July 19, 1993 | Lecture on Economy
Jack Kemp is a Distinguished Fellow at The Heritage Foundation. He addressed The Heritage Foundation's annual Board Meeting and Public Policy Serninar, Colorado Springs, Colorado, on April 16, 1993. ISSN 0272-1155. 01993 by The Heritage Foundation.The Heritage F oundation has pointed out, substantial tax increases were enacted in 1982 and 1990 for the purpose of deficit reduction. Yet in every case, the deficit went up, not down, in the year fol- lowing these tax increases. Lessons From History. The 1990 budget a g reement serves as a good case study because it so closely mirrors Clinton's New Economic Policy. The assumption behind this plan was that higher taxes, especially on the rich, would lead to more government revenues, lower deficits, and greater economic gr o wth. Well, the facts show.,exactly the opposite. Taxes went up, the economy went down, and millions of middle-class and low-income workers lost theirjobs in the recession. The deficit increased from 3.1 percent of gross domestic product (GDP) in 1990 to 5 percent by 1992 because the anticipated tax revenues failed to materialize, as they always do when taxes are raised, and the size of government expanded. Slower economic growth, compared with the four years prior to the budget agreement, cost the Treasury an estimated $180 billion in lost revenues in 1992 alone. This experience demonstrated once again that the best way to reduce the deficit is to expand the tax base by creating new jobs and new businesses. Few remember that the budget deficit was declin- i n g before the 1990 budget deal. Measured in 1987 dollars, the deficit fell by more than 60 percent from 1996 to 1989, from $227 billion to $142 billion, or from nearly 5.5 percent of GDP to around 2.5 percent of GDP. Will we see lower interest rates as a r e sult of this package? No, even if the history of tax increases is repealed and higher taxes reduce the deficit, there is no guarantee of lower interest rates. The Heritage Foundation studied the correlation between interest rates and deficits over the pas t twenty years and found that they have moved in the opposite direction 76 percent of the time. Be- tween 1989 and 1993, for example, the deficit increased from $152 billion to an estimated $327 bil- lion while yields on three-year Treasury notes dropped f r om 9.41 percent to around 4.35 percent. Low interest rates are a function of investors' confidence that the value of the dollar will be pre- served. The monetary policies of Federal Reserve Chairman Alan Greenspan and Fed Governor Wayne Angell-which have b rought us close to price stability-are responsible for lower interest rates, not Bill Clinton's promise of higher taxes. Will raising tax rates to over 40 percent on wealthy Americans force them to pay their fair share? No, raising tax rates won't hurt th e rich. They can shift their money out of productive investments that create jobs into tax shelters which have little or no economic benefit for the nation. Or they can avoid paying taxes by investing in tax-free municipal bonds or by shifting their earnin g s to non- taxed perks and fringe benefits. Harvard economist Martin Feldstein estimated that if higher rates caused people to reduce their taxable income by just 10 percent, three-quarters of Clinton's expected revenue gains would disap- pear. The lesson o f the Reagan-Kemp-Roth tax rate cuts-and the Kennedy tax rate cuts for that matter -is that lower tax rates on wealthy Americans increase their share of the tax burden. In 1990, the wealthiest 5 percent of taxpayers paid 43 percent of all taxes, up from 3 6.4 percent in 1980. For Bill Clinton, raising tax rates will be a Pyrrhic victory when the middle class and low-income Americans are forced to bear a greater share of the tax burden in the name of soaking the rich and class envy.
