March 17, 2003 | Commentary on Taxes
The Truth About Deficits
"Deficits." Of all the arguments being marshaled against President
Bush's latest tax proposal, the one with the most sticking power
can be boiled down to that one word. Pass this tax cut, we're told,
and huge, economy-wrecking deficits will result.
Sen. Joseph Lieberman, D-Conn., fired a warning shot on Feb. 3. "In
total, $5.6 trillion in projected surpluses have turned into more
than $1.5 trillion in projected deficits over the next five years
for us and our children -- including deficits of more than $300
billion in each of the next two years alone."
Unfortunately, Lieberman and many other politicians are wildly
overstating the likely budget deficits. Many economists, including
those of us at The Heritage Foundation's Center for Data Analysis,
predict the deficit under President Bush's proposed tax plan will
actually grow by a fraction of the Lieberman estimate -- about $340
billion between 2004 and 2013.
Creative spin? No. You get that result when you analyze tax policy
changes with a forecasting method known as "dynamic scoring." This
type of economic model, used for many years by private businesses
and state governments, predicts the president's tax cut would lead
to more jobs, higher wages and a stronger economy.
How? By taking into account the fact that changes in tax policy
cause taxpayers and businesses to change their behavior. Cut their
taxes, and they'll have more money to save, spend and invest. That
means federal tax revenues will increase over time, bringing down
the projected deficits.
But isn't any deficit of any size a problem? Sen. John McCain,
R-Ariz., says it is. Deficits are "incredibly harmful to our
economy," he recently told the Newhouse News Service. "We all know
the results of high deficits and that's higher interest rates,
which directly affect middle-income and retired Americans."
McCain is echoing the conventional wisdom -- but the conventional
wisdom is wrong. In fact, the Treasury Department examined trends
between 1965 and 1983 and concluded that "high deficits have
virtually no relationship with high interest rates in this time
period." A series of university and government studies of other
nations and time periods yielded the same result.
What really harms middle-income Americans is unemployment. Again,
history shows that tax cuts -- what the president is proposing --
lead to more employment and economic growth. That will assure that
families, as well as the federal government, have the resources
they need to address pressing problems.
Rep. Dick Gephardt, D-Mo., claims the government used
have those resources. He blames the president for "squandering the
surplus." On Feb. 19, Gephardt charged, "President Bush said if we
passed his trickle-down tax cuts, it would help the economy and pay
for itself. But he turned the largest surpluses ever -- $5.6
trillion dollars -- into the largest deficits, breaking his own
But the truth is, today's deficits are caused by a faltering
economy, not tax cuts. When the Bush administration took office,
the Congressional Budget Office predicted the economy would grow
2.4 percent in 2001 and 3.4 percent in 2002. Instead it sank into
recession, costing the Treasury an estimated $145 billion of tax
revenues in 2001 and $280 billion more in 2002.
Again, the president's plan has the answer. The Bush plan would
give some 123 million taxpayers a break -- giving them more money
to spend and boosting consumer confidence. That will help the
economy grow. And as it rebounds, tax revenues will increase as
Of course, if lawmakers -- including Lieberman, McCain and Gephardt
-- were really concerned about deficits, they could easily bring
the budget back into surplus. All they need to do is cut spending
by a relatively small amount. Instead, Congress actually
spending each of the last two years -- helping
to turn yesterday's surplus into today's deficits.
It's time for Congress to get to work. Instead of pretending
deficits are a major problem and blaming the Bush administration
for them, lawmakers should work with the president to pass his
tax-cut plan and get the economy moving again.
William Beach is the director of Center for Data
Analysis at The Heritage Foundation (www.heritage.org), a
Washington-based public policy research institute.
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