January 31, 2002 | Commentary on Taxes
Fans of the TV show "Seinfeld" will remember an episode in which
perpetual loser George Costanza announces a major shift in
attitude: From that point on, he will simply "do the opposite" of
whatever he would normally do in any given situation. This turns
into an immediate success formula. Nothing goes wrong -- until he
reverts to form.
It's a lesson that congressional critics of President Bush's tax
cut should take to heart. Last year, they decided to "do the
opposite" of what they would normally do by agreeing to cut income
tax rates across the board. Now, alarmed by a weak economy and the
prospect of budget deficits, they propose repealing (or at least
delaying) the cuts. In theory, this will balance the budget and
spur the economy.
That isn't how it worked for President Herbert Hoover, though.
He took office several months before the stock-market crash of
1929. The resulting recession caused tax revenues to run dry and
threw the budget into deficit. His solution? Balance the budget by
raising income tax rates and tariffs. We all know what happened:
The economy collapsed, the budget ran bigger deficits, and the
recession turned into the Great Depression.
Fast forward about 50 years. It's 1981, and President Ronald
Reagan is also facing an economy in deep recession and a budget in
deep deficit. But he knows better than to saddle an already
suffering economy with higher taxes. So he helps enact legislation
that brings tax rates to their lowest levels in years. Skeptics
predict ruin, but once the cuts are phased in, the economy begins
what was, at that time, the longest peacetime expansion in American
But, critics charge, Reagan's approach caused budget deficits.
Wrong: The deficits resulted from runaway federal spending. Even if
Congress had just limited spending increases to the rate of
inflation, it would have run budget surpluses in 28 of the 32
fiscal years since 1970. Instead, it increased annual spending by
852 percent -- 120 percent above the rate of inflation -- and the
federal government wound up running 28 deficits and just four
Small wonder, then, that President Bush said in his State of the
Union speech that any budget deficit we run "will be small and
short-term so long as Congress restrains spending and acts in a
fiscally responsible way."
Unfortunately, most lawmakers seem to misunderstand the
relationship between the budget and the economy. They think that
raising taxes will transfer more money to Washington and ultimately
balance the books.
But while higher taxes are busy swelling the government's slice
of the economic pie, they're also shrinking the size of the pie
itself. The price of working, saving and investing goes up, and
people find it harder to start, continue or expand a business. Soon
they can't afford to hire the extra workers they had hoped to hire.
Economic activity declines -- and, as a result, so do tax
President Bush understands this. That's why he also said that
Congress can promote "long-term growth" if it will "make these tax
cuts permanent." If Congress were to repeal them, in the
Hoover-like belief that such a step will balance the budget, it
will be discouraging the very economic activity we need to end this
recession and, not coincidentally, balance the federal budget as
The fact is, economic growth drives the federal budget, not the
other way around. Too many lawmakers labor under the mistaken
belief that budget surpluses cause economic growth. But they don't:
Surpluses are a consequence of growth. And economic growth, history
clearly shows, can either be encouraged with lower tax rates -- or
strangled with higher ones.
The best way for Congress and the president to end the recession
is to focus on family budgets rather than the federal budget. That
is, they should focus on economic growth and assure that families
and businesses aren't burdened by a tax system that discourages
work, saving and investment. If Congress wants to see budget
deficits disappear, it should follow the Reagan model and hold the
line on spending.
Let's hope tax-cut critics have the courage to "do the opposite"
here -- and give the economy the helping hand that it needs.
Brian Riedl is the Grover M. Hermann fellow in federal budgetary issues at The Heritage Foundation (www.heritage.org), a Washington-based public policy research institute.
Distributed nationally on the Knight-Ridder Tribune wire