Why America Does Not Need More Taxes

Report Taxes

Why America Does Not Need More Taxes

November 22, 1988 19 min read Download Report
Daryl Plunk
Former Senior Visiting Fellow
Daryl is a former Senior Visiting Fellow

(Archived document, may contain errors)

680 November 22,1988 MEMO TO THE HONORABLE GEORGE BUSH 16oopEN"IAAVENUE WASHINGTON, D.C HOLD FORARRIVAL WHY AMERICA DOES NOT NEED MORE TAXES INT RODUCTION During the presidential campaign, George Bush repeatedly assured Americans that he would not raise their taxes. He declared "Read my lips: no new taxes Just hours after Bush's victory, however, America's pro-tax lobby began an all-out offen sive to convince'him that, because of the federal budget deficit, he must ignore the American people's mandate and break his vow by accepting a steep tax increase.

Yet the facts are on Bush's side. They show that there is no reason for him to retreat from his pledge.

Indeed, there is good news concerning the federal budget deficit. Recently released forecasts Tom the Congressional Budget Office 0) indicate that the flow of red ink is subsiding. From its peak level of $220 billion in fiscal 1986, the federal de ficit in fiscal 1989 is expected to shrink to $148 billion. More important, as a share of total economic output the best measure of the eqmomic impact of federal borrowing the deficit will fall to 2.9 percent of gross national product (GNP) in 19

89. This is substantial progress, considering that the deficit consumed 6.3 percent of GNP in 1983 Heartening Forecast. The forecast for the next five years is even more heartening than the statistics suggest. The CBO projects that, with moderate economic growth, the deficit will shrink to just 1.8 percent of GNP by 1993 one-third its 1983 peak. Other forecasters most notably the Office of Management and Budget, are more bullish on the economy in the near future and thus are anticipating androp in the budget defic i t to less than one-half of one percent of GNP by 1993 Two factors are mainly responsible for this dramatic improvement in the federal fiscal outlook. First, the 1985 Gramm-Rudman-Hollings balanced budget law (GRH) has forced Congress to slice the growth r ate of fedyal outlays in half. The federal government still is growing, of course, but at a slower pace.

Second, the U.S. economy, which just entered its peacetime-record 72nd straight month of expansion, is outpacing the deficit. With over 18 million more Americans working since the recovery began, family incomes up by over 10 percent, and corporate profits growing by about 5 percent per year, the federal treasury since 1982 has been enjoying an unprece dented $60 billion to $80 billion annual fiscal divi d end through rising tax receipts. As these growing revenues pour into the federal coffers, the federal budget can be balanced by the end of President Bush's first term without raising new taxes and without deep program spending cuts. In fact, if Congress c an simply hold the rate of spending growth to less than 4 percent per year, the deficit will be erased in 19

93. With an aggressive budget-cutting strategy, the President could balance the budget even sooner Threats &om Capitol Hill. There is, however, one dark cloud looming. Congress seems determined to halt this progress on the deficit by torpedoing the economic expansion with a tax hike and a surge of new spending. Such a double blow not only could halt further progress in deficit reduction, it could se n d the economy into a tailspin. Already this year legislators have spent billions of dollars on new federal programs, including welfare reform catastrophic health care, AIDS research, expansions to the Food Stamp program, and drug rehabilitation programs. N ext year, this spending spree is expected to continue as Congress unleashes a huge catalog of new spendin mitiatives, which could add as much as $150 bil lion to the deficit over the next five years Included in this package. are new federal com mitments f or child care, long-term health care, an infrastructure loan fund, and an es timated $60 billion bailout of the savings and loan industry.

Even more threatening is the mounting enthusiasm on Capitol Hill for a major tax in crease in 19

89. Ignoring all th e data from their own budget experts and turning their backs on even modest spending restraint, many lawmakers insist that raising taxes is 'the only course of action for the President. Yet a tax hike in 1989 would not produce a balanced budget, and it wo u ld almost certainly disrupt the current economic expansion. The reasons 2 Much of this reduction in federal outlays is attributable to real cuts in defense spending Since 1980 3 Stephen Moore A Budget Summit to End the $100 Billion Spending Spree Heritage Foundation Execurive Memomndum No. 202, May 25,1988 2 1) Federal taxes are already at record high levels Taxes will consume 19.6 percent of GNP in 19

90. In only five years of this century, most recently just prior to the 1981-1982 recession, have tax bur dens been this heavy. Even without new taxes, federal revenues will rise to over $1 trillion for the first time in history in 1990 2) Tax increases result in higher spending, not lower budget deficits A recent study finds that every dollar of taxes raised since 1948 has led to $1.58 in in creased spending. New taxes just lead to a surge of new spending by lawmakers? A tax in crease in 1989 simply would be a green light for Congress to use the money to finance its 150 billion wish list of new spending progr ams 3) A major tax hike would slow economic growth and could spark a recession Over the past quarter century, higher federal taxes have led to slower economic growth.

