By Anthony Cash
It is time for some shocking news. The Federal Government is continuing to spend money at an alarmingly high rate, exceeding tax revenues. Consequently, deficits are continuing to climb. Our war efforts in Iraq cost $6 billion a month. Coupled with the projected $150 -$200 billion that will be spent on the unexpected Katrina relief and recovery efforts, the result is an even greater deficit than was originally expected for the year. As a result of this spending, the annual interest cost on our debts is anticipated to increase by $5 billion.
This increased deficit has caused many people to question the wisdom of George W. Bush’s tax-reduction plan. Some pundits have even suggested that the tax cuts be repealed or scaled back. This, however, would not be a step forward for the Federal Budget or the economy. Such drastic and ill-conceived action would in all actuality do more harm than good. Pro-growth tax policies have a history of leading to greatly increased Federal Tax revenue when they are allowed to run their course.
Look, for example, at the tax cuts of Ronald Reagan. These were massive tax cuts. The top tax bracket was reduced from a tax rate of 70 percent to a tax rate of 50 percent and then again to a rate of 38.5 percent before Reagan left office. As a result of these cuts and the ensuing economic prosperity, tax receipts increased by 56 percent over the course of the Reagan presidency.
Annualized, this growth easily outpaced the average 4 percent inflation rate for those years. However, a curious thing happened. Despite the increased revenue, deficits during this period soared. That’s because government spending grew by 69 percent over that same period of time.
Already I can see two arguments forming. One is opposed to the theory that Reagan’s tax cuts resulted in the revived economy. It will state that the increase in government spending resulted in the economic boom of the 1980s and, ironically, the increased tax revenues. However, following John F. Kennedy’s tax cuts the economy leapt forward. The resulting increase in tax revenue combined with fiscal moderation led to a balanced budget by 1969.
The second argument is that Bush’s tax cuts have not had the same dramatic effects as Reagan’s. But looking at economic data from the 1980s, we can see that Reagan’s cuts took some time before they turned the economy around and increased revenue. From 1981 to 1983, tax revenue only increased by 1 percent. Similarly, it will take time before we see the full effect of these tax cuts, but some progress has already been made. Unemployment is back below 5 percent. Tax revenues gained 5 percent in 2004 as a result of the more permanent 2003 tax cuts and are on pace to increase significantly this year as well.
Bush’s tax policies may not be as short-sighted as some are claiming. If he is to be faulted, then it should be for not vetoing a single spending bill passed by the Congress. It seems that the real key to reducing federal deficits is not to do away with pro-growth tax policies. The real key is that government spending must be reined in and our policy-makers must learn some self-control when it comes to spending our money.
Anthony Cash is a sophmore majoring in Political Science, and is a contributing writer for The Louisville Cardinal. E-mail him at: opinion@louisvillecardinal.com
