I want to start by acknowledging some tremendous
assistance that I've gotten from Heritage in preparing a broader,
faster, more ambitious tax relief package. Your help has been
instrumental in being able to bring this legislation to introduction as quickly as we have. Most important, we've been able to quantify what we want to do. So I really want to thank you for that help.
You know, if we look back, it was over a year ago that then-Candidate George W. Bush proposed using about $1.6 trillion of the then-projected $3.1 trillion tax surplus to provide tax relief for all taxpayers. It seems to me two big things have changed since George Bush made that first proposal. First, the surplus is much, much larger now. In fact, the size of the surplus has been revised upward in every estimate by the Congressional Budget Office (CBO) since the Balanced Budget Act of 1997. And now the consensus estimate, amongst CBO anyway, is that the 10-year projected surplus is $5.6 trillion.
The other thing that's happened, clearly, is the economy is much weaker today than it looked over a year ago. This shows that we cannot take economic expansion and robust growth for granted. We need prudent government policy to enable that to occur. There's no question the economy is much weaker--Fed Chairman Alan Greenspan has said that he believes the economy has stopped growing, we have much lower consumer confidence, energy prices are very high, the NASDAQ's off by more than 60 percent, and unemployment seems to be edging up.
When you look at these facts, we need more tax relief now than ever, and we can afford more than ever before. With $5.6 trillion over the next 10 years, we've got enough money to leave the Social Security and Medicare surpluses entirely untouched, to pay off all the available national debt over the next 10 years, to accommodate a trillion dollars in additional spending, and still have more than enough money left over for the President's tax relief plan.
So my view is that the President's plan is a great start. But it should be just that--a start. We need to do more. We need a bigger, faster, broader, deeper tax relief package than the President proposed over a year ago.
And I'm introducing just such a bill. In a few days, I'll be introducing a bill with more than 30 colleagues as original cosponsors. It's fully supported by the Republican Study Committee in the House of Representatives. It's got the support of numerous taxpayer groups, including the Club for Growth.
I want to tell you a little bit about this plan. It differs from the President's plan in two broad ways. First, it expands and accelerates the President's plan: It takes what the President does and does it faster. So, for instance, with income tax rate reductions, we start them all retroactively: January 1 of this year. We do the reduction, almost all of it, all at once rather than the gradual step-down in the President's plan. And we end up with cuts that are deeper, with lower rates in the end. We repeal the death tax faster than the President does. And we take the marriage penalty and we eliminate it entirely, rather than just reducing it, as the President does.
Second, we've added things that the President doesn't have in his plan. For example, we completely phase out the individual alternative minimum tax. When you think about what the alternative minimum tax is all about, it is a confession of the stupidity of our tax code. We phase that out completely.
We increase the amount of money that people are able to put into IRA and 401(k) plans. We take the capital gains rates and we drop them by 25 percent, retroactively to January 1 of this year. The capital gains tax is one of the most irrational taxes we have in our entire code. We repeal President Clinton's 1993 Social Security tax increase. We eliminate the Spanish-American War tax on phones. We make health insurance fully deductible for the self-employed. We have a number of other things that we do as quickly as we can.
And you know, the fact is it still leaves us with a very affordable and responsible plan. In the crazy world of government, where you do what they call "static scoring," which is estimating--you pretend that despite enormous changes in incentives, people's behavior won't change. The fact is people's behavior will change. But in that world that we have to operate in, our plan ends up costing a little over $2 trillion. It's very, very affordable.
Like the President's plan, our plan doesn't touch a dime of the Social Security or Medicare surplus, it still allows us to pay down all the available debt in 10 years, and it still accommodates a trillion dollars in new spending. The difference is that our plan takes the rest and uses it for tax relief. And my question is, why wouldn't you do that? What else would you want to do with it?
Our plan returns just seven cents of every dollar that's scheduled to go to Washington to the taxpayers who earn it. And when you compare it to the size of our economy, it's modest in relation to historical tax cuts. It's less than half the size of the Reagan tax cuts of the 1980s. My plan is smaller even than President Kennedy's plan in the 1960s. I apologize for that. But it's really, in a historical sense, a very reasonable, even modest, plan. It uses only 37 percent of the combined surpluses to lower the tax burden that Americans are paying.
One of the things we have to keep in mind is that major tax relief--substantial, across-the-board tax relief, of the kind that the President is talking about, and the kind that I would like to see expanded--is going to help our economy in the medium and long term very, very substantially. It always has.
You know, in the last century, every time we had a major tax relief package, the economy responded with robust growth. The Mellon tax cuts in the '20s, the Kennedy tax cuts in the '60s, and the Reagan tax cuts in '80s fueled an average annual economic growth of about 5 percent a year, lasting, on average, about six years. Greater economic growth means more jobs, higher wages, higher productivity gains, and rising standards of living for everybody.