2The point needs to be made once again that a fiscal policy committed to punishing success, penal- izing investment, and discouraging family saving will cost jobs and reduce economic growth. Our economic policy should be aimed at nurturing and expanding the recovery, not burden i ng American workers, investors, and businesses with higher taxes and more government regulation. If the whole Clinton model is wrong, it's time to propose alternatives. That's why Empower America-the organization Bill Bennett, Jeane KirlMatrick, Vin Weber , and I co-founded-has formed an alliance with over 100 national and state organizations to oppose the Clinton tax in- creases. We believe that expanding economic growth, jobs, and opportunity for all our people must be the goal of Arnerica'siecionomiic p6 l icy. To achieve this goal, we must build a strong foundation of rewards and incentives for entrepre- neurship and productivity with lower tax rates, sound money, less government regulation, and open trade. We must also respect the first and last rule of s o und tax policy: Tax something more, and you'll get less of it; tax something less, and you'll get more of it. Conservatives are strongly united in their opposition to the Clinton economic plan, but we have yet to unite on an alternative. In that spirit, h e re are some ideas designed to create and sustain a growing, entrepreneurial economy in the 1990s. First, encouraging investment, entrepreneurship, and job creation. In a global economy-where $1 trillion in capital crosses national borders daily seeking th e highest return-America simply cannot compete while imposing the highest tax on business formation in the industrial world. It is an undeniable fact that we cannot create more employees without first creating more employ- ers. How do we create more employ e rs? By unleashing and expanding the supply of capital avail- able to start new businesses and create new jobs. We should begin by phasing out the tax on capital gains for any asset held for two or three years. While we're at it, we should completely elimi n ate the capital gains tax and the Alternative Mini- mum Tax for anyone who invests and creates jobs in America's distressed inner cities. As Heritage's Stuart Butler has said, we need to greenline our nation's pockets of poverty for success instead of pov e rty and dependency. In addition, we should immediately index retroactively for inflation all barriers to the creation of new businesses and the expansion of existing businesses. This includes indexing not only capital gains taxes, but depreciation allowan c es, corporate tax rates, and retirement plans such as IRAs and 401(k)s. These proposals will increase the rewards for those entrepreneurs and investors who create the most jobs and opportunities. They stand in sharp contrast to the Clinton industrial poli c y of trading off a temporary Investment Tax Credit, which favors machines over people, for a permanent in- crease in the corporate tax rate. Second, providing tax relief for working Americans. The 1990 budget agreement started a trend- which President Cli n ton apparently wants to continue-toward higher tax rates combined with more inefficient tax loopholes. Our goal should be to move in the opposite direction toward a flat- ter, fairer tax system-one that rewards, not punishes, working, saving, and investin g . To encourage job creation, we should adopt the main thrust of Senator Moynihan's plan to reduce the payroll tax rate-currently the greatest tax burden on middle income workers. This proposal would expand employment by lowering the cost of hiring additio nal workers and increasing the re- ward for working.
3Third, firm caps on federal spending. Spending restraint should be part of an overall philosophy of limited government. We should be committed to reducing the cost and burden of government whether t he budget is in deficit or surplus. Congressman John Kasich and Senator Hank Brown each have produced specific spending reduc- tion plans which demonstrate beyond all doubt that we can cut the deficit without raising taxes. And The Heritage Foundation has proposed spending reductions including $275 billion once supported by top Clinton OMB officials Leon Panetta and Alice Rivlin. In addition to cutting wasteWl spending, we. should.establish strong bndget caps to ensure that fed- eral expenditures do not gr o w faster than the economy. For instance, capping the growth of entitle- ments, except Social Security, at the rate of inflation plus population growth would save $257 billion over five years. Governments around the world, from Mexico and Argentina to East e rn Europe, as well as America's largest corporations, are downsizing and streamlining to become more efficient and pro- ductive. It's time the U.S. government did the same. We could begin by privatizing government functions like Amtrak, the National Endow m ent for the Arts, the Corporation for Public Broadcast- ing, the Rural Electrification Administration, and the Small Business Administration, among others. Congress should also adopt institutional changes which would make it easier to block useless spendi n g and more difficult to raise tax rates. A line-item veto, which Governor Clinton used in Ar- kansas, would give the President the ability to eliminate pork-baffel projects and help us balance the budget by cutting wasteful spending without