Higher taxes increase business costs, discourage investment, and reduce consumer demqd da mpening or even halting economic growth. Some studies have concluded hat every dol lar of higher income taxes reduces economic activity by as much as 50 cents. s A healthy, growing economy, combined with modest federal spending restraint, would af ford th e least painful and most promising route to reaching a balanced budget by 1993 as re quired by the Gramm-Rudman-Hollings legislation. This means that Congress must pursue only pro-growth fiscal policies over the next four years. Raising tees is an anti-gro w th policy. It risks slamming the brakes on the current economic expansion and causing red budget ink to begin gushing again CONFOUNDING PREDICTIONS OF DOOM Big budget deficits are clearly undesirable, but members of the pro-tax lobby have been consistentl y wrong in their predictions about the course of the economy during the Reagan Administration In 1982 they predicted that the Reagan tax cuts would cause high inflation; inflation declined 4 Richard Vedder, Lowell Gallaway, and Christopher Frenze, Federal T ax Increases and the Budget Deficit 1947-1986: Some Empirical Evidence, Report to the Republican Members of the Joint Economic Committee 1987. 5 Charles L. Ballard, John B. Shoven, and John Whalley, General Equilibrium Computations of the Marginal Welfare Costs of Taxes in the U.S.,hericOn Economic Review, March 1985, pp. 128-138, and James L. Miller Director of the Ofice of Management and Budget, Hearings before the House Republican Study Committee on Tax Increases and the Economy, April 1,1987 6 For more details see Paul Craig Roberts, Putting Stability At Risk, The Warhingron limes, September 16 1988, p. m 3 In 1983 they claimed that big deficits would bring a rise in interest rates; rates fell sharply from 13.5 percent to 9.4 percent over the next four years During the 1984 presidential campaign, they promised the electorate a recession unless taxes were raised substantially; taxes were not raised, but the economic expansion has con tinued uninterrupted.

Most recently, they have insisted that the burden of federal debt would cause the loss of U.S. business and jobs to foreign competitors. Yet corporate profits and employment levels in the U.S. are now at all-time highs Concealing Good News. A primary reason for these consistently faulty forecasts is that since 1983, the federal budget deficit gradually has been fading as an economic problem.

One of Washingtons best kept secrets is that the budget deficit is slowly declining in real dollar terms and falling rapidly as a percentage of gross national product (see Figure 1).

Next year the budget deficit will consume only one-half the proportion of GIW that it did in its peak year of 19

83. And in 1992, according to CBO estimates, which do dot assume any congr-ssional actions to curb spending, this proportion will fall to about one-third the 1983 level. Remarkably, this good news about the deficit has been almost completely conceded from the U.S. public.

The second reason that the catastrophic projections of Ronald Reagans critics have proved false is that the im pact of large federal deficits has been of fset somewhat by an nual state and local government budget surpluses. These have ave raged ap proximately 50 bil lion in recent years.

This means that cur rent total public sec tor borrowing, the The Federal Budget Deficit as. a Percentage of GNP 1980 1993 6.3 71 I I I6 E i5 a4 I x 3 2 f1 G NO P 1 1 5.4 5.3 A I I de0 idei idee ides ide4 i des idee ide7 i Bee idee idB0 idei 1692 id93 most accurate measure of the impact of government on the private credit market, in fact, is only about $100 billion a year.