And I'd like to take this moment to salute Heritage for another thing that you've done. Working with The Wall Street Journal, you've developed the Index of Economic Freedom, an annual statistical analysis where you demonstrate with empirical evidence the irrefutable fact that lower taxes and economic freedom leads to greater prosperity and opportunity. It's correlated incredibly well around the world. Everywhere you look, the freest countries in the world are the most prosperous, and the people have the highest standard of living. And the least free countries in the world have the lowest standard of living, the fewest opportunities, and the least prosperity. It's true everywhere on the spectrum, and it's true in America. If we lower this tax burden, we will, over time, have greater prosperity.
I'd like to also mention that when you have greater prosperity, of course, it ends up generating more tax revenue, and hence the folly of the static-scoring model that we're required to use. And speaking of federal revenue, I'd like to just put to rest the nonsense about the Reagan tax cuts causing deficits. The fact is that the 1980s tax cuts didn't cause the deficits; it was uncontrolled federal spending that caused those deficits. The tax cuts, in fact, caused our economy to boom, as I mentioned earlier. Between 1981 and 1989, federal tax revenue nearly doubled after Ronald Reagan and the Congress lowered taxes. The problem was that spending tripled over that period of time. So clearly, it wasn't a lack of revenue to the federal government that caused those deficits, it was uncontrolled spending.
Another issue that always comes up in this conversation is debt reduction. And you know I'm concerned about the $3.4 trillion or so of the national debt we have. It's funny when I hear former Clinton Administration folks talk about this issue; sometimes, they suggest that their fiscal discipline--in fact, the courage they had to raise taxes--is the reason we have surpluses today. I would suggest that's a little like King George III taking credit for the American Revolution. The truth is that in the last Congress, President Clinton vetoed all of our bills that would have provided significant individual tax relief, and that was done so they could spend more money.
And in the three years since taxpayers started producing a surplus, that's exactly what's happened--in the absence of tax relief, we've seen a huge increase in spending. Before we had surpluses, and the few years prior, spending grew about 2 percent a year. In the couple of years since we've had surpluses, spending has grown over 6 percent a year.
Now, despite all that spending, we have, fortunately, managed to retire some debt, about $350 billion in debt reduction over the past two years. I think most of that is because it caught us by surprise. We woke up one morning and the money was sitting there--we couldn't spend it fast enough, and we didn't have an opportunity to pass a spending bill quickly enough. So, fortunately, we did manage to pay down some debt. And that's great. But it's important to keep in mind that both the President's plan and my plan allow us to do what we need to do with our national debt: It allows us to pay off all the available national debt over 10 years.
It's simply not possible to pay off every last bit of national debt immediately. First of all, the debt, as you know, is held in the form of bonds. Bonds are held by individuals and institutions around the world, and they have no obligation to sell them to us. These are not callable securities. They are the private property of other people. So if we want to get it back, we've got two choices: We can wait till it comes due and pay off the principal, which we ought to do, or we can pay some exorbitant premium; namely, whatever price the bond holder chooses to charge if we want to take it back sooner. I think we ought to pay off the debt as it matures. And if we do that, we can pay off $2.5 trillion over the course of the next 10 years. And if you look at what we'll be left with, the debt service will be insignificant. In terms of total federal spending, in terms of the size of our economy, by any reasonable measure, we will have diminished the national debt to the point of insignificance.
I think that's enough. And I think that we have to remember that the alternative to tax relief, therefore, is not more debt reduction--we're going to retire debt as fast as we can--it's one of two things. One of them Alan Greenspan is very worried about, which is the accumulation of private assets by the federal government--more commonly known as socialization, or socialism--and there's no possible justification for the federal government to go out and buy private stocks and bonds. The more likely alternative is just massive new government spending. And as you know, there is no limit to the creativity of members of Congress to launch new spending programs. There's one truth about spending programs which we should all remember: They always end up costing more than anyone ever said they would originally. That kind of approach, taking the surplus and dedicating it to new spending programs, is the surest way to return us to deficit spending.
On this note, some have suggested triggers. Maybe we should make the tax-relief package contingent on the surplus actually materializing. Let me warn you, many who advocate the use of triggers are doing so because they don't want tax relief at all. Think about it. The trigger gives the first call on the money to the politicians. It says, You get to spend it first, and if you choose not to, then we can have tax relief. I would suggest this is not a very good policy to pursue.
Not only that, the inherent uncertainty that a trigger introduces into the idea of tax relief means we'll never get the kind of economic stimulus that we could have if people knew with certainty that they could plan on having more money in their paycheck every week.
