October 15, 1991 | Backgrounder on Taxes
860 October 15,1991 TAX RATES, FAIRNESS, AND ECONOMI C GROWTH LESSONS FROM THE 1980s Daniel J. Mitchell John M. Olin Fellow INTRODUCTION One year after a record tax and spending increase, the American economy is reel- ing. Two million Americans have lost their jobs, personal and business bankruptcies are at all time highs, and family incomes are falling. With little prospect of a strong re covery in the near future, policy makers are coming to realize that actions must be taken to jump-start the economy. A consensus is emerging that tax relief is necessary p erhaps even the key-to restoring economic growth, but the proposals now before Congress rely on radically different approaches to the problem.
Ronald Reagans policies, particularly his tax cuts. These lawmakers, led by Senator Albert Gore of Tennessee and Representative Thomas Downey of New York, both Democrats, have introduced legislation (H.R. 2242, S. 995) that would grant tax relief to low-income families but sharply increase marginal tax rates for higher-income tax payers. Supporters of this legislati o n assert that Reagans economic policies hurt the poor and therefare would amend the tax code to achieve more fairness and income quality as well as, they hope, to triggcr economic growth last years record tax increase. These legislators believe that the w ay to rejuvenate the economy is to enact tax cuts that would increase incentives to work, save, and invest.
The Economic Growth and Jobs Creation Act (S. 381, H.R. 960 introduced by Sena tor Malcolm Wallop, the Wyoming Republican, Representative Tom DeLay, the Texas Republican, and. Representative Robin Tallon, the.South Carolina Democrat, would re Some legislators continue to believe that the current recession is the culmination of Tax Cut Remedy. Other legislators believe the nzession due at least .in pa rt to duce payroll taxes, lower the capital gains tax, expand Individual Retirement Ac counts, and cut taxes on business .investment.
Supporters of the Wallop-DeLay-Tallon bill point out that America enjoyed its long est-ever period of peacetime economic growth after Ronald Reagans tax cuts took ef fect, and that the income of all segments of the population rose sharply in the 1980s.
These advocates of supply-side economics reject the notion that tax cuts for some Americans must be offset by tax increases for others. In fact, they argue that such an approach likely will reduce revenues to the United States Treasury, leading to higher budget deficits and pressure to impose higher taxes on all income groups Reagan Success. As lawmakers consider these and oth e r tax relief plans, they would do well to learn the public policy lessons of the 1980s By every measure of prosperity, Reaganomics worked. Some twenty million new jobs were created. Infla tion was brought under control. And inflation-adjusted income rose for all segments of the population. Much of the credit for this spectacular economic performance goes to the 1981 Economic Recovery Tax Act, which cut tax rates across the board for individ uals and reduced the tax burden on business.
If policy makers want to restore economic growth, they should heed the following lessons of the 1980s Lesson #1: Economlc growth Is the best weapon agalnst poverty.
Lesson 2: Economic growth Is stlmulated by low taxes, partlcularly low Lesson 3: The poor get richer when the rlch get rlcher.
Lesson 4: If the alm Is to make the rlch pay more actual taxes, cut their tax Lesson #5: Ralslng taxes on the rlch does not help the poor.
Lesson 6: Increased Social Securlty taxes have wlped out the beneflts of Lesson 7: Hlklng taxes doe s not lower the budget deflclt, It ralses It While there is much about the U.S. economy that economists cannot explain, the cur rent recession is no mystery. For nearly six months last year, politicians debated which taxes they should raise. This created u ncertainty in the financial markets, lowered con sumer confidence, and undermined investors faith in the future. The prolonged debate resulted in the Bush Administration and congressional Democrats agreeing to saddle workers consumers, and businesses with the largest single-year tax increase in Americas history. When combined with then enactment of costly new regulatory legis lation such as the Clean Air Act and the Americans with Disabilities Act, this tax in crease was a body blow to an already fragile e conomy last two years, but a strong economic recovery is unlikely in the absence of a pro growth tax package. Not all tax cuts, however, are created equal. The Wallop-DeLay marginal rates. rates.