raising taxes. Fourth, implementing a free enterprise anti-poverty program. Today, low-income Americans re- main segregated in a "second economy" that perpetuates poverty instead of encouraging self-suffi- ciency and economic independence. The fault lies not with the va lues of the poor, but with the welfare system that prevents low-income Americans from realizing their God-given human poten- tial. No longer can policies which empower government bureaucracies rather than families and indi- viduals claim any moral or pract ical authority. We conservatives should support a serious anti-pov- erty program based on the proven values of entrepreneurship, homeownership, strong families, and education. We should establish enterprise zones in every distressed urban and rural commun ity and eliminate the capital gains tax for anyone who works, saves, or invests in a zone. We should give every resi- dent of public housing the right to help manage his or her community and work toward homeowner- ship. We should expand educational vouche r programs so that all families-not just the rich-can send their children to the schools of their choice. We should allow low-income people to save and accumulate assets, currently illegal under federal Aid to Families with Dependent Children (AFDC) laws, a nd end the penalties for getting married and forming families. These proposals would extend the benefits of entrepreneurial capitalism and private property own- ership to America's most impoverished communities while helping low-income people get jobs and return to the economic mainstream. Conservatives must show people and families of all back- grounds that our policies and ideas will work for them. Fifth, expanding trade and opening markets to growth. Protectionism forces companies to compete in Washingt o n for government favors instead of competing in the marketplace to build better prod- ucts and deliver better services. Open trade forces governments to compete to lower taxes and re- duce regulations to make their economies more competitive in the global marketplace.
4The liberalized trading policies of Presidents Reagan and Bush helped expand the global export market to $3.1 trillion, or nearly 15 percent of worldwide output, by 1989. Unfortunately, the Clin- ton Administration seems intent on paying l ip service to these policies while favoring a zero-sum course of confrontation by the U.S. matched by retaliation by our trading partners. Already, the Clinton Commerce Department has slapped tariffs averaging 27 percent on imported steel, driving up the p rice of this important basic material. The Administration has also threatened to raise tariffs on mini-vans by 1,000 percent-a huge blow to American families. And while President.Clinton publicly.-claims.to supportthe-North American Free Trade Agree- ment , he seems more interested in imposing environmental and social policies on Mexico than in ex- panding trade in our hemisphere. For over forty years, the United States has been the worldwide champion of free and open trade. The global trading system helped anchor Germany and Japan in the family of democratic nations following World War Il and led to expanded economic growth unprecedented in human history. Our generation should be no less ambitious. We should negotiate a series of fire trade agreements to op e n new markets for U.S. goods and ser- vices. These agreements should extend not just to Latin and South America, but should include the Pacific Rim states and the former communist nations as well. We should also take a more active role in completing the U r uguay round of the General Agree- ment on Tariffs and Trade (GATT), currently floundering for lack of leadership. This would expand economic growth at home and help secure the success of democracy and entrepreneurial capitalism abroad. Sbith, relieving th e tax burden on families. Republicans must also champion tax reform that recog- nizes the family as America's paramount value-shaping institution. Economic growth is not an end in itself. The moral, spiritual, and cultural health of our nation is inextrica b ly linked with the strength of the American family. That strength is being undermined by government policies, both economic and social, which are biased against marriage-and families with children. The American family is the most overtaxed institution in A merica. To help relieve this burden, we should phase in an increase in the personal exemption, which has failed to keep pace with inflation over the years. Our ultimate goal should be to restore the value of the exemption to the Truman level, which in cur rent dollars would be over $6,000. This would be part of an overall plan to sup- port the family which would include policies such as educational choice to allow parents to control where their children attend school.
Candidate Clinton promised a plan for ec onomic growth, but President Clinton delivered a pack- age which will slow the recovery and hurt American families. If the Clinton Administration bases its policies on the assumption that higher taxes, more government spending, and more regulation will he l p the economy grow, no amount of salesmanship or soaring rhetoric will make the plan work. And as long as we have The Heritage Foundation, we can be sure that the Americans people will understand the real impact of President Clinton's economic and social policies.5