- The Washington Times - Sunday, October 15, 2000

Should we cut taxes? How much? How much is too much? Al Gore says cutting taxes will wreck the economy. George W. Bush says we should give back some of the "surplus." Who's right? Actually, they are both wrong. Nobody is asking the ultimate question: What is the proper tax rate?

Here's why: If taxes were 1 percent, the economy would go crazy but create no tax revenue. If taxes were 99 percent, the economy would be crushed with overtaxation, and once again, create no tax revenue. But if we lowered taxes from that 99 percent rate, the economy would grow and tax revenues rise. However, the tax revenue would eventually peak and then drop off, to meet that 1 percent level. If you plot this on a graph, (a) it forms a bell curve, or "Laffer Curve," or sometimes called "the curve Democrats don't understand."

The peak of that curve is a perfect, powerful combination of growth and revenue. So where is that peak? And which side of the bell curve are we on? A complex economy is difficult to measure, but if we conducted a simple experiment over, say four decades, we could get a pretty good answer. Impossible? Actually, we already did it. John F. Kennedy cut taxes, and the economy boomed. Jimmy Carter raised taxes, and the economy flopped. Ronald Reagan cut taxes, and the economy set unequalled growth records. President George Bush raised taxes and the economy slowed. Bill Clinton raised taxes in 1993, and the economy almost went into recession. The GOP Congress took over in 1995, passed a massive capital gains tax cut and the economy soared. Since 1960, every time we raised taxes, the economy and revenues slowed. Every time we cut taxes, the economy grew and tax revenues poured in. That means we are on the overtaxed side of the curve.

But there's more.

As you search for that peak, a phenomenon becomes apparent: You get the same tax revenue with two different tax rates, one on the overtaxed side and one on corresponding low-tax side of the curve. (b) On the low-tax side of the curve, tax rates and revenues have a converse relationship; if you raise taxes, the economy slows as revenues grow. But on the overtaxed side of the curve, this GNP/revenue ratio doesn't change much, regardless of the tax rate. Over the last 40 years, tax rates have varied from 90 percent down to 28 percent, but tax revenues have always been about 18 percent to 20 percent of GNP. This also proves we are on the too-high tax side of that curve.

But if tax cuts create more revenue, why did we get those big deficits? Simple. We spent too much. Democrats love to blame Mr. Reagan, who spent $650 billion on a military build-up. But the national debt is $6.5 trillion. That means 90 percent of our debt came from those uncontrolled money-burning entitlement programs. Plus, Mr. Reagan's war machine defeated the Soviet Union, enabling Mr. Bush and Mr. Clinton to cut military spending in half, helping end deficit spending. Actually, tax revenue has little to do with spending. If your boss doubled your salary, then you drove straight to the docks and bought a yacht on credit, spending caused your debt, not your income.

So who gets the tax cut? Democrats rail against those mean rich people evading their fair share of taxes. Yet the richest 25 percent pay 85 percent of all taxes. The lowest 50 percent only pay 3 percent. In fact, the "working poor" get free money, and the poorest get welfare. If you want the rich to pay more taxes, you must find that proper tax rate. That means cutting taxes. With enough revenue, we could even eliminate taxes on the lower income. And that is exactly what Mr. Bush has proposed.

That's why understanding that graph is so critical. Reagan tax cuts actually doubled the tax revenue from the rich. So did Kennedy's. In 1995, Bill Clinton took time out from his coffee room exploits to endorse the Republican capital gains tax cut. The resulting economic boom created a tax surplus funded almost entirely by the rich.

We can argue how the tax burden gets spread out, but we must determine the best tax rate that creates the highest tax revenue with the greatest economic growth. Once we figure out where that peak is, the debate should be about how low taxes should be, not how high. Al Gore wants to nibble with bogus "targeted tax cuts." And his 81 proposed spending programs will swallow the entire surplus. Mr. Bush wants to give money back to taxpayers because "it is theirs," without understanding why it will work. Mr. Bush is right, Mr. Gore is wrong, but sadly they don't know why. They are asking the wrong questions.

Inarguably, America is on the overtaxed side of the tax curve. We should be asking and answering the ultimate question: What is the proper tax rate?

Tom Adkins is the publisher of the Common Conservative.



Click to Read More

Click to Hide