Reagans tax cuts for many Amerlcans Reducing the tax burden alone will not undo all the economic policy mistakes of the 2 Tallon and Gore-Downey tax bills are radically different. Fortunately, lawmakers need only look back over the last fifteen years to determine which approach will work THE ECONOMIC BOOM OF THE 1 9 80s During the 1980s Americans enjoyed an unprecedented economic boom. Reagans Economic Recovery Tax Act of 198 1 set the stage for this record expansion by reduc ing the tax penalty against business investment and sharply reducing, in three stages income tax rates for individuals. Once the tax rate reductions were fully phased in, the economy took off.
Not only did Reaganomics produce the longest expansion in Americas peacetime history, it did so while simultaneously reducing inflation, a feat that many e conomists believed could not be accomplished. Reducing marginal tax rates, along with regula tory relief and sound monetary policy, proved to be a potent prescription for an ailing economy. During the Reagan boom, inflation-adjusted gross national product (GNP rose 32 percent and median family income hit record levels. Thanks to the creation of twenty million new jobs, the proportion of the U.S. population holding jobs reached a new record of 63.1 percent Refuting Critics. When fmt proposed, many critics r e jected the central tenet of Reaganomics-that lower marginal tax rates would increase incentives to work, save and invest, and thus would ignite an economic expansion that would improve the liv ing standards of all Americans. These critics maintained that increased government spending is the engine that drives the economy. Tax cuts, by contrast, were condemned as inflationary. The record expansion with lower inflation which followed the Reagan tax cuts conclusively refuted these critics.
Broad statistics, however, do not present a complete picture of the economic situa tion in the 1980s. The untold story is how low taxes benefitted those Americans who traditionally had not enjoyed the hits of the countrys prosperity. Income levels for al m ost every demographic group had begun to decline sharply in the late 1970s. But once Reagans policies took hold, the statistics reversed. Inflation-adjusted median household income for black Americans, for instance, jumped by 16.5 percent between 1982 and 1989, after declining by 10.2 percent between 1978 and 1982.
Women also realized sigdicant benefits from Reaganomics. Their inflation-ad justed median income climbed by more than 28 percent between 1981 and 1989, after declining by 2.9 percent between 1977 and 19
81. And while some critics maintain 1 Economists continue to debate what year marks the beginning of Reaganomics. Some say 1980, when Reagan was elected President. Many use 1981, since that was the year that Reagan actually took office. Others no te that the budget far fiscal 1981 already had been signed into law by Jimmy Carter before Reagan was inaugurated. Reagans fmt budget was far fiscal 19
82. Some economists contend, however, that Reaganomics did not begin until 1983, the first year in whic h the tax rate reductions were fully phased in.There is no completely accurate answer to this conmersy.What is safe to say, and is supported by the statistics cited in this study, is that after beginning to decline in the late 1970s. most measures of econ omic well-being recovered in the early 1980s and improved dramatically throughout the decade 3 THE 1990 that the poor suffered under Reagan, the average inflation-adjusted income of the bot tom 20 percent of families rose 11.9 percent between 1982 and 19
8 9. By comparison the same income group saw their inflation-adjusted incomes decline by 12.7 percent from 1978 to 1982 Despite the economys spectacular performance during the 198Os, many lawmakers were determined to reverse Reagans policies Indeed, almost f iom the moment the Economic Recovery Tax Act was signed into law in 198 1, lawmakers on Capitol Hill pushed for higher taxes, succeeding on several occasions during the 1980s. The ill ef fects of those tax hikes, however, were at least partially offset by further tax rate reduc tions included in the 1986 Tax Refom Act. As a result, reduced tax rates helped as sure that the record economic expansion was still going strong when George Bush was inaugurated in 1989 BUDGET FIASCO It did not take long for Congre s s and the new Administration to reverse many of Reagans accomplishments A relatively small $5.6 billion tax increase in 1989 was followed by the 1990 budget summit agreement. The uncertainty created by nearly six months of summit negotiations and the even t ual imposition of nearly $200 billion of new taxes over five years was a major cause of the recession. Just as tax cuts helped spark the longest peacetime expansion in Americas history, the largest tax increase in history helped bring the economy to a shu ddering halt.
Supporters of the 1990 budget agreement, which set spending and tax policies for 1991 and beyond, claimed the tax hike was needed to reduce budget deficits, then pro jected to exceed $150 billion in 19
91. Opponents of the budget package war ned that budget summits in 1982,1984,1987, and 1989 all resulted in higher taxes ostensibly designed to reduce the deficit, yet in every case the budget deficit rose the following year. Opponents also warned that a major tax increase would throw the econo my into recession. They further predicted that Congress simply would spend the new tax reve nues.
