The Impact of Higher Taxes: More Spending, Economic Stagnation,Fewer Jobs, and Higher Deficits

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The Impact of Higher Taxes: More Spending, Economic Stagnation,Fewer Jobs, and Higher Deficits

February 10, 1993 23 min read Download Report
Daniel J.
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925 February 10,1993 THE IMPACT OF HIGHER TAXES MORE SPENDING, ECONOMIC STAGNATION FEWER JOBS,AND HIGHER DEFICIIS By Daniel J. Mitchell John M. Olin Fellow Many Washington lawmakers and interest grou ps are urging President Bill Clinton to impose higher taxes on the American economy. They say such taxes will reduce the deficit and provide funds for new programs. Unfortunately, the former Arkansas GOVM nor seems to need little convincing. Although he a l ready has broken several promises made during the presidential cmpaign, there is no indication that Clinton will backtrack on his promise to raise taxes by $150 billion over thelnext four years. Indeed, evidence is mounting that Clinton will propose even more taxes. Moreover, after telling Americans to examine the fine print in his campaign statements, it appears the new President also will violate his prom se to raise taxes only on those families with annual incomes of more than $200,000.

Proponents of ra ising taxes argue that the federal budget cannot be balanced without a tax hike. They argue, too, that tax increases will make the tax code fairer. Some even claim that tax increases will encourage economic growth by reducing the need for federal hwing.

R aising taxes, however, would be a political and economic mistake, regardless of who pays and what taxes are increased. If history is any guide i Higher taxes will fuel additional federal spending. For every dollar of higher taxes since 1947, spending has increased by $1.59 1 2 White House Bulletin, Alexandria,Virginia, January 25,1993, p. 5.

Clinton to Consider ConsumptionTax, The Wushingron Post, January 25,1993, p. Al Higher taxes ~Ill hinder economic growth. Large tax increases under Herbert Hoover, Jim my Carter, and George Bush slowed the economy, while tax cuts under John F. Kennedy andRonald Reagan led to record economic expan sions Hlgher taxes wlll shrlnk the tax base and reduce tax revenues.The recofd tax increase in 1990, for instance, was meant t o bring in billions of dollars to the Treasury and spur growth. Instead, the increase in the tax burden helped throw the economy into a recession and lost $3.25 of tax revenue for every dollar it was supposed to raise Hlgher taxes wlil result in larger fe deral budget deficits. Taxes were raised in 1982,1984,1987, and 19

90. In each case, proponents of the hike claimed that the deficit would decline. But in each case, the deficit rose the following year Advocates of higher taxes have resorted to promoting g eneral myths in an effort to derail opposition. Among the dishonest statements now being used Myth #l:The 1981 tax cuts caused the deficit.

Reality: Tax revenues this year are $630 billion higher than they were in 1980 an increase of 26 percent

et adjusting for inflation Myth #2: The federal government is suff erlng a revenue shortfall.

Reality: Federal tax revenues are expected to increase by an average of $67.8 billion each yea between 1993 and 1998 Myth The rich are not paying their 7alr share."

Reality: The wealthiest 10 percent of taxpayers are paying a larger share of the income tax burden today than they were in 1980 Myth #4:The rich got richer and the poor got poorer during the 1880s.

Reality: All income groups enjoyed higher real earnings during the Reagan years.

The only beneficiaries of tax increases axe those who gain from the new programs that taxes finance. By contrast, typical American families suffer when higher taxes consume a larger percentage of their income. American workers suffer when tax increases reduce employment opportunities and upward mobility. American businesses suffer when tax hikes make new investment unprofitable and hinder their international competitiveness.

If policy makers are concerned about economic growth , they should cut taxes instead of raising them. Presidents from Calvin Coolidge to John Kennedy to Ronald Reagan triggered strong economic expansions by cutting tax rates; that policy increased incen tives to work, save, and invest. Presidents Herbert Ho o ver, Jimmy Carter, and George Bush, on the other hand, imposed substantial tax increases and the economy suffered in each case. This does not mean, of course, that tax policy is the sole determinant of economic growth. Herbert Hoover's protectionist trade policy, for instance, clearly con tributed to the economy's poor performance in the 1930s while John Kennedy's free 2 trade policies helped boost economic growth in the 1960s. But tax policy is a major fac tor in U.S. economic performance.

