Advocates of high taxes have denounced President Bush’s preferred tax-cut argument—it will help the economy—as outmoded Keynesianism. They have a point.
In his first address to Congress, Bush said, “To create economic growth and opportunity, we must put money back into the hands of the people who buy goods and create jobs.”
That sounds like the old Keynesian idea made popular during Franklin Roosevelt’s New Deal: Cut taxes and increase government spending to “prime the pump” during a recession; raise taxes and reduce spending to slow down an “overheated” economy. Keynesianism seemed to have been finally laid to rest in the 1980s when President Ronald Reagan argued for a tax cut on supply-side grounds, and even liberal economists now agree that such fine-tuning has little effect on the economy.
But one weak argument doesn’t mean we shouldn’t cut taxes. Here are eight good reasons for a cut in income tax rates:
1. In a free country, money belongs to the people who earn it. The most fundamental reason to cut taxes is an understanding that wealth doesn’t just happen, it has to be produced. And those who produce it have a right to keep it. We may agree to give up a portion of the wealth we create in order to pay for such public goods as national defense and a system of justice. But we don’t give the government an unlimited claim on our money to use as it sees fit.
2. Private individuals and businesses use money more efficiently than governments do. People with their own money at risk spend or invest it carefully. You don’t find many $600 hammers or insolvent retirement programs in the private sector. Money will do more good for more people in private hands than in government hands.
3. High taxes discourage work and investment. Taxes create a “wedge” between what the employer pays and what the employee receives, so some jobs don’t get created. High marginal tax rates also discourage people from working overtime or from making new investments. It’s true, as some critics say, that our current marginal rates of 39.6 percent (somewhat higher when combined with other taxes) do not depress economic output as much as the 70 percent rates that taxpayers faced in 1980. But most economists now agree that a reduction in marginal tax rates will increase output to some degree.
4. Income taxes should be cut because the overall tax burden is quite high right now. As of the third quarter of 2000, federal revenues as a share of the gross domestic product hit a peacetime high of 20.8 percent. Prosperity has made Americans more accepting of the rising tax burden, but the current economic slowdown will make high taxes harder to bear.
5. If we don’t cut taxes, Congress will spend the money. If one thing is certain in Washington, it is that Congress will spend every dollar it can get its hands on. Every interest group wants something—a road, a dam, a social program, more teachers, more policemen, more corporate welfare—and members of Congress want to be liked. The only way to “put the surplus in a lockbox” is to let the taxpayers keep it.
6. Lower taxes are the only real check on the expanding size and scope of the federal government. If we want smaller government, our best strategy is to reduce the amount of money Congress has to play with.
7. Elected officials should keep their promises. As a candidate, Bush promised to cut income taxes. As president, he should keep that promise.
8. For Bush and Republicans in Congress, this may be the most important reason of all: Republicans win when they cut taxes. Tax cuts unite the Republican base. The tax consumers in our society are well organized; the taxpayers need to be organized, too, around a tax cut program. In 1980, 1984 and 1988, Ronald Reagan and George Bush won three presidential elections by promising to cut taxes and then cutting them. George Bush raised taxes and lost the next election. I wager this is a lesson not lost on George W. Bush.
There you have it: one bad reason to cut taxes, eight good ones. President Bush should drop his weak argument and focus on those that work.
Author: David Boaz (Cato Institute)