By Greg Smith
This is boring. This is dull. This is important.
For many years the standard Republican template for economic growth has been cutting taxes, but with an enormous national debt it is time to recognize tax cuts without spending cuts, tax and regulatory reform are almost meaningless. Today, whether you tax or borrow the money from the private sector the effects will be nearly the same.
In years past one of the favorite descriptions Republicans pinned on Democrats was “tax and spend.” Democrats wanted bigger government and were willing to raise taxes to pay for it. President Reagan’s massive tax cuts passed in 1981 were very sensible and when you look at the 33% increase in federal tax revenue in constant dollars from 1981 to 1990 the tax cuts more than paid for themselves. Military and social spending went up considerably, which was why the national debt increased in the 1980s.
Comparing the Republican Congress of 1995-99 with the Bush administration, which enjoyed Republican control of Congress from 2001-07, show a considerably different agenda and outcome.
The elections of 1994 were such an enormous victory for Republicans that President Clinton was actually forced to explain why he was still even relevant. The Republican-controlled Congresses from 1995 through 1999 among other initiatives reformed welfare and farm subsidies while controlling spending increases, resulting in government much friendlier to economic growth and employment. Clinton was pretty much forced to go along. When he takes credit for the balanced budget toward the end of his term, he is taking credit for Republican plans he fought tooth and nail.
These were serious reforms with serious consequences: By 1999 the country was at four percent unemployment, which economists consider to be full employment. National debt actually began to be retired. Quite a contrast to the predictions made by detractors in 1995.
President Bush took office in 2001 and Republicans held both houses of Congress until 2007. Bush was never a conservative and was not much of an ideologue when it came to tightening the purse strings. While both the defense budget and social spending increased, Republicans stuck to the idea of lower taxes because it worked under Reagan, but when Reagan took office tax rates were much higher and a greater impediment to growth, so his cuts had the potential to unleash much more growth.
One of the basic arguments for Reagan’s tax cuts was the Laffer Curve, which argues government would collect zero tax revenue with tax rates of 0% or 100%. In the latter case no one would bother working on the books. Government would actually collect more money with 50% tax rates than at 90% tax rates because of the greater incentive to work. The truth of this is elemental.
But if tax rates continue to decline at some point government begins to collect less revenue. Where this point sits is an open question, but it explains tax cuts today – while they should still increase revenue and are justifiable on other grounds – are not going to produce the same increase in revenue as under Reagan because marginal tax rates are already much lower than in 1981. Tax cuts should produce slightly greater revenue, but tax cuts by themselves will not solve our debt problem. We cannot grow our way out of our debt without cutting regulation, waste and simplifying the tax code.
Continuing to spend as we are now requires borrowing, and borrowing money causes the same outcome as taxing: wealth is destroyed because it is taken from economically useful activities – the private sector which exists on its own merits – and given to the public sector in which only a fraction of the money is spent in a way that indirectly generates wealth-producing jobs.
Today, tax cuts without spending cuts are almost meaningless because whether you tax or borrow the money out of the economy matters very little, you still remove it from the private sector. The GOP should look at the successes of Congress from 1995-99 – reform, cut and simplify government bureaucracy and programs, and then consider tax cuts. Republicans fail to claim the success of this strategy at their electoral peril. ©
Greg Smith is a freelance writer and political consultant who lives in Bantam, CT. His blog is found at www.betterfatthanfascist.com.