The Case for a Tax Cut

January 2, 2001

Even before President-elect Bush is sworn into office, his opponents on Capitol Hill are making a case against his tax cut plan. These comments, peppered with fears of a recession and a lower surplus, all conspired to kill the idea of a tax cut before it could be sent to Congress. With all this talk of a tax cut being irresponsible, it is time to make the compelling case for a tax cut.

1. Taxes are too high. Although Americans have become used to the gradual increase of their taxes every year, there are good reasons to argue that our taxes are too high. Let's compare the level of taxes to the economy as a whole. Last year, federal tax revenue as a percentage of the economy was over 20 percent of the GDP.

One-fifth of the economy goes to federal spending at a time when we are at peace and facing no major national issue. Perhaps you could justify this percentage if we were fighting a war or working to clean up a national disaster. We are not. We are spending over 20 percent of the GDP on federal programs.

2. The tax rates are too high. The marginal rates of taxation have climbed from the original Reagan percentages (15%-28%-33%) to the current Clinton tax rate hikes (15%-28%-36%-39.6%). Taxes end up being higher for all Americans due to bracket creep which occurs because the robust economy has pushed wages and salaries into higher tax brackets.

And tax rates are only part of the equation. The 1990 tax bill disallowed various deductions and exemptions. This had the effect of increasing taxation on Americans. For the past eight years of the Clinton administration, tax revenue has grown faster than national income.

3. The economy would benefit from a tax cut. Economists are beginning to predict that the economy might fall into a recession. Opponents of a tax cut are using that economic possibility as a reason to kill any idea of a tax cut. Actually, the argument should go the other way. Consumer spending constitutes a significant percentage of economic activity. If American taxpayers are allowed to keep more of their money, their spending, saving, and investing will help stimulate the economy.

Energy prices may hurt the economy. Gas prices are nearly double what they were in the past, and natural gas prices have almost quadrupled just in the last year. A tax cut will help Americans ease the strain of higher energy prices until the Bush administration and Congress can address crucial issues facing the energy industry and the economy.

4. The government will spend our taxes unless we get a tax cut. The recent experience with Congress and President Clinton should be a sufficient example. When the government has money to spend, they go on a spending binge. Leave the money in Washington, and Congress and the President will find new ways to spend it. Congress exceeded its own budget caps during the last fiscal cycle. And President Clinton found new ways to fund existing programs and creative ways to fund new programs.

The Cato Institute estimates that non-defense, discretionary spending will soar almost 13 percent this fiscal year. Lots of this was nothing more than pork-barrel spending.

America needs a tax cut, and President-elect Bush seems ready to push for needed change. Some of the relief can come from small, but important tax proposals. Congress can pass legislation that abolishes the marriage penalty. Congress can also pass legislation that removes or reduced the estate tax (the so-called death tax). President Clinton vetoed such proposals. President-elect Bush will sign them.

Congress should also index the Alternative Minimum Tax (AMT). Because it is currently not indexed for inflation, the AMT sweeps more and more taxpayers into its grasp each year. The U.S. Treasury estimates that 17 million taxpayers will pay the AMT by 2010, with many of them paying higher taxes merely because they have children.

But the biggest action should be an across-the-board tax cut. President-elect Bush proposed a reduction in the marginal rates (10%-15%-25%-33%) during the campaign. Many have also called for raising the per-child tax credit to $1000. Congress should pass legislation that includes these and other tax-reducing measures as soon as possible. Lowering marginal rates will restore incentives to start new businesses that hire new workers. It will encourage more Americans to spend, save, and invest in the economy. And it will reduce the amount of money Congress and the President will be tempted to spend. A tax cut is what America needs.