L&vmakers thus should be we of *sals to reduce the deficit by increasing tax rates or raising taxes on savings and investment. The recard is unambiguous. Raising taxes fuels spending and widens the deficit. And raising taxes slows the economy by directly reducing incent i ves to engage in productive economic activity. No lawmaker familiar with this record can support a tax increase while genuinely wishing to protect the economic interests of the average American HOW MORE TAXES MEAN MORE SPENDING Politicians routinely claim that higher taxes mean defxit reduction. But in reality, addi tional tax revenues are consumed by mare spending. In the 19709, for instance, tax revenues grew by $324.3 billion, but spending rose by $395.3 billion. In other wards, for every dollar of high er taxes, spending rose by $1.

22. In the 198Os, tax revenues rose by 514.2 billion. Rather than use the new money for deficit reduction, however, lawmakers increased spending between 1980 and 1990 by $661.7 billion, a spending inmase of 1.29 for each doll ar of new tax revenue. The pattem has become even mare pronounced since 19

90. In the last three years federal spending has increased by 1.91 forevery dollar of additi n al tax revenue.

The relation ship between taxes and spend ing is confirmed search. A 1991 study by Con gresss Joint Economic Com mittee, for in stance, measured the budgetary im creases. The study found that every dollar of higher taxes between B by scholarly re pact of tax in Increase in Federal Spending Associated With a $1.00 Increase in Taxes 2.00 Increased SDendina (in Dollars 1.59 SO 1 179 1 1825 1826- 1860 1867-1 913 1947- 1990 Sour= Vedder. Galloway and Fmnze. Taxes and Wick New Evidence Joint Economic Committee. 199

1. Herltage DataChad 3 B~dget Baselines, Historical Data, and A lternatives for the Future, office of Management and Budget, Washington D.C., January 1993 3 1947 and 1990 was associated with $1.59 of new spending! To make matters worse, the propensity of Congress to spend new revenues has increased. As the chart on th e pre vious page indicates, the bulk of new tax =venues went to deficitreduction in the early years of the Republic. But over time lawmakers steadily have increased the amount of new spending associated with higher taxes is incumbent upon pponents of highe r taxes to explain why the pattern would be dif ferent in 1993-why tax increases today will produce any different result than tax in creases in the past. In theory, the budget deficit could be solved with higher taxes. In reality, however, lawmakers seem m o re concerned with reaping political benefits by in creasing spending. Until this political relationship is changed, higher taxes will under mine rather than promote the goal of deficit reduction Given the persuasive historical evidence that tax inmases re s ult in higher spending, it WHY HIGHER TAXES ARE A RECIPE FOR RECESSION Higher taxes lead not only to higher spending, but also to a deterioration in the economy's performance. Taxing labor income (payroll and income taxes for instance drives a tax wedge b etween the .employer's cost of hiring a worker and the after-tax in come a worker receives. This wedge reduces the incentive for Americans to work. And it discourages businesses from hiring new workers by raising the cost of attracting labor.

The increased tax burden between 19 5 and 1980, for instance, drove an estimated 1.9 million people out of the labor farce. For businesses, statistical research has found that each one percent increase in payroll taxes reduces hiring by approximately 1.4 penxm6 Taxing capital is equally pernicious. Capital formation is the key to economic growth and rising living stanw. Yet the tax code is heavily biased against savings and invest ment? Examples of this bias include the double taxation of dividend income, the taxa tion of capital gains, punitive depiation schedules, the taxation of interest income, es P Richard Vedder, Lowell Gallaway and Christopher Frenze Taxes and Deficits: New Evidence Joint Economic Commiuee, Washington, D.C October 30,19

91. For additid evidence, see Neela Manage and Michael L.

Marlow The Causal Relation between FW Expdiaue~ and Receipts,"Southern Economic Journol, Volume 52 No. 3 (January 1986 Paul R. Blackley Causality Beween Revenues and Expendim and the Size of the Federal Budget Pdlic Finance Qwterly,Volume 14, No. 2 (April 1986 and Rati Ram Additional Evidence on Causality between Govemment Revenue and Government Expenditure Southern Economic Jour Volume 54 No. 3 (January 1986).