They were right. The budget deficit climbed to nearly $300 billion in 1991, the fmt year of the agreement, and is now projected to reach record $350 in billio n fiscal year 1992 largely thanks to recd increases in domestic spending. And a sharp recession is expected permanently to lower living standards for all income classes compared to what they would have been had the economys growth not faltered Ignoring Hi s tory. Ironically, even though the dismantling of Reagans economic legacy ended the expansion and pushed the economy into recession, some lawmakers assert that additional tax increases somehow will strengthen the economy. Other law makers apparently believ e that while Congress should cut taxes for some Americans, it should raise taxes on others. Still other politicians argue that the best way to help poor citizens is to increase taxes on wealthier Americans 2 See Larry Hunter, The Never-Ending Recession, Th e Wolf Street Journal. September 19.1991 4 Lawmakers who support these policies claim fairness requires income redistribu tion, higher taxes, and more government spending. Americas less fortunate citizens however, historically have not fared well under suc h policies. If lawmakers truly are in terested in helping the poor, they should adopt policies to promote economic growth not redistribute income. Whether measured by job creation, income growth, the pov erty rate, or any other indication of living standar d s and prosperity, the poor have done best in years when the economy expands THE CHOICE FOR CONGRESS Policy makers now face what should not be a difficult choice: Do they return to the pro-growth policies of the 1980s? Or, do they replicate the mistakes of the 1970s, heap ing additional taxes and regulations on an economy already staggering under a record tax burden and an unprecedented wave of expensive regulation? The lessons of the 1980s provide an easy answer.
Lesson #1: Economlc growth Is the best weapon agalnst poverty.
Many politicians in Washington would like Americans to believe that poverty can be cured by more federal programs. In reality, high increases in spending have had little impact on poverty, and may have exacerbated the problem. It was o nly after the so called War on Poverty began in the mid 1960s that the poverty rate, which had been falling rapidly and steadily since the early 1950s, leveled off.
Like other measures of economic distress, the poverty rate began to rise in the late 1970s rising from 1 1.4 per cent in 1978 to 15.2 percent in 19
83. It began to fall, however once Reagans policies took effect, dropping to less than 13 percent by 1989.3 26 20 15 10 6 OS Chart 1 1959-1990 Americas Poverty Rate 010 1016 (970 1976 1010 (806 l0D O Noh hrty Is detlned (IS s household of four persons Bourne bHlrty In the UnImd Slam: rQ
O, Bureau of Ceneuo wlth a 1990 Income of less then $13.3
59. Herltmgo DataChmrt 3 Census Bu reau statistics routinely overestimate poverty in the United States. It probably safe to assume. however that changes in the poverty rate do reflect whether poverty is rising or falling, even if the totals are exaggerated. See Robert Rector, Kate Walsh OB e he. and Michael J. McLaughlin, How Poor Are Americas Poor, Heaitage Foundation Backgrounder No. 791, September 21,1990, and Robert Rector, Why the New Census Report Will Overstate Poverty, Heritage Foundation Execurive Memorandum No. 309, September 23,199 1 5 Other measures of the economys per formance reveal similar trends. For ex ample, inflation-adjusted average house hold and family income statistics for the poorest fifth of the population indicate that low-tax policies in the 1980s raised living standa r ds for less fortunate Amen cans. The incomes of poor households stagnated for much of the 1970s began to decline sharply in the late 1970s, and rebounded only after Reagans tax cuts were fully in place. If the 1990 numbers are the beginning of a new trend , it ap pears that high tax-and-spend policies under the Bush Administration will have the same damaging impact on Ameri cans as Jimmy Carters biggovernment policies Lesson #2: Economlc growth Is stlmulated by low taxes, partlcularly low marginal tax rates While accepting that the economy grew in the 1980s some analysts assert that this prosperity had nothing to do with Reagans policies in general and his tax cuts in particular. Some even claim that income levels for the poor would have increased faster had it not been for Reaganomics. Yet after taking the effects of other economic factors into account, the evidence still points clearly to low-tax policies as the leading cause of record growth in the 1980s With the myriad forces that affect eco nomic growth, there is no way to deter mine precisely the influence of any sin gle policy on the economy. The Great Table 1 Average Income for Poorest Fifth of U.S. Households In 1990 dollars I lncomeof Chan eln I Year Households I DoII I I 1973 I $7,039 I -I I 1974 I 7 .008 I -31 I I 1975 I 6,765 I -243 I I 1977 I 6,897 I -38 I 6,845 6,676 I 1982 6,549 -1 27 1 1985 I 6,819 I -19 I 1 1990 I 7.195 I -177 I Source: Money Income of Households Families, and Persons in the United States: 1990, Bureau of the Census Depression o f the 1930s for instance, resulted in part from poor monetary policy and trade protectionism. Herbert Hoovers decision in 1932 to raise taxes in the middle of the economic downturn doubtlessly exacerbated the economys contraction. But it can not be said w ith precision how much the tax increase contributed to the Depression.
