Partners - Stock market, economic and political commentary by Patricia Chadwick

Archive for February, 2001

Democratic Party’s unfounded fear of Tax Cuts

Thursday, February 15th, 2001

President George W. Bush noted at the Republican convention in Philadelphia a rather peculiar quality of the modern Democratic Party, the party of Franklin Delano Roosevelt. “The only thing that Democrats have to offer is fear itself,” he remarked. Never has this truth been more apparent than today, as the war over tax cuts heats up on Capitol Hill.

Panic has set in among the Democrats in Congress. Fearful that they are losing the battle on tax cuts — particularly now that Alan Greenspan has seen the light and weighed in with an endorsement of them — they have resorted to using scare tactics. They are bemoaning the tax cuts as a return to the Reagan years and the deficits he “created” with his “profligate” spending and generous tax cuts. Unfortunately for those Democrats, it is their selective memory that is scary. Today’s dramatic economic slowdown and historically high tax burden demand wide, deep and immediate tax relief.

When Ronald Reagan was elected president in 1980, the U.S. economy was suffering from the dual affects of economic recession and runaway inflation. The CPI was above 12annually, the price of oil was hovering around $40/barrel, the dollar was in the tank and the top marginal personal income tax rate was 70 The U.S. was humiliated by the kidnapped embassy employees in Tehran. Economically, we were epitomized by the sobriquet “rust belt”.

In walked a new president with a new vision, an agenda so radical that the liberal press had to resort to rationalizing it as the feeble ramblings of an aging, B-grade movie actor. His mission: slash income taxes, reduce the size of the Federal Government and reinstate the U.S. as the world’s preeminent military and economic superpower.

Even without a Republican majority in the House of Representatives, President Reagan was able to get his tax cut and wholly justified defense investments passed. But Congress never gave him cuts in wasteful non-defense spending. Meanwhile, with cost of living adjustments (COLA) for social security recipients and civil service and military retirees running at upwards of 12 non-discretionary spending was accelerating fiercely for the first half of the decade.

In this context, Reagan’s tax cuts undeniably benefited both taxpayers and investors. But equally as important was the enormous INVESTMENT made by Reagan in the national defense that broke the back of the Soviet Union and won the cold war. It was that very victory that ultimately allowed the U.S. to reduce spending on defense. During the Reagan years, defense spending averaged 5.9of GDP, whereas during the Clinton years, it averaged only 3.5of GDP.

Lest the liberal media have convinced you that President Reagan was simply a dim witted if charming man with a lot of good luck, I recommend you read the new book, Reagan, In His Own Hand. His handwritten radio addresses and speeches are the work of a deep thinker and a man of conviction. According to the book’s editors, 30of Reagan’s 670 drafts of radio broadcasts dealt with national defense or foreign policy issues. All of the writing was done before he was elected President.

In fact, one can lay the current budget surplus to a few very basic achievements: the decline in defense spending; the reduction in the capital gains tax rate by Clinton in 1997; low inflation which made the impact of COLAs inconsequential; and, most importantly, the Republican Congress, led by Newt Gingrich which, starting in 1994, held the Government’s feet to the fire and forced the deceleration of Federal Government spending.

Prolonged government surpluses are ultimately unhealthy for the economy and for taxpayers. Governments do not generate profits, they dissipate them. Budget surpluses do not necessarily imply financial health; rather they drain profit-seeking capital out of the economic system and impede economic growth.

The phony cry of the Democrats is that tax cuts are a boon to the rich and the cuts unfairly benefit the well to do. But look at the arithmetic, which is quite simple. It doesn’t take higher math to figure out that the people who pay most of the taxes will, of necessity, get most of the tax cut. In 2000, the income tax paid by all individuals making less than $50,000 was $67 billion or a mere 7.5of the total income tax receipts. Put another way, 65of the tax returns paid 7.5of the Federal income tax liability.

Tax cuts do several things. At the lower end of the wage spectrum, they do indeed stimulate spending and augment saving. At the upper end of the wage spectrum, they have far greater impact on investment than on spending. The major portion of high-end wages are reinvested into the economy through investment in stocks or through direct equity investments in businesses. Those investments in turn generate new revenues and profits, which in turn produce tax receipts. It is a very virtuous cycle.

President Bush has sent to Congress the tax plan on which he ran – nothing more and nothing less. That says a lot about him and his vision and his conviction. It also shows leadership and a lack of Washington “insiderness”; he is not playing to any special interests, be they Republican or Democrat.

The liberal media are grudgingly giving President Bush “good marks”, anxiously waiting the moment they can pounce on him and dredge up their old stereotypical descriptions. But I believe they will be surprised at their lack of opportunity. Just as with President Reagan, the media fail to understand that powerful and successful leadership does not conform to the ideals and the norms of pundits and spin-doctors; rather they are embodied in the soul and mind. President Bush’s deep-seated beliefs have been espoused all through his campaign – individual freedom, small but strong government, personal accountability. He is leading with those, and there is no time like the present. American taxpayers – the economy they have built – need real Reaganesque tax relief, not more fear mongering from the “party of the people”…