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Executive Memorandum #312 on Taxes

October 10, 1991

Time to Repeal the Cold War Tax

By


(Archived document, may contain errors)

10/10/91 312

TME TO REPEAL THE COLD WAR TAX The conapse, of ft Soviet empire and the end of the cold war have made the world a safer place. They also have cr eafted a long overdue opportunity to reduce the tax burden on Americans. With significant reductions in previousIrproject6d defense spending likely to occur in-fume years, Congress quickly should enact tax reduction legislation. Lowering taxes will stimul a te an economy burdened by excessive t and hampered by last yea's -decision to enact the largest one-year tax increase in American his. tory. Morwver, a commitment to red= taxes will preclude special interest schemes to use savings in the defense budget to fuel yet another domestic spending binge. Several lawmakers seem to understand the mportance of triminnig spending-domestic as well as Mmse-to, help finance a reduction in taxes. Senator Bill Bradley, the Now Jersey Democrat, this week proposed legislatio n giving families a $350 tax credit for each dependent child. This $116 billion, five-yea tax cut would be offset by a $119 billion reduction in currently projected spending Koh over the five-year period. Even House Majority I ca Richard Gephardt, the bdis s ouri Democrat, declared in vacbaractezistic fashion that"We would like to see if we can re=n some of the m6ney to the American people." On the RepukHcan skle of the aisle. tax cut proposals range from amoinic growth legislation proposed by Sens Malcolm Wa l lop of Wyoming and Tom DeLay of Texas (S. 381, HJL 960) and California Representative David Dreier MJL3290) to family tax relid, bills intr*iuced by Senn Dan Coats of Iddliens and PFVP. FmakWolf of Virgink (S.710,HIL1277). TO dir, extent dim is die peace d ividend, other than peace itself, the money should go, back to the American people. Sim f Warid War IL the American taxpayer has paid a heavy prim defending the wmid hom Soviet aggression. Mic ddimse budget. just like any other fam of government spending, diverted resouzces out of the productive sector of the economy. Money spew on battleships, jets, missiles, and tanks was money do families and businesses could have spent on education; factories, homes, and jobs. 7be price of Awdom was heavy. Rmahft Prqwe & UnMw many other pvernmM pqFams, hoirem. da many. spew an ddense, amaDy produced results. Ronald Reagan's ratorafim of Amesim's defenses in the early 1980s, combined with do Soviet ecoomy suacring to a halt thealm to seventy yam of socialis central planni n g. finally I i S1 - about the Soviet Union's political collapse. The apparent end of a major military threat from what remains of do Soviet Union does not inean, of course. that the United States con dismude its defenses. Ma recent cwfiict in the MIldle F A st and the continued potential for dangerous turmoil in the 6 f rn P , Soviet Union an i - m g.arpments for caution and military preparadML In particular, the, U.S. must be ready to defend itself Arm sudden attack by smaller cownries with high Vchnology w e spons, rather than itself primarily from large-scale assaults. This danger underscores the case for a shift in military resources w such programs as die Strategic Deftse, Initiative. But this prudent _g of the U.S. arsenal still could free up tens of bill i ons of dollars. The growing bipartisan consensus for tax relid, however, does not guarantee taxpayers will reap the benefits of a lower defense budgeL Powerful lawmakers an Capitol HUI we eager to, use deftse budget savings to, create now domestic spendin g programs or expand existing ones. As a result. even though last

year's budget deal already means record increases 'in domestic. spendin -manylawmakers envision a surge. .9 .of new domestic spending. This will mean taxxel@ef is sacrificed at the altar o f special -interest politics. Arguments for more domestic spending have little merit. Whether measured;in nominal or inflation-adjusted dollars, domestic spending is at. record levels and increasing rapidly. Because of 'last year's budget deal, domestic d i scretionary spending will grow 91 percent faster than needed to keep pace with inflation between 1990 and 1993, while dom.Iestic: entitlement spending will climb 131 percent faster ihan inflation from .1990 -to 1996. And unlike the money spent for defense , it is not easy for advocates of increased domestic spending to identify.programsIthat already have solved the problems for which they were created. Poverty rates.have become more irtt@ractable and families less stable since the War on Poverty t6g'ati. St u dent test scores have fallen as federal aid to education has mounted. Indeed, in general, -the federal government seems ill equipped to solve many -of the problems that exist in America, and in several ,instances its programs may make the problems worse. T he dismal record of federal attempts to combat domestic problems suggests what is needed is not more money but a change in strategy. If lawmakers truly are concerned about p6verty and falling living standards in, America, for instance., they should cui'ia x es. After Reagan's tax cuts we're fully in place, the economy began its longest-ever period of peacetime growt@.. During that economic @001!11, the official poverty rate fell from 15.2 percent to 12.8 percent, inflation-a4justed gross national product cli m bed 32 percent, over twenty million new jobs were created, and inflation-adjusted average income for even the poorest 20. percent of households jumped by 12.6 percent. _.-Undoft Damage. Using the peace -dividend t6 cut. taxes would do far more to deal wit h the domestic problems fa6edby Americans than a raft of new -programs. More immediately, a tax cut would help. undo. P, of the damage caused by last year's M-conceived budget deal. The current economic stagnation is in no small put a result of the record t ax increase impos6d on America's workers, consumers, and businesses last year. Before the tax increase, politi inns proinised that the money would be used to reduce the deficit. But as usual, the new tax revenue was exaggerate# because policy makers ignor e d the fact that higher taxes slow the economy. The shortfall in tax collections caused by the recession, combined with unwarranted increases in domestic spending, has pushed the projected deficit in fiscal year 1992 to $350 billion, an all-time record. Po l icy makers have what should be an easy choice. Do they transfer defense savings to domestic spending priogra@ms, leaving the tax burden on the'productive sector of the. economy unchanged? Or, do @hey use this historic opportunity to grant sweeping tax rel ief to American families and businesses? The answer should be clear.

Daniel J. Mitchell John'M. Olin Senior Fellow

F or Further Information: Daniel L Atchell, "rax Rates, Fairness, and Economic Growth:.Lessons From the 1980s," Heritage.Foundation Background er No. 8% October 15,1991. Stuart K Butler, '7he Pe*ce Divided- It Belongs to the Pe6ple,:Not Congress," Heritage Foundation Backgrounder-No. 752, February 9. 1990.

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