Otto Eckstein Tax Policy and Care Inflation, A Study prel#lred for the Use of the Joint Economic Committee Washington, D.C Government Printing Office, 1980 Also see L. Godfrey Theoretical andEmpirical Aspects of the Effects of Taxation on the Supply of Labour (F'aris: Organization for Economic Cooperation and Development 1975).

Michael Beenstock Tax ation and Incentives in the U.K Uoyrls Bd Review, Number 134, October 1979, pp 1-15 Fix a detailed discussion of the role of capital in the economy, including quotes fimn liberal economist Paul Samuelson and the Democratcontrolled Joint Committee onTaxati on, see Daniel J. Mitchell An Action Plan to create Jobs Heritage Foundation Memo to President-Elect Clinton No. 1, December 14,19

92. Also see Gary Robbins and Aldona Robbms Capital,Taxes and Growth" National Center for Policy Analysis, Report No. 169 Jan ua~y, 1992 and Arthur P. Hall, 11 Big Government or Economic Prosperity? A Rimer onTaxation, Regulation and Economic Growth Washington, D.C Citizens for a Sound Economy Foundation, June 1992). tate taxes, and the corporate income tax. These taxes combine to discourage savings and investment, biasing economic choices in favor of consumption rather than investment and creating.a pxeference for-shart-term .rather than long-term investment.

Other levies, such as excise taxes and property taxes, may not impose quite as much economic damage as taxes on capital and labor, but their impact still is negative. Energy taxes, for instance, increa the cost of producing and transporting almost every good produced in the economy. So-called luxury taxes can devastate part icular industries.The luxury taxes imposed as part of the disastrous 1990 budget deal, for example, are widely credited 'th destroying jobs and businesses in the light aircraft and boat-building in dustries.

Major tax increases almost always have a signifi cant impact on the economy's perfor mance. Herbert Hoover's decision in 1930 to increase the top tax rate from 25 percent to 63 percent doubtless contributed to the Depression. Lyndon Johnson's surtax on income tax liabilities enacted in 1968, together wi t h an increase in the capital gains tax, helped choke the expansion triggered by the Kennedy tax cut. The economy's dismal perfor mance during the Presidency of Jimmy Carter was associated with large tax increases, in cluding inflation-induced bracket cree p. And George Bush's record tax increase in 1990 was a principal cause of the recent recession and subsequent anemic recovery.

The inverse relationship between taxes and economic growth is confimed by academic nmarch. A 1983 World Bank study of twenty coun tries found that low-tax na tions experience faster growth, generate more investment, enjoy faster productivity growth, and experience mure rapid inc~ases in living standads than high-tax nations. l1 A mure recent study of taxes in the United States found that each 1.0 percent increase in the federal tax burden reducelponomic growth by 1.8 percent and lowers national employment by 1.14 percent 8 T 1'6 8 9 10 11 12 For empirical evidence on the relationship between taxes, capital formation, and economic gro w th, see &stein, op cit Roger H. Gordon and Dale Jorgenson The Investment Tax Credit and counterCyclical Policy Cambridge Harvard Institute of Economic Research, Discussion Paper No. 373, June 1974 James M. Poturba and Lawrence Summers Dividend Taxes hpomt e Investment and 'Q National Bureau of Economic Research, Working Paper No. 829, December 1981 Martin Feldsteh Inflation,Tax Rules and the Accumulation of Residential and Non-~esidenW Capital Seminar Paper No. 186, Institute for Intenrational Economic Stud i es, University of Stockholm, November 1981 Dale W. Jorgenson Taxation and Technical Change" in Ralph Landau and N. Bruce Hannay, eds Tcurarion,Technology and the US. Economy (New York: hrgamon Press, 1981 Robert E. Hall and Dale W. Jorgenson Tax Policy an d Investment Behavior American Economic Review, 583, pp. 391414; and Charles W. Bischoff The Effect of Alternative Lag Distributions in Gary Fromm, ed Tax Incentives ond Capitul Spendins (Washington, D.C The Brookings Institution, 1971 Jobs-At-Risk: Short- Term And Transitional Employment Impacts of Global Climate Policy Options, Final Rem"

CONSAD Research Corporation, Pittsburgh, PA, May 12,1992 The 1992 Joint Econolnic Repon" Joint Economic Committee, Washington, D.C., Government Printing Wice Keith Marsde n Linlrs Between Taxes and Economic Growth: Some Empirical Evidence" (World Bank Staff Working Paper Number 605, Washington, 1983).

