President Bush recently told an audience in New Hampshire: “You
cut taxes, and the tax revenues increase.” He reasons that lowering
taxes will entice employers to expand their operations and consumers
to spend more. To invigorate the economy, moreover, the largest tax
reductions need to go to the wealthiest, because they have the capital
to take risks and to finance business expansions. The Cato Institute,
an avid advocate of tax reductions as economic incentive, found over
the past decade that the ten states with the largest tax cuts enjoyed
27 percent more income growth than the ten states with the largest
tax increases.
Yet, whether reduced taxes produce more business and more tax revenues
obviously depends on the case-by-case decisions of millions of employers
and consumers if and when they want to spend more. A growing body of
research, however, does not support the unqualified optimism of the
tax cutters.
Last December, the Congressional Budget Office estimated that further
tax cuts would recover only 22 percent of lost revenue over the first
five years and 32 percent over the next five. Harvard professor Gregory
Mankiw, former chairman of the President’s Council of Economic
Advisors, found that “over the long run” growth stimulated
by cuts on capital taxes is likely to pay for half of the lost revenue
while tax cuts on wages might recuperate only 17 percent of the revenue
loss.
Based upon these data, every $1 billion cut in income taxes would add
$870 million to the national debt. The opponents of tax reductions
warn that the country cannot afford going much deeper in debt at a
time when this year’s budget deficit is still expected to exceed
$300 billion. The shortfall created largely by the six tax reductions
in the past six years is now totaling nearly $2 trillion. Does it make
sense to buy uncertain economic growth for certain debt inflation?
Since the tax cut in 2003, Federal tax revenue has increased from 1.9 trillion
in 2004 to an anticipated $2.3 trillion in 2006. Revenues as percentage of gross
domestic product, however, fell from 20.9 percent in 2000 to 16.3 in 2004 and
17.7 this year.
Alan Greenspan, former chairman of the Federal Reserve, reminded Congress that “The
budget deficit problem needs to be resolved primarily or fully on the expenditure
side.” Yet, the assumption that tax cuts will force matching cuts in government
spending has also been torpedoed by recent research. William Niskanen of the
Cato Institute, an economist in
President Reagan’s White House, found to his dismay that tax cuts usually
did not curb government spending.
While the benefits claimed for the Bush administration’s tax cuts are in
dispute, the harm done by them is incontestable. The six cuts have widened income
inequality and swelled the U.S. debt to $8.341783 trillion (or $8,341,783 million)
as of May 18, 2006. On this day the estimated population of the United States
stood at 298,733,643 so that your share and mine of this debt was $27,923.81.
In the meantime, the national debt has risen steadily, an average of $1.78 billion
per day since September
30, 2005.
In fiscal 2005, the federal government spent $352 billion of our taxes on interest
payments to the holders of the national debt. By comparison, the Feds spent $61
billion on education and $56 billion on transportation.
As a loyal owner of U.S. government bonds, I am playing a funny game for years:
With one hand I collect the interest payments while with the other hand I return
them to the U.S. Treasury as taxes.