Thesefigures also expose the fallacy of the argument that the U.S. budget deficit hamp ers the well-being of American firms as compared with that of corporations in other countries 7 Congressional Budget Office, 1988, op. cir 4 Total public sector borrowing in the U.S. now consumes 2.3 percent of GW.8 The com bined public sector deficit for the member countries of the Organization for Economic Cooperation and Development (OECD which includes most of America's major European competitors, is 2.5 percent of GNP. Most U.S. trading rivals, in other words, face larger budget deficits deficit of $1 0 0 billion to $150 billion is nothing to cheer about. But thanks to strong growth in the U.S. economy, the deficit is headed firmly downward. It is far smaller as a proportion of national output than just five years ago and slightly lower than in most indu s trialized countries. Panic action is unnecessary, and panic tax hikes could be a disaster To be sure, the budget deficit does have .a negative influence on the economy, and a IS AMERICA UNDERTAXED Proponents of tax increases repeatedly charge that Reagan tax cuts are responsible for the triple digit budget deficits of the 1980s. But the evidence refutes this claim. Federal revenues adjusted for inflation rew b 7.2 ercent in 1984,7.4 percent in 1985,4.1 percent in 1986, and 8.7 percent in 19

87. Total feder al tax receipts today are over $300 billion higher than the year Ronald Reagan became President, and in 1988, revenues will be higher in real dollars than in any other year in history. The increase in tax receipts alone during the past seven years was eno u gh to finance the entire Reagan defense buildup and still leave 175 billion of revenues for other purposes YP Rich Paying More Taxes. By encouraging faster economic activity, moreover, the careful ly crafted tax-rate reductions of 1981 appear to have impr oved revenues for the Treasury.

Several new studies indicate that, as a result of the new jobs and income growth spurred by the 1981 reductions in income tax rates, Americans are paying more taxes now than they would have under the old tax system. And it i s the rich who are paying the fastest growing slice of these taxes. Harvard University economist Lawrence Lindsey, for instance, calcu lates that the nation's richest one percent of taxpayers could have been expected to pay $40 billion in 1985 taxes under the old tax code, but paid appr dmately $50 billion in taxes after top tax rates were slashed from 70 percent to 50 percent Even more remarkable, Lindsey finds that the wealthiest 15 percent of Americans paid three times more in income taxes in 1985 than t hey would have under the old tax code mainly because of the prosperous economy. These results should not be surprising. They mirror the historical experience of the 1922-1925 tax cuts and the 1963 Kennedy tax cuts. In both these cases the economy boomed, a nd tax receipts collected by the IRS mushroomed after tax rates were slashed 8 Richard W. Rahn Do We Need a Tax Increase U.S. Chamber of Commerce, July 27,1988, p. 4 9 Office of Management and Budget, Hisfoncal Tabla: Birdget of flie Uiited States Govenim e nt, Fiscal 1989. 10 See Lawrence B. Lindsey Supply Side Lessons for Reducing the Deficit,"-Business Economics, October 1988, pp. 13-18; and "Laffer's Last Laugh 77ic Econontist, March 19,1988, p. 54 11 "he Classical Case for Cutting Marginal Income T& Rat e s working paper prepared for Representatives Bob Michel, Trent Lott, and Jack Kemp, February 1981 5 The fiscal outlook could have been better, had not Congress spent the past six years work ing to reverse the impact of the 1981 income tax cuts. Congress h as passed fourteen separate tax increases since 19

82. As Figure 2 shows, the tax reductions for Americans achieved by the 1981 tax law will have been eroded by 1989, thanks to this steady procession of tax hikes. Fortunately, the marginal rate reductions of 1981 and 1986, which boost risk taking and the incentive to work, will remain, but the total deduction from the family paycheck once again will be close to the level prevailing just before the last recession.

Greater Danger than the Deficit. The main c ulprit has been the regressive, anti-employ ment Social Security payroll tax, which consumes almost 15 percent of the paychecks of low and middle-income families. Current law schedules another 7 billion Social Security payroll tax hike for 1990 As a resul t of these increases, federal taxes will climb to 19.6 percent of GNP'in 1990; faf above the post-World War II average of 18.2 percent (see Figure 2 Many economists believe that the current high level of taxation as a share of total output constitutes a fa r greater danger to the American economy than the budget deficit Growth in Taxation With No New Tax Federal tax revenues as a percentage of GNP e5 1 1950 1955 I980 I985 1970 1975 I980 I985 1990 Year (OS NOTE Ubt dmdIn# npraentm 1007 CBO budlna ~J.oUOM for rmwamun MUp Inlnchuc Figure 2 WOULD TAX INCREASES REALLY LOWER BUDGET DEFICITS The reason thatthe U.S. has experienced big deficits despite rising federal revenues is that Con gress has made only minimal progress in controlling spending.

The 1 trillion federal budget is equal to about 23 percent of GNP. This is a higher percentage than in 1981 when Reagan entered the White House and is substan tially above the postwar average-of 19.5 percent.