William C. Dunkelberg and John Skorburg "How Rising Tax Burdens Can Produce Recession" Cat0 Institute Policy Analysis, No. 148, Febtuary 21,1991 1992, pp. 159-164 5 HOW T The direct economic cost of taxation is compounded by a tax code that is unnecessarily complex.and burdensome. In fact, tax experts have discovered that the tax system as a whole im ses $1.65 of cost on-the- p rivate sector for evgr $l.that.the government receives.'kis cost to the economy includes the time, money, and resomes that are used to comply with the tax law, and the economic output lost because of the tax code's impact on incentives to work, save, and i nvest. Thus elected officials deciding whether to create or expand government programs should ask themselves the following question What will benefit people more, one dollar of additional federal spending or $1.65 of spending in the productive sect& of th e economy? Many government programs today would fail this test LX INCREASES LEAD TO HIGHER DEFICITS When the economy slows, the impact on the tax base is often dramatic. Workers without jobs do not pay income and payroll taxes. Businesses losing money do n o t pay corporate income taxes. A reduction in disposable income means fewer purchases of gasoline, imported goods, alcohol, cigarettes, and other items subject to excise taxes. It is because tax increases cause the tax base to shrink in this way, compared with what would have happened if economic policy had remained constant, that new taxes never raise as much money as originally farecast.

A majw reason why projected revenues from tax increases routinely exceed the amount of money actually generated is that lawmakers rely on static economic models.

Incredibly, these models assume that higher taxes will have no impact on the economy.

As a result, even though taxes have a well-documented harmful effect on economic ac tivity, Congress uses revenue estimates that simply pretend the real world does not exist.

The absurdity of this system was exposed in 1989 by Senator Robert Packwood of Oregon, the ranking Republican on the Finance Committee. Senator Packwood asked Congress's revenue estimating body, the Joint Committee on Taxation (JCI to estimate what would happen to tax revenues if the government confiscated all income over 200,000 per year. The Jm replied that such a tax would generate $104 billion the first year, $204 billion the second year 232 billion in the third year 263 billion in the fourth year, and $299 billion in the fifth year.

The notion that such a tax would raise higher amounts of revenue each year is of course prepostemus. As Senator Packwood pointed out The JCI' estimate] assumes people will work if they ,have to, pay all their money to the Government. They will work foreve r and pay all the money to the Government when clearly yone in their right mind will not. Of course, there will be a behavioral response."

Despite the themtical models used by the JCT, in the real world higher taxes do affect the economy. Individuals and b usinesses change their behavior in an effort to reduce their tax liabilit As a result, tax increases never increase revenues as much as conps 1P 13 James L. Payne Unhappy Return: The %600-Billion Tax Ripoff Policy Review, Winter 1992 14 Congressional Reco r d, November 14,1989, p. S 15534 15 Many Citizens already are taking action UI protect their earnings from excessive taxation. Executives at major 6 I!I it sional forecasts predict. This revenue shortfall, combined with lawmakers propensity to spend pjecte d new tax revenues (which do not materialize), explains why tax increases Americas recent fiscal history illustrates the counterproductive effect of tax inmes almost always-increase.the budget deficit Major tax hikes were imposed on the American economy fo u r times in the last twelve years, but not once did the deficit fall The 1982 Tax Equity and Fiscal Responsibility Act was supposed to reduce the budget deficit, but the deflclt climbed the followlng year The 1984 Deficit Reduction Act was supposed to redu c e the budget deficit, yet the deficit rose In 1985 The 1987 Omnibus Budget Reconclllatlon Act was supposed to reduce the budget deficit. Once again, the deflcit was higher the following year The budget deal of 1990 saddled the economy with the largest sin gleyear tax Increase In Amerlcan history, as Congress allegedly sought to reduce the deficit. Slnce then the budget deflclt has risen to record highs The 1990 budget deal exemplifies why tax increases are such an ill-conceived policy.

