Evans On The Economy -- Federal Budget Deficits Forever?

Dec. 21, 2004
They're not a given if a re-elected Bush reverses course, imitates Reagan.

So is it to be federal budget deficits forever -- again? Maybe not. We heard similar budget deficit laments in the 1980s and the early 1990s. But they did not occur. Rapid growth of the U.S. economy helped. But the fact of the matter is that the deficit was temporarily retired by raising taxes -- under Presidents Reagan, Bush I, and Clinton -- and by cutting spending. Will this happen again? Along about, say, Nov. 3, 2004, newly re-elected George W. Bush is going to say something like, "I had no idea the deficit was growing so rapidly. We must do something about it, and do it soon." And so all the wheels will then turn in motion to reverse the fiscal profligacy of the past four years. That much is almost a given. But there is a tremendous difference between reducing the deficit by cutting spending and by raising taxes. And, for that matter, not all tax increases have an equal impact on the economy. For many years -- in fact, many decades -- I have pointed out that tax cuts don't make sense unless they are accompanied by spending cuts. In fact, one of the very first articles written for IndustryWeek, I said I could not support the Kemp-Roth tax cuts unless they were accompanied by spending cuts. Rep. Jack Kemp went ballistic when he read the article and, doing his best early Howard Dean imitation, ranted and raved to me for 15 minutes. This time, the spending "cuts" -- at least relative to election year promises -- are relatively easy to identify. The war in Iraq will be "won," so we can start cutting back there. That trip to Mars, while the best idea of at least the past century, will have to be postponed until more funds are available. And upon closer examination, the new Medicare expansion will turn out to be flawed, so it also will be delayed. What about tax increases? The major question is whether the tax cuts that are currently in place will be permanently extended, or permitted to expire in 2011, as the legislation is now written. Obviously there will be some compromises. Taxes will not return to 2001 rates, for if they did, not only would people be hit by a massive tax increase, but the alternative minimum tax (AMT), which is not indexed, would affect a majority of taxpayers. I have always thought the tax cuts that have the biggest beneficial impact on the economy are the reduction in high marginal rates. In that sense, once everyone above the poverty level is subject to the AMT, we will essentially have a flat tax. So why not reform the tax system and move to a flat tax right away, set at 25%, with a deductible of $10,000 per person? That would raise as much money as the pre-2001 tax schedule but would cause fewer distortions. Actually that is just what President Reagan had in mind in 1986 when he lowered the top tax rate to 28% and cancelled most deductions. But the system was gutted when Clinton moved the top tax rate back to 50%, including all the disappearing deductibles and other gimmicks. It was that decision more than any other that led to the new proliferation of abusive tax shelters, a decision hidden from sight because the once-in-a-lifetime stock market boom generated a huge temporary surge in receipts. When the surge ceased, we were left with the raw truth, namely that an additional $100 billion per year in tax receipts was gone because of shelters and other aggressive tax avoidance. It was the principled cuts in high marginal rates and spending under Reagan that set the stage for prosperity in the 1990s, and George W., in his second term, has the same opportunity to accomplish what Reagan did in his second term. We'll see. Michael K. Evans is chief economist for American Economics Group, Washington, D.C., and president of the Evans Group, an economics consulting firm in Boca Raton, Fla.

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