December 14, 2000

December 14, 2000 | Commentary on Taxes

Tax Cuts: Now More Than Ever

President-elect George W. Bush is being advised by his political foes to abandon tax cuts. This step, they tell him, is the only way to heal the wounds caused by weeks of legal wrangling and partisan rhetoric. Yet abandoning tax cuts would be a big mistake, both politically and economically.

From a political perspective, Bush should regard this "healing" solution with suspicion. His opponents, for the most part, either have ideological objections to tax cuts or hope to drive a wedge between him and his conservative supporters.

It seems unlikely Bush will fall for this siren song. He surely remembers how his father's administration was sabotaged. Back in 1990, President George H. Bush was urged by his opponents to abandon his no-new-taxes pledge as a sign of bipartisanship. In exchange, liberal lawmakers promised to reduce spending.

What really happened? President Bush was lured into a bad deal. The tax burden rose, but spending increased even faster. The deficit climbed, and the economy shrank. When the dust settled, Bush lost his 1992 re-election battle-a result some people clearly hope will be replayed in 2004.

But the tax-cut issue is about much more than political posturing and election battles. It reflects fundamental judgments about the role of government. It demonstrates whether we intend to keep America competitive in a world economy. And it reveals whether we will finally take an important step on the road to fundamental tax reform.

Politicians currently are awash in a sea of surplus tax revenue. They are collecting an extra $200-plus billion in taxes this year, and excess revenues could reach $4 trillion over the next 10 years. Unfortunately, one side effect of these surpluses is that politicians have lost the will to say no to special interest groups. With so much extra money floating around, politicians have doubled the inflation-adjusted growth of federal spending.

There can be little doubt that failure to enact broad-based tax relief will undermine fiscal discipline in Washington. Put bluntly, it is unrealistic and foolish to assume politicians can resist the temptation to use the extra money, as shown by this year's bipartisan rush to increase spending.

Yet while cutting taxes is a good strategy to control spending, it also is the right way to keep our economy strong. The world economy today is much more competitive than it was 20 years ago. This means it is critically important for countries to enact pro-growth tax policies. Those that reduce tax rates will attract savings and investment from around the world. Those that maintain excessive tax burdens will wind up like France, suffering high unemployment, a loss of talented entrepreneurs, and a general economic malaise.

The good news is that America generally has lower tax rates than many of our competitors. This has enabled us to become more prosperous in the past two decades. But the bad news is that other nations are beginning to catch up. Germany and Japan have reduced tax rates, and other countries are looking to follow that example. This means that we will have to lower our tax rates if we want to remain the No. 1 economy in the world.

Lower tax rates also would be a good insurance policy for the economy. Some economic analysts fear that our economy is beginning to slip into recession. To be sure, economists (and I am one) are often no better at forecasting the economy than gypsies and fortunetellers, but it is possible that we are facing a downturn. And if that is the case, all the more reason to lower tax rates so that people have a greater incentive to work, save and invest.

Last but not least, we should cut taxes as part of a long-term strategy to junk the internal revenue code and replace it with a simple and fair flat tax. The two main elements of the Bush tax plan - death tax repeal and tax rate reductions - are important steps in the right direction. This debate, after all, is not only about the tax burden. It also is about whether we can replace a loophole-riddled, corrupt tax code with a system that treats all taxpayers equally and gets the IRS out of our daily lives.

Bush was right to embrace sweeping tax cuts during the campaign. Let's hope he remembers the lessons of recent history - and sticks to his promise.

 Daniel J. Mitchell is the McKenna senior fellow in political economy at The Heritage Foundation.

About the Author

Daniel J. Mitchell, Ph.D. McKenna Senior Fellow in Political Economy

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