Not only did the agre ement unleash a record increase in domestic spending, but the mas sive tax hike also helped cause a large decline in tax revenue. The table below compares five-year baseline revenue projections made in the Summer of 1990-before the budget deal was enacted -with the revenue numbers and estimates released in January 1993.

Rather I than by an rising addi- I The 1990 Budget Agreement: More Taxes Equals Less Revenue tionat 175 bil lion over Source# MNession Refew of the Bu&et and Bueet Baselines Mstohl Dam 8ndAk emetives actually for the Fu Office of Management and Budget 1 990 and 1993 I reu by 569.7 billion compared with the Summer 1990 estimates. This means the tax crease produced a revenue loss of $3.25 for every dollar it was supposed to generate. i2 corpora t ions, including General Dynamics and Disney to name just a few, axranged to take bonuses and exercise stock options in 1992 because of fears that tax rates would be raised this year. Similarly, many major league baseball players, such as Demit Tigers outf i elder Cecil Fielder and Kansas City Royals pitcher David Cone, have signed contracts taking a substantial portion of their remuneration in lumpsum amounts in 1992 because of expected increasesintaxrates 16 The tax in- is not responsible for the entire dro p in tax revenues. Other misguided policies, such as the ment programs such as food stamps and un employment in Deficit Impact of Economic Growth 1% Less Than Predicted skce. It does not include any spend- t ing increases companying a tax Dellclt Increase + 7.1 +24.0 +45.0 +68.8 +95.6 +124.1 increase FEDERAL SPENDING IS REAL PROBLEM Source: Budget Beselnes Histwkal Data and Alternatives for he hture OHie of Management and Budget, 1993 Even if tax increases could reduce the budget deficit, higher taxes still w ould be the wrong choice. The xeason for this is tha budget deficits are only a symptom of a greater problem-excessive federal spending It is the total level of spending, regardless of whether it is financed by taxing or harrowing, that is the fiscal burd e n imposed on the economy by government. Both taxes and barrowing hinder economic growth by reduc ing the amount of resources available to the productive sector of the economy. Simply replacing government borrowing with taxes-even assuming the taxes do not of themsel ves harm the economy or induce additional spending-leaves the overall fiscal burden of government unchanged minimum wage increase, the Americans with Disabilities Act, the Clean Air Amendments, and the record increase in domestic spending have c ontributed to the economy's problems and helped shrink the tax base 17 "Listing of Tax LawsWhich Increased Revenues from 1962 to the Present" Memorundum, Congressional Research Service, Washington, D.C May 11,1992 18 For an excellent discussion of this is s ue, see Lawrence Kudlow The Deficit Obsession The Woll Srreer Journal January 25,1993, p. A16 8 As in the case of taxes, scholars have discovered a strong inverse relationship between government spending and economic growth. A 1983 study in the Southern E c onomic lournal,-forinstance, discovered that percentage point increase in government con sumption spending as a percent of gross domestic product causes real economic growth to fall by .33 percentage points.19 A 1989 study in the Journal of Monetary Economics came up with similar results. The authors found that every percentage point increase in government consumption spending as a share of na 'onal output reduces the economy's inflation-adjusted growth by .35 percentage points Numerous other studies also con firm the inverse relationship between economic growth and government spending One reason for this inverse relationship is that politicians and bureaucrats do not have the incentive to spend money in ways that promote economic growth. Instead, gov e rn ment decision makers spend money in response to political pressures. Workers, con sumers, investors, and businesses in the private sector, on the other hand, have strong financial incentives to use resources as efficiently and productively as possible. Thus a dollar taken from the private sector and spent in the public sector almost always means a net economic loss THE PHONY FAIRNESS ISSUE Even though higher taxes encourage more spending, undernine economic growth, and increase the budget deficit, some policy makers still argue that the tax burden on upper income citizens should be increased in order to restore "equity" to the tax code.

Proponents of this "fairness" argument maintain that tax changes during the 1980s al lowed upper-income Americans to avoid paying their fair share.

I This ideologically driven assertion is factually flawed and economically bankrupt.