The recent call for higher taxes to trim the budget deficit is n ot the first time that this demand has been heard in Washington. In 1982,.for instance, Congress convinced Reagan to accept a huge tax hike, the Tax Equity and Fiscal Responsibility Act (TEFRA by pledg 6 ing that the record $100 billion increase would be used to cut the deficit. Yet by 1986 the deficit had not fallen as the pro-tax lobby had promised, but had climbed b&$lOO billion.

The reason: the tax increase triggered a $200 billion surge in new spending.

Similarly, a major tax increase in 1984 again w as followed not by a deficit reduction, but by higher spending. It was only when the Gramm-Rudman-Hollings Deficit Reduction Act placed a statutory ceiling on spending that the deficit began to reverse its upward course Tax and Spend Relationship. Several academic studies confirm statistically that new taxes almost always sthulate higher federal spending, rather than lower budget deficits.

Economists Neela Manage and Michael Marlow, for instance, report in the Southern Economic Journal that between 1929 an d 1982 federal receipt growth fostered faster than expected increases in outlays.13 They conclude that a tax increase may not even offer a temporary solution to unacceptably large federal deficits In a subsequent study the authors discovered thy$ this sam e tax and spend relationship holds true statistically for state governments as well.

More recently, members of the congressional Joint Economic Committee commissioned Ohio University economists Richard Vedder, Lowell Galloway, and Christopher Frenze to examine the impact of tax increases on the budget deficit over the last 40 yearss These ex perts have found that higher taxes do not lower budget deficits. On the contrary, they dis covered that a dollar rise in taxes results in a 58-cent increase in the budget deficit because of resulting higher spending after the hike THE IMPACT OF ECONOMIC GROWTH ONTHE FEDERAL.BUDGET DEFICIT Those who want to balance the budget by raising taxes ignore the essen t ial link between economic growth and the budget deficit. Although there is honest disagreement as to whether the U.S. can grow out of the deficit, virtually every economist agrees that without a strong economy, the budget cannot be balanced. Just as an ex p anding economy produces substantial increases in federal tax receipts as incomes, employment, and business profits rise, so an economy in recession causes the federal deficit to mushroom In its February 1988 report, the Congressional Budget Office quantif i ed this relationship between economic performance and the size of the budget deficit.16 According to the CEO 12 For an assessment of the impact of TEFRA on the budget deficit see Richard W. Rahn, Chamber of Commerce of the United States, hearings bcfore t h e House Republican Study Committee, Tax Inkases and the Economy, April 1,1987 13 Neela Manage and Michael Marlow, The Causal Relationship Between Federal Expenditures and Receipts, Southem Econoniic Journal, January 1986, pp. 617-629 14 Michael Marlow and Neela Manage, Expenditures and Receipts: Testing for Causality in State and Local Government Finances, Public Qioice, 1987, pp. 243-255 15 Vedder, op. cit 16 Congressional Budget Ofice, nie Economic and Budst Outlook: Fiscal Years 1989-1993, February 1988 7 Each one percentage point increase in the rate of economic growth would generate a 21 billion deficit reduction in 1989, a $41 billion reduction in 1990 a $64 billion reduction in 1991, and a $90 billion reduction in 1992 Each percentage point reduction in the unemployment rate would reduce the deficit by 42 billion Each percentage point reduction in general interest rates would trim the budget deficit by 11 billion in 1989 and $26 billion in 1992 To illustrate the importance of economic growth on the si z e of the budget deficit, con sider the following scenarios. The CBO projects economic growth rates of between 2.5 per cent and 3.0 percent over the next four years, leading to a 1993 budget deficit of $130 bil lion. But if the economy grows by just one pe rcentage point faster than anticipatedaby CBO the deficit plummets to about $10 billion in 19

93. Conversely, if the economy were to slow by only one percent per year, the budget deficit would be about $300 billion by the end of George Bushs first term.