So, I think we ought to be very leery about triggers--with one exception. There's a trigger that I could support, I think, and that would be if we failed to pay down a predetermined amount of debt. We might want to consider an automatic across-the-board spending reduction. You know, I don't understand why that's not part of this discussion. If we're going to have a trigger, I think that would be one that we should consider quite seriously.
And I do think we need to acknowledge the surplus is a forecast. It's an economic projection. And we can't with certainty know exactly how many dollars and cents it's going to be. In fact, CBO is probably going to revise it upward yet again within a few months.
But the fact is, we've got to make the best decisions we can with the best information we have available, and by all accounts, we have huge surpluses coming in. Many economists believe it's going to be larger than what the Congressional Budget Office is currently projecting. In fact, CBO is below the consensus of the Blue Chip economists' forecast. There are some conservative assumptions built into CBO's forecast--like the assumption that, contrary to recent history, revenue will not grow more quickly than the overall economy. And of course, there is the assumption that I mentioned earlier, the assumption that despite everything else being equal, tax relief will not generate greater economic output and there will be no robust growth in corresponding federal revenue feedback, and we know that's simply not true. It's also worth noting that even if we have a recession on the magnitude, say, of the recession we had in the early '90s--the projected surplus would be diminished by only about 2.5 percent. Again, we've got to remember that the alternative to tax relief is big spending programs. And that's a sure way to lead us back to deficits.
There's also been a fair amount of demagoguery that I think we've all heard about tax relief--the predictable old standby from the left: This is a tax cut for the rich. But let's deal with some facts. First of all, it's hard to cut taxes for people who don't pay taxes, although the Democrats are determined to find a way. But the fact is, under either the President's proposal or my proposal, the benefits of the tax relief go disproportionately to lower-income workers. That's a fundamental fact that I think should not be overlooked. Today, the top 50 percent of wage earners pay about 96 percent of all federal income taxes. The bottom 50 percent pay about 4 percent. Under the President's plan or my plan, a greater percentage of that burden would be borne by the top 50 percent of wage earners. It's hard to explain how that's unfair to the wage earners at the lower end of the spectrum.
In addition, it's the lowest-income families that receive the greatest percentage benefit. A family of four making $50,000 a year would get to keep half of what they currently send to Washington in taxes. That's a 50 percent tax cut. And families earning $35,000 and less would pay no federal income tax at all--a 100 percent rate reduction. It's hard for me to understand how that's unfair to that family.
Let me wrap up with this: You know, at the end of the day, all the arguments that we make about the economic benefits of tax relief are important, and they're valid. And the arguments about the distribution of the tax tables are important to think about. But they miss the central point that we should be making about tax relief; because, I think cutting taxes ought to be a permanent, ongoing goal of government. I think every member of Congress ought to wake up every morning and ask how he or she can lower the tax burden today. And the reason that I believe that is because lowering taxes is all about increasing personal freedom and economic freedom--the right to your private property and that includes your income that you earn. In my mind, that has got to be every bit as fundamental as the right to free speech, to practice religion, the right to vote. These freedoms are all inextricably linked. They're all part of the same continuum of personal freedom. And, therefore, the tax burden is a measure of our lost freedom, that which we've foregone and given to government. And if we can't cut taxes now, with record high spending, record high taxes, and unprecedented record high surpluses, I don't know how we'd ever cut taxes.
I think that the budget resolution that the House passes later this month must reflect the intent to at least accommodate a larger tax relief package. If it doesn't spell out exactly what it will be, it needs to at least say that this extra surplus on top of everything else is available to be used for tax reduction.
That would enable us to go back and do more--do more even this year, or do more next year. That's one thing, and that's one battle we're going to wage to make sure that the budget resolution has that. And then we need to engage every time a new tax relief package comes to the floor or even, really, before that--when it gets to the committee. For instance, those of us who believe in a bigger, faster, deeper tax relief package had a modest victory with the bill that we're going to vote on tomorrow, in the sense that the bill that the President proposed had all the rates dropping in one percentage per year increments.
The bill we're going to vote on tomorrow goes from 15 percent automatically to 12 percent, and it does it retroactively. So we've got, you know, a modest victory there. I would like to shoot for more ambitious victories on the subsequent bills that come through.
I am confident that Congress and the President will find a way to get meaningful tax relief for all taxpayers this year. I hope it will be soon enough and significant enough that everybody feels this benefit, sees what's happening, and that this economy has an opportunity to respond. And I'll be working as hard as I can to do that. I want to thank you for all your help in trying to expand what is a terrific start in tax relief in this Congress.
Representative Pat Toomey, a Republican, represents the 15th District of Pennsylvania in the U.S. House of Representatives.