The Case for Tax Cuts - Accelerating the marginal rate cuts in the Bush tax cut and extending it to corporate income increase the incentives for individuals and businesses to work and invest.

by Paul Beckner
president and CEO of
Citizens for a Sound Economy.

12/11/02

Many of us believe we should cut taxes simply because we believe in less government, lower taxes and more freedom. So the indications that the Bush Administration plans to push for additional tax cuts next year, including making the 2001 cuts permanent, are very encouraging. But not all elected officials in Washington share our desire for less government and lower taxes – and it is these politicians who have to vote for the President’s proposals if we want the tax cuts enacted into law.

Most elected officials feel a responsibility to plunge-in and “fix” the economy. And, in fairness, since voters tend to hold incumbents responsible for the state of the economy, we should expect politicians to respond accordingly. Therefore, the overwhelming number of politicians in both parties have little interest right now in the ideological arguments for another round of tax cuts. Instead, they want to know how additional tax cuts will lift the economy out of its current doldrums in time for the next election. In other words, we have to make the economic case for tax cuts.

The job is not as easy as it seems. First, the liberals plan to make the case that the Bush tax cuts caused the current slowdown. Sunday talk shows will be filled with statements similar to Senator Kent Conrad’s (D-N.D) on Monday, “they’re plunging us back into deficits and dramatically increasing the national debt, and their only answer is to dig the hole deeper.” Liberals seem to think that keeping resources in the private sector is bad for the economy. The class warfare argument did not work in the last election and the deficit argument rings hollow from the party of big spenders. Additionally, with long term interest rates near historic lows, it is hard for the liberals to argue that the return to deficits has harmed the economy.

But we still have to develop a better case for tax cuts than “it’s the people’s money.” The public expects the politicians to “fix” the economy, so we need to explain how cutting taxes helps this economy right now.

The ultra-liberal Senator John Corzine will be a primary spokesman for the Democrat party. The former chairman of the investment firm Goldman Sachs has supposed “credentials” on what is good for investment. After all, he’s an “investment banker.” He has claimed recently that the corporations today suffer from overcapacity and a lack of demand, so providing additional tax breaks for business will not spur additional investment.

Other more pro-market business executives have complained about pricing pressures and lack of demand in particular sectors. Jack Welch, the former CEO of General Electric, for example has said globalization has temporarily taken away the pricing power for many corporations in particular sectors– and thus cut into profitability.

The challenge for pro-market tax cutters is in understanding the important distinction between the Corzine and Welch arguement. First, Welch argues corporations face primarily a profitability problem, not a fundamental over capacity or lack of demand. So, lowering the cost of doing business by lowering taxes could spur investment. That’s especially true for U.S. corporations facing global demand in international markets. If we lower costs for U.S. firms they will win more business from their global competitors. Second, Welch argues that the severe problems are isolated in particular sectors, such as telecommunications. Sure, tax breaks probably will not increase investment in telecom right now, but telecomm is far from the only industry in America.

Accelerating the marginal rate cuts in the Bush tax cut and extending it to corporate income increase the incentives for individuals and businesses to work and invest. Cutting the capital gains tax rate adds further incentive to risk capital on a new venture or a plant expansion – primarily that you can earn a higher return with a lower tax rate.

While the economy is sputtering along at a less than ideal growth rate, government policy should encourage long-term investment. That’s exactly the impact of lowering marginal rates. Secondly, the government should provide more certainty in its policies – particularly its tax policy. Individuals and businesses make better decisions in a world of more certainty. That’s why it makes sense to make the tax cuts permanent right now – take away the uncertainty of whether the rate reductions will last.

And we should state very clearly – the private sector makes better economic decisions than politicians – so we should keep as many productive resources in the private economy as possible. Cutting taxes does make it harder for Congress to spend money on wasteful programs. That is good economics.

We have a chance to enact good tax policy over the next few months and lay the groundwork for more fundamental tax reform in the near future. But, we must remember to explain specifically how the tax cuts can help the economy – and thus help the politicians keep their jobs.

Paul Beckner is president and CEO of Citizens for a Sound Economy.