S trong economic growth is critical to deficit reduction. Yet proponents of tax increases practically ignore the potential impact of new taxes on the growth rate HOW FEDERAL TAXES AND SPENDING AFFECT U.S. ECONOMIC GROWTH Several studies have examined the hi s torical relationship between the level of federal taxes and the rate of economic growth. Most have discovered that, when Congress raises taxes,;the economy grows at a slower pace, adding to deficit pressures. Other studies indi cate, meanwhile, that the p a ttern is for increased taxes to fund more spending and for this tax-induced expansion of government to undermine growth. Examples 1) John Skorburg, chief economist at Sears, Roebuck Company, has analyzed the im pact of federal tax receipts as a pert5ntage of GNP (the tax ratio) on changes in real GNP in the U.S. between 1960 and 19

84. Skorburg concludes that there is a statistically sig nificant negative relationship between the tax ratio and U.S. economic performance over this period. Writes Skorburg: Ev ery year that we have had large increases in taxes as a per cent of GNP, the next year showed a large deceleration in the growth of GNP. For every time we have had a large decline in taxes as a percent of GNP, the very next year it has been followed by a v ery large increase in the-growth of GNP. Table 1 illustrates this inverse relationship since 1960 17 John Skorburg, Taxes vs. Economic Growth Compelling Evidence, in The State Factor, American Legislative Exchange Council, July 1985 8 1960-1969 1970-1979 1 980-1984 Table 1 U.S. Growth Rates and the Federal Tax Burden 1960-1984 Federal Taxes as%GNP 19.0 19.4 20.0 Real Economic Growth 4.2 3.2 2.1 Source: William L Dunkelberg and John W. Skorburg, Taxes and Economic Growth: A Not So Complicated Look at the Iss u e, 1960-1985, unpublished manuscript, March 1986 2) In a follow-up study, Skorburg and Purdue University economist William C. Dunkel berg found a direct inverse relationship between federal taxes and both GNP growth and job creation.lg The authors conclud e Taxes are a key factor in measuring change in the U.S. economy. Using just the tax ratio we can account for over three-fourths of the growth in real GNP as well as over two-thirds of the growth in jobs, in the entire U.S. economy over the past 26 years H i gh taxes lead to low growth, and low taxes lead to high growth 3) Hikes in federal taxes also impair U.S. productivity. Robert Genetski, chief economist at Harris Trust and Savings Bank in Chicago, has reviewed the impact of changes in mar ginal tax rates upon productivity (as measured by private nonfarm output per man hour be tween 1950 and 1986 (see Table 2).19 Concludes Genetski Our analysis suggests that tax rates have been particularly significant in influencing productivity in the past, and all of th e data subsequent to 1981 appears to support that conclusion. Whenever marginal tax rates have increased, productivity trends have deteriorated. Whenever these rates have fallen, productivity trends have improved.

Since the 1981 tax cuts, manufacturing pro ductivity in the U.S. has grown at an average annual rate of 4.3 percent. This growth rate has been higher than that achieved by either Japan or West Germany, and much hi her than the 1.5 percent rate in the U.S. in the five year period prior to the 1981 t ax cuts. 8 18 William L. Dunkelberg and John W. Skorburg, Taxes and Economic Growth: A Not So Complicated Look at the Issue, 1960-1985, unpublished manuscript, March 1986. 19 Robert J. Genetski, Taking the Voodoo Out of Econoniics (Chicago: Regnery, 1986 2 0 Robert J. Genetski, Testimony before the National Economic Commission, August 3,1988, p. 4 9 1950-1958 1958-1962 1962-1965 1965- 1972 1972- 1978 1978- 1980 1980-1985 1985-1991 Table 2 The Inverse Relationship Between Tax Rates and Productivity Change in Average Marginal Tax Rate 3.1 1.1 1.4 3.8 7.5 2.6 4.2 1.4 Change in Worker Productivity 1.4 -0.2 0.9 1.0 1.2 -1.2 1.3 0.5 Source: Robert J. Genetski, Taking the Vmdm Out of Economics (Chicago: Regnery, 1986 4) This year, George Washington University econo m ists James R. Barth and Michael Bradley conducted a U.S. Chamber Foundation study of the impact of federal fiscal policy on the performance of the U.S: economy. Their results identify government spending as the main influence on national economic growth. B arth and Bradley examined total U.S public sector spending at all levels of government as a percentage of GNP in 1930 and 1986 and compared it with the rates of national economic growth. They uncover a clear and con sistent finding that the impact of gove r nment spending on U.S. economic activity or growth is negative This fiiding indicates that it is not so much the method of financing government spending direct taxation versus borrowing that is critical to economic growth, but rather the per centage of pr oductive goods and services in the economy consumed by the government.