The economic decline which began in the late 1970s also was partially due to high taxes. But other factors such as inflation and excessive government regulation of busi nesses contribut ed to the stagflation which plagued America. Similarly, while the 6 Bottom Second Middle Year Fifth Fifth Fifth 1978-82 -8.2 5.4 5.2 lop 5 3.8 1.1 3.2 h Percent Fourth Fifth is that if the rich get richer then the poor must become poorer. This view of the world however, is completely at odds with the evidence. As Table 2 indicates, the fortunes of all income classes tend to rise or fall together.
The Census Bureaus household income statistics underscm John F. Kennedys contention that A rising tide lifts al l boats. When the economy prospers, the poor are just as likely to realize the benefits of economic growth as are those in higher income classes. Similarly, if policy makers adopt anti-growth policies, for the stated purpose of helping the poor, all incom e groups suffer.
The household income figures also indicate that the Reagan years benefitted all in come classes. Even if the base year used is 1981-before the Reagan tax cuts were phased in-the figures show significant income gains for all segments of the popula tion during the 1980s. By contrast, periods of increase taxation, including both the Car ter and Bush Administrations, are associated with falling average incomes for all PUPS 1989-90 I -2.4 I -1.7 I -2.3 I -2.6 I -3.3 I -4.7 Note: Shaded areas in dicate increases Reagan tax cuts take effect.
Source: Money Income of Households, Families and Persons in the United States: 1990 Bureau of the Census. i L 7 Some critics condemn economic policies of the 1980s because wealthier citizens in comes rose faste r than did the incomes of the least affluent fifth. While true, this criti cism overlooks one very important fact: poorer Americans incomes increased in real terms during the 1980s. If a goal of policy makers is to improve living standards for the poor, t h e Reagan policy of reducing tax rates on the rich as well as the poor did more to improve the standard of living of low-income households than the high tax pol icies of the Carter and Bush Administrations Lesson #4: If the aim is to make the rlch pay more taxes, cut thelr tax rates Critics of Ronald Reagan assert that tax rate cuts in the 1980s meant wealthy Ameri cans paid less than their fair share of taxes. Indeed, Robert S. McIntyre of Citizens for Tax Justice, a Washington, D.C.-based research organiz a tion, contends tax breaks for the rich during the 1980s are the sole cause of todays budget deficit! Yet the assump tions required to support this assertion border on the absurd. To achieve his results, Mc Intp takes 1977 tax rates and applies them to cur r ent income levels to determine the size of the tax cut received by the rich. In other words, his model just assumes that the economy would have expanded just as much had the top tax rate stayed at 70 per cent, rather than being cut to 28 percent during th e Reagan years. The model also conveniently assumes that wealthier taxpayers would earn and report just as much income with 70 percent tax rates as they are projected to earn and report next year with tax rates at 31 percent.
Not surprisingly, Internal Revenue Service statistics paint a very different picture.
