May 1, 2003 | Commentary on Taxes
The Cost of Not Cutting Taxes
Can we afford a big tax cut right now?
That's what the arguments against the president's $726 billion
proposal boil down to, really. The fact that we've been at war,
that the economy remains sluggish, that we've returned to deficit
spending -- all amount to a concern about price.
It would be a valid concern, too, if tax cuts simply extracted
money from the economy. Then it would be a bad idea to slash our
collective income just as our expenses were set to rise. It would
make much more sense to go with $550 billion or $450 billion or
$350 billion -- or whatever number congressional skeptics such as
Sens. George Voinovich, R-Ohio, and Olympia Snowe, R-Maine, are
But that's not how tax cuts work. Properly constructed, they result
in more jobs, more savings and more income.
Indeed, a tax cut that encourages long-term growth by making it
cheaper for people to invest -- and eliminating the tax individuals
pay on dividends would do that in spades -- is exactly what our
fragile economy needs, even (perhaps especially) when there's a war
to pay for.
Yet the dividend portion of the president's plan is just what
congressional tax-cut opponents are targeting. Many would prefer a
temporary, "fiscally responsible" tax cut instead. But that idea
has already been found wanting: The $300 and $600 rebates mailed to
taxpayers in 2001 were a sop to this way of thinking, and they did
nothing to boost the economy.
We should never try to induce consumer spending at the expense of
our long-term economic health. As the Congressional Budget Office
noted in an analysis of the president's budget, encouraging higher
government spending and private consumption hurts economic growth
in the long term. By focusing instead on pro-growth tax cuts,
lawmakers can ensure a quicker and smoother economic
A dividend tax cut is an excellent way to do this. It's why the
$726 billion plan would lead to more business expansion and more
jobs -- an annual average of 914,000 more jobs over the next five
years, a recent Heritage Foundation analysis found. By contrast, a
$350 billion tax cut would create about 362,000 new jobs annually.
That's nothing to sneeze at, but why settle for generating only
about one-third the number of new jobs we could get if we go with
the original $726 billion package?
Tax-cut critics have one more ace up their sleeve, however --
deficits. Look at what happened when Congress enacted a big tax cut
in the 1980s, they say. The budget was plunged into red ink because
the 1981 cut drained federal revenues.
But facts sometimes have an inconvenient way of wrecking such tidy
cause-and-effect arguments. Take a look at the revenue figures for
the 1980s, and a different picture emerges. In 1980, the last year
before the tax cut, the government took in $956 billion (in
inflation-adjusted dollars). Did government revenues drop like a
stone, per the hand-wringing predictions tax-cut opponents made
then? On the contrary. In all but two of the next 10 years,
revenues rose as much as $265 billion (and even in the two "off"
years, they came close to matching it).
The real culprit behind the Great Deficit Mystery is government
spending, which also rose in the 1980s. But try telling that to the
critics, who still accuse tax-cut advocates of pushing "voodoo
economics." They'd rather stick with short-term stimulus, it
Yet it stands to reason that when individuals are faced with job
and war uncertainties, providing them with one-time tax rebates
will do little to change their outlook, and it's outlook that
drives behavior -- how much people save, spend and invest. And
that's true whether we're at war or not.
-Norbert Michel is a
policy analyst in the Center for Data Analysis at The Heritage
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