The trouble is, of course, that new taxes tend to unleash new spending. Hence raising taxes weakens the economy THE MESSAGE FOR GEORGE BUSH These studies of the impact that taxes have o n economic growth and budget deficits show that, rather than focusing on the federal deficit, which can be eliminated by maintaining growth and constraining spending, the new President and the new Congress should focus on the underlying causes of the defi c it. Balancing the federal budget is a commen dable and important goal. But a more imminent threat to the U.S. economy, says the d most unanimous evidence, is the rising tide of taxes and government spending. This means that balancing the budget will gener a te a stronger economy only if deficit reduction is 21 James R. Bar& and Michael Bradley, The Impact of Government Spending on Economic Activity National Chamber Foundation, 1988 10 achieved by controlling government spending. Conversely, a balanced budget at higher levels of taxes and spending will reduce the living standards of Americans JFKs Wise Words. Policy makers also should recognize that raising taxes is a self-defeat ing strategy to cut the deficit. In 1962, President John F. Kennedy promoted his h istoric tax reduction package by stating: An economy hampered by restrictive tax rates will never produce enough revenue to balance the budget just as it will never produce enough jobs or enough profit.22 Four decades of U.S. experience.confirm Kennedys w ise words; There is a very strong negative relationship between marginal tax rates and economic growth.

Other countries finally appear to be understanding this message. Most countries in the world today are cutting taxes, not raising them. Table 3 shows th e enacted or planned reduc tions in top marginal tax rates for businesses and individuals in eleven developed countries.

Already these countries are enjoying economic and fiscal benefits from their recently enacted tax cuts. In a review of this internatio nal tax revolt, lh Economkt notes: Across the world in recent years, a red tion in top rates of taxes has quickly resulted in higher, not lower, yields to the exchequer Table 3 Top Individual and Corporate Tax Rates, 1984 and 1990 Country Sweden Denmark F rance Netherlands U.K.

Germany IdY Canada Australia U.S.

Japan Individual 1984 1990 82 75 73 68 65 57 72 60 60 40 56 53 65 60 51 45 60 49 50 33 88 76 Corporate 1984 1990 52 40 50 43 45 56 36 51 46 46 53 52 50 42 35 35 50 46 44 39 34 37 Source: Joseph A. P echman, ed. Word Tax Refom: A Ptvgms Report (Washington, D.C.: Brookings Institution, 1980 pp. 4-5; and Bruce Bartlett, An Agenda for Tax Policy, forthcoming In this environment of falling international tax rates, the adverse economic implications of rais i ng U.S. taxes would be magnified. Almost all of the empirical evidence indicates that countries with low tax burdens compete more effectively than their trade rivals burdened with heavy taxes. Furthermore, a recent study by Peat Marwick Main and Company 2 2 President John F. Kennedy, Speech before the Economic Club of New York, December 1982 23 Laffers Last Laugh, op. cit p. 54 11 economist J. Gregory Balentine reveals that the current U.S. effective corporate. tax rates on new investment tends to cluster a r ound those of the highest tax group of countries, well above those of countries like South Korea, Taiwan, Hong Kong, Spain, and By raising taxes, Congress would risk placing the United States at a significant competitive dis advantage against its major tr a ding partners, who are in the process of lowering their taxes CONCLUSION George Bush has been elected President in the month marking the sixth anniversary of the current economic expansion. Over this period 18 million jobs have been created, the unemploym e nt and inflation rates have been cut roughly in half, and real family incomes have climbed by over 10 percent. Bush must remember that the economists and lawmakers who are now supporting a tax hike, and who have done so throughout the Reagan Ad ministrati o n, once claimed that the economic improvement of the past six years was impos sible. They seem completely unable to learn from their mistakes. Once again they insist that, without a major tax increase to balance the budget, the economy will slide into a d eep recession.

Bush should ignore them. Their advice is as bad now as it has been during the past eight years Record Tax Receipts. Bush should understand that, without a tax hike next year, federal ax collections are expected to climb by about $80 billion annually over the next four years thanks mainly to economic growth. In 1990, federal tax receipts will top the $1 trillion mark for the first time. Surely this is enough money to fund the essential activities of the federal government.

Although many in Co ngress attempt to cloak their desire to raise Americans taxes in the rhetoric of deficit reduction, their real purpose to use the money to embark on another 100 billion spending spree could not be more transparent. Dozens of spending bills are al ready aw aiting the tax-hike green light. If Bush permits a tax hike next year, he will lose both the war on the deficit and the war on wasteful spending.

Stephen Moore Grover M. Hermann Fellow in Federal Budgetary Affairs 24 J. Gregory Ballenhe, An International Comparison of J3fective Tax Rates on New Investment, prepared for the American Council for Capital Formation, 1988, p. 2 12


Daryl Plunk

Former Senior Visiting Fellow