According to IRS data, wealth ier Americans are now paying a far larger share of the total tax burden today than they were before the Reagan tax cuts. As Chart 2 meals, the richest one percent of U.S . tax payers shouldered 27.5 percent of the total income tax burden in 1988, up from 17.6 percent in 198
1. The propartion of the income tax burden paid by the top five percent jumped from 35.1 percent in 1981 to more than 45 percent in 1988 Chart 2 Shar e of Total Federal Income Tax Paid By Wealthy, 1981-1988 Sham of Total Income Tax Recelpb 1882 I884 1886 lB8S Oouror: Internal Revsnue Servlce Horltoga DataChmrt 4 Robert S. McIntyre, Borrow N Squander, The New Republic, September 30,1991 8 Confronted by t hese statistics, some critics complain that the rich are paying a higher portion of the income tax burden only because their incomes rose so dramati cally during the 1980s when compared with those of other Americans. Yet this is pre cisely what advocates o f low tax rates predicted would happen. Once marginal tax rates were reduced, they said, the incentive to work, save and invest would increase while the amactiveness of tax shelters would be reduced. As a result, taxable income would increase significantl y . Moreover, as Lesson 3 explains, this income gain did not come at the expense of other groups of Americans. Incomes for all groups rose dur ing the 1980s Lesson #5: Ralslng taxes on the rlch does not help the poor With the economy in recession and the bu r den of federal taxes at an all-time high according to the Washington, D.C.-based Tax Foundation, some policy makers finally have concluded that tax relief is needed. For example, Senator Albert Gore of Tennes see and Representative Thomas Downey of New Yo r k, both Democrats, have intro duced legislation which would, among other things, lower taxes on families by creat ing an 800 tax credit for each child (H.R. 2242, S. 995 Senator Lloyd Bentsen of Texas and Representative Dan Rostenkowski of Illinois, the D emocratic Chairmen of the tax-writing committees in each chamber, are rummd to be drafting similar legisla tion. That is the good news.
The bad news is that the Gore-Downey legislation also raises the top income tax rate to 36 percent, from todays 31 perce nt, and imposes an additional 15 percent surtax on upper income taxpayers. The combined effect of these two provisions would push mar ginal tax rates to more than 40 percent for certain taxpayers. While this boost in the top rate allegedly is designed to promote fairness and offset the revenue loss caused by the tax credit for children, neither goal will be satisfied if history is an accurate guide.
Increasing the top tax rate by approximately one-third, as the Gore-Downey bill would do, means reducing sig nificantly the prospects for a strong recovery from the current recession. As Lesson 1 illustrated, the poor axt most dependent on economic growth for their well being. Thus while the Gore-Downey bill might in the short term benefit those taxpayers eligib l e for the tax credit, the package would in the long term hurt lower-income households because higher marginal tax rates mean economic growth would slow down, fewer jobs would be created, and living standanis would de cline. Supporters of the Gore-Downey l e gislation fail to understand what has become so evident to the emerging democracies of Eastern Europe; it is better to promote the creation of wealth than it is to attempt to redistribute it Flawed Calculations. The Gore-Downey redistribution legislation i s based in part on deeply flawed calculations used by the Congressional Budget Office (CBO The CBO uses estimates that predict higher tax rates will generate revenue to offset the losses to the Treasury caused by the childrens credit. But the static model used by the CBO assumes taxpayer behavior is unresponsive to changes in the tax code. As a re sult, even huge increases in tax rates are projected to raise large amounts of new tax revenue according to the CBO model.
Practical experience refutes this. Las t years tax increase, for instance, initially was projected by CBO to raise nearly $200 billion in revenues by 1995 above and beyond 9 the revenue growth otherwise projected to occur. Recent CBO budget projections however, now estimate that revenue in the 1991-1995 period will be lower than that projected for the same period in the summer of 1990-before last years tax increase was enacted. The Congressional Budget Office blames attributes this huge revision to economic and technical factors Lesson #6: Incr e ased Social Securlty taxes have wiped out the beneflts of Despite the reductions in marginal tax rates enacted in 1981 and 1986, total federal tax rates, the percentage of income paid to Washington through direct taxation, actu ally are higher today for m i ddle class Americans than they were before Ronald Reagan became President. Meanwhile, total federal tax rates have declined for the richest tax payers. This has led some policy makers to condemn the Reagan tax cuts as a giveaway to the rich at the expense of the poor.
Federal income tax rates for all income classes were reduced by the Reagan tax cuts and remain lower today than they were under the Carter Administration. The reason total federal tax rates have increased for many taxpayers is because of rapi dly escalat ing payroll taxes. In other words, income tax rate reductions for many Americans have been completely wiped out by increases in Social Security and Medicare taxes. To add insult to injury, the Social Security system collects far more money tha n is needed to pay retirement benefits. Most Americans assume the surplus funds are put into an ac count, safely tucked away and drawing interest to help pay retirement benefits for fu ture generations. In reality, Congress spends every penny of this money on other gov ernment programs, leaving nothing but IOUs in the Social Security Trust Fund.
