- The Washington Times - Monday, March 12, 2001

Democratic leaders Dick Gephardt and Tom Daschle have been making outrageously exaggerated class-warfare charges about the Bush tax cuts. But rarely do you see the news media the guardians of the truth challenging their accusations.

Let's take a look at their most egregious claims.

First, they say President Bush's tax cuts are too big. But compared with what?

There have been two across-the-board income-tax cuts enacted in the last 40 years: President Kennedy's and President Reagan's. Both were substantially bigger than Mr. Bush's tax cuts when measured as a share of the gross domestic product, which is the value of all goods and services produced by our economy each year.

Kennedy's tax cuts represented 2 percent of the GDP. Mr. Reagan's cuts, enacted in the midst of a severe recession, measured 3 percent of the GDP. Mr. Bush's plan, in contrast, would be just more than 1 percent of GDP.

The Democrats who argue that the tax cuts are too big never say what they mean by that. When Mr. Reagan cut taxes in 1981, the annual budget was about $600 billion, and GDP was measured in the low single-digit trillions. Today, the annual budget is approaching $2 trillion, and the size of the economy has grown to $10 trillion a year. The Bush tax cuts, which would cost a mere $5.6 billion in the first year of the six-year phase-in period, pale in comparison.

Second, critics say the Bush tax cuts cost too much and thus will drain precious funds from the Treasury.

In fact, his plan's $1.6 trillion price tag under static analysis is about 6 percent of the $25 trillion the U.S. Treasury will rake in over the coming decade.

As a percentage of the nearly $6 trillion projected surplus (and I believe the surplus will be much larger than that), we are talking about returning only one-fourth to the taxpayers; using some to pay down $2 trillion of public debt in order to strengthen Social Security and Medicare; and, finally, to set aside the rest for a rainy-day fund and for other spending priorities.

However, if you use dynamic analysis to calculate the cost of the tax cuts that is, if you include the increased tax revenues they will spawn as a result of higher economic growth studies show the cost will be much less than $1.6 trillion.

Heritage Foundation economists Mark Wilson and William Beach figure the real cost of the tax-cut package will be $939 billion $650 billion below the White House's cost estimate.

Their model projects that the tax cuts would produce 1.6 million more jobs than the Congressional Budget Office forecasts. If that is so, the cuts would yield $846 billion more in tax revenue, boost net interest payments on the debt by $226 billion and raise federal spending by $283 billion.

Another dynamic analysis by American Enterprise Institute economist John Makin projects that a $1 trillion tax cut would add at least half a percent to the economy's average annual growth rate over the next 10 years. That would push the projected 3.5 percent increase in the GDP to 4 percent, which in turn would boost tax revenues by $700 billion, bringing the tax cut's cost down to just $311 billion.

Also, it is important to remember that virtually all of the critics of the Kennedy and Reagan tax cuts predicted that they would drain money from the Treasury. In fact, both tax cuts fueled stronger economic growth, which in turn produced substantial increases in federal tax revenues.

Third, the Democrats say the tax cuts help only the rich at the expense of the middle class and the poor.

But a distributional table on who benefits from the Bush tax-cut plan produced by the Joint Committee on Taxation in Congress shows that those in the broad middle-income range, taxpayers making between $30,000 and $75,000 a year, would reap 20 percent of the tax cuts. Include those making $100,000 or less, and they receive 30 percent of the tax cuts.

The richest 1 percent, who pay 31 percent of all federal income taxes, would get 22 percent of the tax cuts in the Bush plan (estate taxes are not included in this measure because estates are not income). But their share of taxes would rise in future years, while the share paid by the middle class would decline.

A middle-class working couple earning $40,000 a year, with two children, would get a total tax cut of $1,760 when the plan is fully phased in. That's a tax reduction of 79 percent. Notably, $1,000 of that cut comes from doubling the $500-per-child tax credit.

Finally, critics fear that the surpluses will decline or vanish, and that tax cuts will result in a return to deficits.

But the surpluses which are coming in about $35 billion higher than last year will only decline if the economy declines. As the Kennedy and Reagan tax cuts showed, lower tax rates will, over the long term, increase job-creating capital investment, expand the economy and produce more tax revenue. Keep government spending at moderate levels, and the surpluses will indeed grow.

Yes, we are in a slowdown, but no one expects it will last more than six months to a year. Over the next decade, the economy will grow substantially if we follow the kind of tax-cutting, growth economics that have made us the largest and most affluent nation on Earth.

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