Indeed, wealthier Americans in fact are paying a larger share of the income tax burden than they were in 19

80. The top ten percent of income earners, for instance, paid 53.9 per cent of federal income taxes in 199o--compared with 48.6 percent in 19

80. The bottom 50 percent of income earners, on the other hand, saw their portion of the income tax bur den drop from 7.4 percent to 6.2 percent 19 Daniel Landau Government Expenditures and Economic Growth: A crosS-coUnby Study Southern Economic 20 Kevin B. Grier and Gordon'hllock An Empirical Analysis of Cross-National Economic Growth, 1951-1980,"

JOWMI OfMonemy Economics 24 (1989 pp. 259-276 21 Far example, see R.C. Konnendi and P.G. Mequhe Macroeconomic Determinants of Growth: Cross-Country Evidenw" JOWM~ OfMonemy Economics 16 (1989, pp. 141-163; Michael Marlow Private Sector Shrinkage and the Growth of Industrialized Economies Public Choice 4 9 (1986 pp. 143-154; John McCallum and Andre Blais Government Special Interest Groups and Economic Growth Public Choice 54 (1987 pp. 3-18; James R. Barth and Michael D. Bradley The Impact of Govemment Spending on Economic Activity," The National Chambex Fo u ndation, 1988, Robert J. Barro A Cross-COunby Study of Growth, Saving, and Govenunent National Bureau of Economic Research, Working Paper No. 2855, February 1989; and Robert J. Barro Economic Growth in a Cross-Section of Counuie8 Qwterly JOWM~ of EconOmic s 56 (1991 pp. 407443 JOWM~ 49 (1983 pp. 783-792 9 Resented with these data proponents of "tax fairness respond thatthe only Ieason that upper-income taxpayers are paying a larger share of the income tax burden is be cause the rich got richer and the poor g ot poorer during the last decade. In other words the rich paid compar atively more in taxes because their in comes skyrocketed, leaving the poor farther behind class once the Reagan tax In 1990, Upper Income Americans Paida Larger Share of Income Taxes Th a n a Decade Earlier 8 of Toto1 Income lm Pald OZmbI Household Income Growth By Quintile: 1977-1 991 Once again, the assertion is incomct. The rich did report significant income gains during the 1980s, just as tax cutters predicted would hap pen once lower t ax rates reduced incentives to shelter and under-report income. But every other income class in America also experienced substantial gains in income during the Reagan expansion. In Even these figures under I 1...1 0 20 40 60 80 100 Note: 1982-1 989 repres ents the period between Reagan's tax cuts and Bush's tax increase.

Sourc Budget Baselines H&torical Data end Airemrives for the Fur~re Office of Management and Budget 1993 1990 1980 cutsbok ef fect, and fell again when hident Bush returned policies to high -tax 10 As the preceding table indi cates, policies encouraging economic growth are the best way to increase the living stand ards for all income classes, in cluding the poor. Income growth was especially strong during the years when the Reagan tax cuts w ere in effect.

During the high-tax periods of the Carter and Bush presiden cies, by contrast, all income classes experienced a decline in living standards. Nor will rais ing taxes for the purpose of in come redistribution address the poverty problem. The a djacent chart illustrates how rising wel fare expenditures have had no effect on the poverty rate. In deed, the poverty rate was fall More Welfare Spending Does Not Result in Less Poverty I A 1930 1940 1950 1W 1970 1900 1990 ing at a steady rate before th e War on POV took effect, the decline in poverty ceased began. once fetieraI anti-poverty programs 5P TAX RATE REDUCTIONS DID NOT CAUSE THE DEFICIT Many politicians argue that tax cuts caused the deficit, and so higher taxes are needed to balance the budge t . Nothing could be further from the truth. The 1981 Economic Recovery Tax Act did indeed reduce marginal tax rates, as did the 1986 Tax Reform Act but lower rates do not mean less tax revenue. Tax revenues today are more than $630 bil lion higher than the y were in 1980, an increase of 122 percent. Even after adjusting for inflation, tax revenues jumped by more than 26 percent.

