March 17, 2003

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 to 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 father's record."

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 well.

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 increased 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.

About the Author

William W. Beach Director, Center for Data Analysis and Lazof Family Fellow
Center for Data Analysis

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