October 17, 2002 | Commentary on Taxes
Sorting Fact From Fiction
Facts often are the first casualty of any political battle,
especially during election years. But sometimes the debate shifts
from routine exaggeration and distortion and becomes flagrantly
misleading. Exhibit A: Efforts to pin blame for our stagnant
economy on the Bush tax cut.
Recent polls show that most Americans rank the economy first among
political issues, so now's a good time to demolish a few myths that
The sluggish economy proves tax cuts
don't boost growth.
According to Commerce Department figures,
the economy began to weaken in the middle of 2000, almost one year
before the Bush tax cut was enacted. It averaged less than 1
percent growth in the final six months of 2000 and started to
contract in the first three months of 2001 -- well before any tax
cuts were approved.
But, some argue, shouldn't the cuts be fueling growth now? This
brings us to another fact: The vast majority of the pro-growth
provisions in the 2001 tax bill won't take effect until 2004, 2006
and 2010. It's preposterous to say tax cuts don't work when they
have yet to take effect.
Tax cuts are driving interest rates
higher by increasing the budget deficit.
Government budget estimates have shifted
from large surpluses to large deficits, yet interest rates have
In 2000, the federal government had a record budget surplus of $236
billion dollars. The same year, the average interest rate on
10-year government bonds was 6.03 percent, according to the Federal
According to the latest projections, the budget will have a $157
billion deficit in 2002, a shift of nearly $400 billion. But
instead of rising, as tax-cut critics argue should have happened,
interest rates have declined. The Federal Reserve Board reported
that the 10-year government bond rate in August was only 4.26
Fiscal discipline requires a balanced
Limiting government is the best way to keep
the budget under control. Special-interest groups seek to fatten
their wallets by convincing politicians to give them other people's
money. Politicians intent on promoting fiscal discipline must be
prepared to resist these demands.
They certainly shouldn't delude themselves into thinking that
discipline consists of raising taxes even higher in order to fund
even more excessive spending. Many European nations pursue this
vision of "fiscal balance," for instance, and their tax burdens
sometimes consume half of their economic output. These nations
inevitably suffer from sluggish growth and high unemployment.
Countries that limit the size and growth of government, by
contrast, enjoy more growth and create more jobs, regardless of
whether their budgets are balanced.
The Bush tax cut caused the
The weak economy is the main reason the
deficit has reappeared.
According to Congressional Budget Office figures, lower tax
revenues from the tax cut account for just 8 percent of the change
in fiscal balance. The vast majority of the change is due to the
economy's sluggish performance and forecasting errors -- much as
the budget surpluses of the late 1990s were caused by strong
economic growth. Spending increases, primarily for domestic
programs, also have contributed to deficits.
The economy drives the budget, not the other
Fiscal balance shouldn't be the ultimate goal of fiscal policy.
Instead, lawmakers should strive to control the size of government
and to lower tax rates. In this way, they can boost growth by
leaving more resources in the productive sector of the economy and
giving people greater incentives to work, save and invest. As a
result, the amount of taxable income will increase and government
will collect additional revenue.
One other benefit of cutting tax rates: It helps control the growth
of federal spending. Consider how the shift from budget deficits to
budget surpluses in 1998 significantly undermined fiscal
discipline. Budget surpluses were viewed as "extra" money and
lawmakers dramatically increased the growth rate of federal
spending. Indeed, federal spending has grown about twice as fast in
the four years since 1998 as it did in the four years prior.
Indeed, clamping down on this "spendfest" is one of the best
reasons for speeding up the Bush tax cut. Cutting down on the
amount of money flowing into Washington makes it tough for Congress
to fuel even bigger increases in government. And that's a fact even
the mythmakers in Washington can't deny.
J. Mitchell, Ph.D., is the McKenna fellow in
political economy at The Heritage Foundation, a Washington-based
public policy research institute. A modified version of this essay
appeared recently in the
New York Post.
Distributed nationally on the Knight-Ridder Tribune wire