Proponents of higher spending specifically blame President Reagan's 1981 Economic Recovery Tax Act for the budget deficit. But tax revenue growth was ma impressive in the period when the tax cuts were in effect than in other years since 19

80. From 1983 when the tax rate reductions enacted in 1981 became effective, until 1990, when Bush agreed to the infamous budget deal, tax revenues gxew by an average of more than $61 billion per year. But in the three years since taxes were raised by a record amount, as part of the 1990 budget deal, revenue growth has averaged less than $39 billion annually 23 For furthex details on the harmful effects of government welfare programs. see Robeat Rector The paradax of Poverty: How We Spent $3.5 Trillion Without Changing the Poverty Rate Heritage Lecture No. 410, September 3 1992 11 The deficit exists not because of tax rate reductions but because federal spending has increased even faster than tax =venues. Federal outlays have climbed from $590.9 bil lion in 1980 tom est imated $.1,474;9-billion in 1.993, an-increase of nearly 150 ant.

Even adjusting for inflation, outlays have risen by almost 42 percent since 19

80. This relentless rise in spending is the reason that the deficit has jumped from $73.8 billion in 1980 to m ore than $327 billion in 1993 I THE SOLUTION: SPENDING CONTROLS, NOT TAXES The only way to solve the budget crisis is to tackle its mot cause-the growth of federal spending. The budget would be balanced today had lawmaken chosen to exercise fiscal respons i bility in the past. For example, if lawmakers had decided in 1989 to heze total federal spending at that year's level of $1,143.2 billion, there would have been a budget surplus this year of mm than $4 billion. If they had permitted spending to rise no fa s ter than 2.0 percent annually, beginning in 1987, the budget would be in surplus to the tune of $17 billion this year. And if federal spending growth since 1983 had been limited to the rate of inflation, the budget deficit this year would be less than $4 bil lion. Unfortunately, policy makers did not choose these prudent and reasonable options. In stead, they continued to vote for rapid increases in spending, pushing the deficit to record levels.

On the few occasions when policy makers have adopted policies to slow the growth of federal spending, the results have been dramatic. In 1987, far example, the overall growth of federal spending Will More Taxes Reduce the Deficit?

Since 1980, Tax Revenues Have Increased Over $630 Billion Blllbnr of Dollars 1981 19 83 1966 1987 1989 1991 1993 Nota Data are for Fiscal Year Source: wldger olthe US. Gommnt Historical Tables. e was held to 1.37 p&ent. As a result of this fiscal restraint, the budget deficit fellby a record $71.4 billion. And significantly, taxes did not increase that year.

The Gramm-Rudman-Hollings Deficit Reduction Act is another example of just how successful spending control can be in reducing the deficit. Enacted in 1985 and amended in 1987, the law created fixed deficit targets designed to balance t he budget by 1993 24 Another prevalent myth is that higher defense spending caused the deficit. While it is true that defense spending did climb, nondefense spending grew at a faster rate. Inflation-adjusted defense spending rose by 27.7 percent between 1 9 80 and 1993, compared With a 45.8 percent increase in non-defense Spending. Moreover, defense spending has fallen fman 22.7 percent of total spending in 1980 to 19.6 percent of outlays in 1993 12 I I Gramm-Rudman was far from perfect, and lawmakers regula r ly engaged in budget gim micks to.avoid some of the fiscal discipline the law demanded, but the Act significantly slowed the-growth of federal spending. The budget deficit, which consumed 5.4 percent of gross domestic product GDP) when the law was enacted , fell to 2.9 percent of GDP by the time Reagan left office just four years later.

Unfortunately, the Bush Ad ministration and Congress conspired to evade the Gramm-Rudman law in 1989 and effectively repealed the law in 1990 as part of the budget deal. The result? ne repeal of Gramm-Rudman un leashed a torrent of domestic spending.

President Bill Clinton had the opportunity, on January 21 of this year, to re to Gramm-Rudman by using his executive authority to mandate fied deficit targets.&nformnately Clint on chose to continue the current practice of al lowing the deficit targets to expand, thus permitting more spending and higher deficits.

