Monday, January 28, 2002

Tomorrow, President Bush will deliver his first State of the Union Address. Undoubtedly, a major theme of the speech will be to defend his tax cut against increasingly shrill Democratic attacks. A new report from the Congressional Budget Office explains why the tax cut was needed and why it must be preserved.

In recent days, Democratic Sens. Tom Daschle of South Dakota and Edward M. Kennedy of Massachusetts have blasted the tax cut enacted last year.

Predictably, the usual left-wing groups immediately chimed in with analyses blaming the tax cut for obliterating the surplus and explaining why only the rich would suffer if the remaining portion of the tax cut was repealed.

What these analyses always leave out is context. They never really explain what the alternative is. The fact is that taxes as a share of the gross domestic product were at a post-World War II high when the tax cut was enacted last year, and would have continued to rise without legislative action.

Moreover, even with the cut, taxes remain well above their historical average as a share of GDP. In short, there is simply no evidence whatsoever that the tax cut deprived the federal government of the resources it needs to do its job.

The CBO report provides the data lacking in the studies by Citizens for Tax Justice, the Center on Budget and Policy Priorities and other liberal groups. It shows that individual income taxes consumed 10.2 percent of GDP in 2000. This percentage increased steadily throughout the Clinton administration, rising from 7.8 percent in 1992 to 8.5 percent in 1996 and 9.6 percent in 1999. By the time Bill Clinton left office, income tax revenues were almost 2 percentage points of GDP above their long-term average of 8.3 percent.

Although Mr. Clinton’s 1993 tax increase bears much of the blame for the growing tax bite, our progressive tax system also bears much of the blame. Because tax rates rise with income, economic growth pushes people up into higher tax brackets. Thus, taxes will automatically rise as a share of income unless they are cut periodically. Economists call this “fiscal drag,” and it was the main reason John F. Kennedy gave for cutting taxes in 1963.

According to the CBO, had there been no tax cut last year, income taxes would have remained above 10 percent of GDP indefinitely, and would have continued to climb to 10.5 percent by 2011.

The latest estimates, incorporating the budgetary effects of the tax cut, still show income taxes remaining well above 9 percent of GDP for the entire forecast period. In other words, taxes will be considerably higher than their historical average for the foreseeable future even with the tax cut.

Another point nearly always ignored by left-wing tax-cut opponents is that there is a major tax increase already programmed into current law. Because of idiotic Senate budget rules, the tax cut will be, in fact, repealed in 2011. Every single provision that Mr. Daschle and Mr. Kennedy want to get rid of automatically disappears after 2010. As a consequence, income taxes will jump from 9.4 percent of GDP in 2010 to 10.2 percent in 2011 and 10.6 percent in 2012, according to the CBO.

The left-wing tax grabbers talk a lot about budget surpluses, as if they are the magic elixir that creates growth. Mr. Daschle even went so far as to suggest that the tax cut actually deepened the recession. In his Jan. 4 speech, he seemed to say that without the tax cut the government would have had more revenue with which to cut taxes in order to fend off the recession. This has to be the silliest example of circular logic on record.

In any event, the main cause of lower surpluses is not the tax cut, but slower growth cause by the recession and the events of September 11. This accounts for 40 percent of the decline in the surplus between now and 2011. The tax cut accounts for 32 percent compared with the CBO’s projections one year ago. The remainder results from higher government spending. Even if one apportions higher interest payments resulting from the tax cut, its share of the total surplus decline only rises to 41 percent.

Together, all these factors will reduce future surpluses by $4 trillion. Yet, we still will have surpluses. This year and next, small deficits are expected. But in 2004, surpluses will return, rising to $300 billion by 2010. Moreover, the federal debt as a share of GDP declines every year of the forecast period, from 33 percent this year to 15 percent in 2010.

The truth is that even if Mr. Daschle and Mr. Kennedy had their way, we wouldn’t have the large surpluses that they say would exist without the tax cut. That is because they would simply spend the money on additional government programs.

Mr. Kennedy had along list of such programs in his Jan. 16 speech that he would fund with all the money raised by repealing the tax cut.

The case for the tax cut is still strong. Mr. Bush should not be shy about making it on Tuesday.

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