantial expansion of the tax rate reductions currently under consideration. Quite simply, the federal government is awash in surpluses and will remain so even after President Bush’s tax cut, barring a major economic contraction. It would not be unreasonable for Mr. Bush to seek tax rate reductions twice the size of what he has proposed.

The Bush administration has done a marvelous job of presenting the arguments for the president’s proposal. But by locking itself into a $1.6 trillion reduction and devoting a large amount of the surpluses to debt retirement, the administration has fallen behind the curve as circumstances have changed.

Even if one has confidence that Congress will devote every penny of the additional surpluses to debt retirement, which I do not, it will run out of debt to retire even faster than already projected. Then within a very few years we would confront the highly undesirable situation of the government having to invest those surpluses in private assets, i.e., the stock market. That is why Alan Greenspan told Congress a crash course to retire the national debt is not the best fiscal policy for the nation.

Contrary to misconceptions on Capitol Hill among both parties, rushing to retire the national debt will not lower interest rates (they are higher today than they were in 1993 when deficits were around 4 percent of gross domestic product). Neither will debt reduction increase national savings. Debt retirement does not strengthen Social Security. Debt reduction does not promote economic growth. Economic growth reduces the burden of debt. (Although the debt held by the public rose from $2.4 trillion in 1990 to $3.6 trillion in 1999, the debt burden on the economy actually fell from 42.4 percent of gross domestic product to 41.9 percent because the economy grew faster than the debt during the same period.) And, high tax rates do not promote growth; they stifle it.

The president’s political capital for tax cuts may now be as high as it will get. He needs to invest it in a push for broader and deeper tax reductions and reforms. Waiting will only make it harder for him to achieve comprehensive simplification of our confusing and counterproductive tax code.

Of course, I recognize the constraints and political uncertainties a new president faces, and I would not second-guess Mr. Bush’s decision to deliver on the tax cut plan he made during his campaign before reaching for more.

However, I believe it is essential for him to send the nation an unambiguous signal in his upcoming address to Congress that this year’s tax cut is just the first step to rate reductions each year from here on out.

I hope the president pledges to make fundamental tax reform and simplification a keystone of his administration. That means creating a system that applies a low tax rate on all taxpayers, protects taxpayer rights and stops collection abuses, ends the multiple taxation of saving and investment, and imposes rules to ensure substantial consensus before taxes are raised by Congress.

Tax reform is never easy, but it will be easier now than later — and better for the economy. Finally, a reminder to my Republican friends in Congress: Don’t negotiate with yourselves. You’ll lose!

Jack Kemp is a co-director of Empower America.