In the absence of a tax limitation/balanced budget amendment, returning to Gramm Rudman would be a significant move to watd a more responsible fiscal policy. Indeed lawmakers could make a good bill even better by closing some of the loopholes used to skirt the law between 1985 and 19

90. In particular, replacing deficit targets with spend ing targets would focus the law o n the real problem-uncontrolled federal spending WASHINGTON'S WELL-KEPT SECRET TAX REVENUES ALREADY ARE RISING Listening to the rhetoric about "revenue shortfalls" in Washington, one would think that tax revenues were plummeting and conclude that a tax in c rease was a necessary response. Once again, however, proponents of higher taxes either do not know the num bers or they are being dishonest. According to the Congressional Budget Office (CBO tax revenues are expected to climb by an average of $67.8 billio n annually between 1993 and 1998-without any additional increase in the tax burden. All told, according to jected to be $339 billion higher in 1998 than they are es- CBO, tax revenues timated to be in 1993. v I 25 Daniel J. Mitchell, "Clinton's Real Defici t Test The Wall Street Jownal, January 12,1993 26 The Economic and Budget Outlook: Fiscal Yews 1994-1998, Congressional Budget Office. Washingtan, D.C January 1993 13 office of Management and Budget (OMB) estimates co& the CBO numbers. Ac cording to OWS pr o jections,.tax revenues under current law are supposed to be $376 billion-higher in -1998 than-they me this .year; an average annual increase of more than 75 billion. Regardless of which estimate is more accurate, reducing the deficit should be a relativel y simple exercise-use the new revenues for deficit reduction, not more spend ing.

Unfortunately, whenadvocates of higher taxes assert that additional tax revenues must be part of any deficit-Eduction package, they are not referring to the revenue windfall the government already is projected to receive. They mean that American taxpayers must sacrifice even more of their incomes to feed a rapidly growing government WHAT DO VOTERS REALLY WANT Many Washington insiders argue that the American people really favo r higher taxes.

But there is little support for this claim in polling data. Voters on election day were asked, for instance, whether they would rather have government provide more seMces but cost more in taxes, or government cost less in taxes but provide f wer seMces. By a 55 to 36 margin, voters chose smaller government and lower taxes.

Since the three major candidates had records or platforms supporting tax hikes, voters did not have much choice when voting for Pmident last November. But sevd state in i tiatives and referenda did give voters a chance to support or reject higher taxes at the bal lot box. A ballot initiative in California, for instance, would have raised state taxes on in dividuals earning more dm $250,000 annually, and on corporations, an d would have used the money to cut taxes paid by lower income residents. California voters defeated the initiative by a 58 percent to 42 percent margin.

Similarly, voters in South Dakota rejected a proposal to impose state-wide personal and carporate income taxes by nearly a thxee-to-one margin. Some 78 percent of Ohio voters rejected a proposal to levy a tax on toxic chemicals. Voters in New York were gi v en the opportunity to approve an $800 million bond package to finance additional state spending on job-creating infrastructure. They rejected it by a 56 percent to 44 per cent margin. Colorado had an initiative to inmase the state sales tax by one cent, t o fund more education spending. Voters said no by a 54 percent to 46 percent margin.

Overall, voters rejected eleven of the twelve tax and/or spending increases on state bal lots. By contrast, voters approved three-fourths of the tax andor spending reducti on in itiatives. Connecticut, Colorado, and Rhode Island voters approved limits on state spend ing. Arizona voters approved a measure requiring that tax inmases receive twethirds support from the legislature. Colorado voters passed a measure mandating tha t all state and local tax increases must be approved by voters 27 27 Public Opinion and Demographic Report, The American Enterprise, Vol. 4, No. 1 (January/February 1993 p. 94 14 i 3 CONCLUSION Higher taxes are neither necessary nor desirable. If taxes are increased, the results will be easy to predict. Federal spending will increase, the economy will weaken, jobs will be desmyed, and the deficit will rise. Rather than pmmote income equality, higher taxes will have an especially negative impact on the poor a nd others who axe most dependent on economic growth for advancement. Tax increases also will undermine American com petitiveness and hinder the capital formation that is so necessary to rising wages and higher living standards taxes. Feigning concern for t he economy as a whole, they say that raising taxes will reduce federal red ink and spur economic growth. Yet the record shows exactly the op posite. No honest lawmaker familiar with this record can vote for a tax increase while claiming to be acting in th e interests of ordinary Americans Americans who will benefit from new or expanded programs are clamoring for higher 15


Daniel J.

Distinguished Fellow