Because wealthier taxpayers are less affected by rising payroll taxes, since there is a cap on the amount of income subject to such taxes, lower- and middle-income taxpay ers have been harmed disproportionately by rising payroll taxes. The impartant ques tion, of course, is how to address this inequity. Some legislators apparently believe higher income taxes on richer taxpayers are the way to offset high tax rates o n the mid dle class. These politicians overlook, of course, the fact that raising taxes on upper-in come Americans will do nothing to lower the payroll tax burden on less affluent citi zens.
The pro-growth solution to high effective tax rates is to reduce Social Security pay roll taxes. Not only would the reduction in these tax rates spur additional economic l growth, it would put an end to the fiction of the Social Security Trust Fund.
Lesson #7: Hlklng taxes does not lower the budget deflclt, It ralses It.
Perhaps the most important lesson of all to learn from the 1980s is that tax increases lead to higher rather than lower budget deficits. Tax increases were imposed on the American people in 1982,1984,1987,1989, and 19
90. On each occasion the legisla Reagans tax cuts for many Amerlcans 5 Daniel J. Mitchell, The Facts About Cutting Social Security Taxes, Heritage Foundation Backgroundcr No. 817 March 15,1991 10 tion was accompanied by prom ises that the money would be used for deficit reduction.
In every instance the deficit rose the following year.
The reasons for this are simple. Notwithstanding the Congressional Budget Offices simplistic, static model, higher taxes inhibit economic grow th. As a result, even if a tax increase does bring in some additional revenue, this new money rarely if ever reaches the level predicted when taxes first are raised. This typical shortfall on the revenue side is compounded by the way in which the federal b udget process works. Congress bases its spending decisions on how much money it expects to receive so boosts in spending invariably outstrip rises in revenue after a tax increase. Thanks to this process, last years budget deal turned a 150 billion deficit into $350 billion of red ink in just two years CONCLUSION The impulse of many lawmakers to enact tax relief to counter the recession is under standable and sound. What is difficult to understand, however, is why some lawmakers think the way to improve liv i ng standards for the poor is to raise taxes on the rich Largely as a result of the 1990 budget summit, a strong expansion was turned into a recession in a remarkably short period. While some members of the Bush Administra tion claim that the President had to violate his promise not to raise taxes because Con gress would have overridden his veto anyway, there was no evidence, before or after the budget summit to support this assertion. The legislative branch, in fact, has never been able to raise taxes over the objection of a President6 By caving in to pressure for higher taxes, the Bush Administration presented the big spenders in Congress with a long-awaited opportunity. As long as the Resident main tained his vow not to increase taxes, the American people resisted the siren song of tax fairness. But once the budget summit began, and the President was persuaded by mem bers of his own Administration to accept a tax increase, many Americans understand ably wanted the burden of any new taxes to fall on someone elses shoulders. Since few Americans consider themselves wealthy, regardless of their earnings, and since few Americans truly understand the relationship between tax rates and growth, propos als to tax the rich tend to be popular with voters.
Reaganomics as a hat to the growth of government. For these lawmakers, the 1981 tax cuts had to be repudiated to restore the pre-Reagan political dynamic. Now, thanks to last years budget deal, politicians once again can press for higher taxes and vote for more spend i ng under the guise of tax fairness and deficit reduction The 1990 budget summit also was a victory for those lawmakers who viewed 6 Congress actually did enact a uuc increase over a presidential veto on one occasion. Franklin D. Roosevelt vetoed a tax inc r ease because it was not as large as he desired. Rather than vote for an even larger tax hike, however Congress overrode his veto 11 Tragic Cost. The recession has imposed a tragic human cost. Two million Ameri cans have lost their jobs, the poverty rate i s climbing, and family incomes are falling.
Sadly, the news may get worse. Yet under the deceptive rubric of tax fairness, some lawmakers want to compound the damage of last years tax hike by further raising mar ginal tax rates. As the last ffiteen years c learly show, however, the poor will not be helped by tax increases because the result will be slower growth Choice for Bush. George Bush already has presided over the slowest period of ece nomic growth of any President since Franklin D. Roosevelts fust te r m. Whether the economy begins to recover may depend on what he does next. If Bush returns aggres sively to the pro-growth policies of the 198Os, there is every reason to expect that the economy will respond as vigorously as it did during the Reagan boom. On the other hand, if Bush fails to make the case for low taxes, and to veto any tax increase legisla tion, America may face a decade of economic stagnation 12