Tax Fraud: Facts disprove claims that Dole cuts would
David G. Tuerck
When Bob Dole announced his proposal to offer
a 15 percent tax cut, Bill Clinton accused him of "blowing
a hole in the deficit." In one stroke, he reduced the idea
of an across-the-board tax cut to an exercise in fiscal irresponsibility
which it decidedly is not.&127&127
Senator John Kerry called the Dole plan "voodoo
redo" and "a huge mistake at this moment in our economy.
Our first obligation is to balance the budget."
At the Beacon Hill Institute, we don't think
so. In fact, our analysis shows substantial benefits for Massachusetts.
For those of us who toil in the economic
vineyards, there is a rich irony in all of this. Sixty years ago,
John Maynard Keynes revolutionized economics with the idea that
government can cure depressions by deliberately running budget deficits.
His apostles among politicians and economists bastardized that insight
into the notion the economy will expand whenever government runs
a deficit. The idea is still found in some textbooks and in the
yellowing class notes of the professors who use them, but is actually
anathema to almost all politicians and many economists today.
Why the irony? The very politicians who condemn
the Dole tax cut for increasing the deficit are unknowingly buying
into the Keynesian argument that tax cuts automatically increase
deficits and interest rates.
Supply-side economists, for whom Jack Kemp
and now, belatedly, Bob Dole, are the political embodiment, reject
this argument. For them, lower taxes encourage work and saving and,
in that way, lead to economic growth. Tax cuts do not automatically
imply higher deficits or interest rates.
Bill Clinton may have good reason to reject
the supply-side approach, but if he's going to use the Keynesian
approach, he can't argue the case both ways. If he wants us to believe
that Dole will raise interest rates through a higher deficit, then
he has to admit that Dole will not hurt the economy in doing so,
because lower interest rates (in the Keynesian view) come from a
weakening economy. If Clinton wants us to believe that Dole will
hurt the economy, then he has to admit that Dole will also bring
lower interest rates.
Clinton is not alone in lacking consistency.
If Kerry were consistent, he would not have cast a decisive Senate
vote in defeating a balanced-budget amendment. If President Bush
had been consistent, he would not have broken his "read-my-lips"
pledge. And, given his own epiphany on the road to San Diego, Bob
Dole can also be accused of inconsistency.
|Our analysis of the plan concludes
that the incentives of lower federal taxes would generate
112,307 new jobs (an increase of more than 3 percent),
increase state payrolls annually by $8.03 billion, bring
about $5.5 billion in new capital spending and annually
bring in an additional $478 million in state revenue.
|As for Dole's proposed tax cut ($548
billion over six years), consider two periods: the Reagan
tax-cut years, 1982-1989, and the Bush-Clinton tax-increase
years, 1989-1996. Looked at this way, Clinton's $260 billion
tax boost was merely the completion of a policy that Bush
began when he raised taxes by some $225 billion.
What Dole promises
is to bring federal tax policy essentially back to where
it was at the end of the Reagan era - - what voters thought
they were getting when they elected George Bush.
We should therefore be able to assess the
Dole tax cut by comparing the effects of the Reagan years
with the effects of the Bush-Clinton years.
The federal government deficit rose under
Reagan (although it was slightly lower in 1989 than it is
today). But the federal deficit does not represent the entire
picture. State and local governments account for about 44
percent of all government receipts. In comparing the Reagan
and Bush-Clinton eras, we need to know what happened to
the combined federal, state and local government deficit.
The combined deficit
was $83 billion or about 2.6 percent of gross domestic product in
1982, the first year of Reagan's income-tax cuts. It was $18 billion
or about 0.3 percent of GDP in 1989. The combined deficit fell both
absolutely and as a fraction of GDP under Reagan.
In the first quarter
of 1996, the combined deficit stood at $64 billion, about 0.9 percent
of GDP. It rose both absolutely and as a fraction of GDP under Bush-Clinton.
That evidence suggests
just the opposite of what Clinton would have us believe: The high
taxes of the Bush-Clinton era are associated with bigger overall
deficits than the low taxes of the Reagan era. Because the economy
grew more rapidly under Reagan than it has under Bush and Clinton,
state and local government tax revenues also rose more rapidly,
thus causing the combined federal, state and local deficit to fall.
The chart on this
page compares the average annual growth rate of selected economic
indicators in each era.
||Reagan Era (average annual % change)
||Bush/Clinton Era (average annual % change)
|Federal Government Receipts
|Real Personal Income
|Real Disposable Income
|Real Per Capita Disposable Income
Source: Economic Report of the President,
1996 and Survey of Current Business, August 1996
What about interest
rates? At the start of the Reagan era, AAA corporate bond yields
stood at 13.79 percent. By 1989, the figure was 9.26 percent. Currently
it stands at 7.71 percent.
By this measure,
therefore, interest rates fell by 33 percent under Reagan and by
17 percent under Bush-Clinton. If we compare rates after adjusting
for inflation, the results are even more striking. The real interest
rate fell by 39 percent under Reagan but rose by 7 percent under
What would the Dole
tax plan do for Massachusetts? The incentives of lower federal taxes
would generate 112,307 new jobs (an increase of more than 3 percent),
increase state payrolls annually by $8.03 billion, bring about $5.5
billion in new capital spending and annually bring in an additional
$478 million in state revenue.
In comparing Reagan
with Bush and Clinton, it appears that the supply-siders are right.
By cutting those federal taxes that did the most to discourage work
and saving, the government was able to increase work and saving,
reduce interest rates and raise new tax revenues.
It is thus the record
concerning deficits that blows a hole in Bill Clinton's views on
David G. Tuerck
is executive director of the Beacon Hill Institute for Public Policy
Research at Suffolk University, where he also serves as chairman
and professor of economics. This article first appeared in Boston
Sunday Herald on September 29, 1996.
Format revised on August 18, 2004