A Major Dole Tax Cut Wouldn't Pay for Itself
David Wyss has one of those fancy computer models that can simulate the impact on the economy of decisions in Washington. The economist cranked up the machine the other day to see what would happen if presidential candidate Bob Dole accepted the suggestion of some of his advisers that he promise a 15 percent tax cut to voters.
The results were not reassuring. The federal deficit would swell to $422 billion by 2006, instead of shrinking to $96 billion without the cut. About 60 percent of the increase in the deficit would stem from higher interest on the national debt accumulating over the 10-year forecast period. Another US deficit - in trade - would also widen, to $277 billion, twice what it would otherwise be.
But, if this model of DRI/McGraw-Hill, a Lexington, Mass., consulting firm, is correct, the tax cut would provide a short-term stimulation to the national output of goods and services. Real gross domestic product would be boosted an extra 1.3 percent in 1997 and 1.5 percent in 1998. As a result, the unemployment rate would fall to 4.8 percent in 1998, compared with 5.7 percent otherwise. This in turn would prompt an anti-inflationary hike in interest rates by the Federal Reserve. The long-term bond rate would reach 8.4 percent by 1998.
Of course, Mr. Wyss's exercise is based on assumptions that may or may not prove out. He assumes a cut in both individual and corporate incomes taxes of 15 percent, but no change in Social Security or Medicare taxes. None of that is clear, though a group of six prominent conservative economic advisers did send Mr. Dole a memo in May, according to The Wall Street Journal, that recommended an across-the-board, unspecified reduction in income taxes to compensate workers for "the slow growth in wages over the last several years."
Nor does Wyss know if Dole actually will accept a tax-cut plan to energize his presidential campaign. "I have a feeling cooler hands will prevail," Wyss says. But if Dole does promise a tax cut, will he actually push a major tax cut through Congress if elected? Sometimes politicians take the same attitude as the line some men use in courting women, "Promise them anything," notes Wyss.
Wyss doesn't accept the view that a tax cut would so boost economic growth that it would pay for itself in higher revenues. The arithmetic is simple, he says: "If tax rates are cut by 15 percent across the board, national income must rise by [about] 15 percent to keep taxes constant. Even if productivity growth doubles as a result of the tax cut, it will take more than a decade for the added growth to offset the initial tax loss. By that time, the level of federal debt will be increased by nearly $2 trillion."
For that matter, Dole himself, when a Kansas senator, didn't buy the tax-revenue argument when it was put forward by some devotees of supply-side Reaganomics. He was reported as once joking: the "good news is that a bus full of supply-siders went over a cliff. The bad news is that there were three empty seats."
Though tax cuts are often sold as a means of boosting the supply of goods and services, says Wyss, if they cause higher budget deficits, their primary impact is to trim investment by reducing the capital available in the nation for private investment. Then lower investment reduces the capacity of the economy to supply goods and services. His computer tells him that private investment after 10 years would be $30 billion, or 2.9 percent, below what it would otherwise be; housing would be down 2.6 percent.
"A tax cut unaccompanied by spending cuts is simply one more sacrifice of the future for the present," he states.
Some conservative economists would advocate a tax cut as a way of forcing spending cuts. But, Wyss notes, the Reagan tax cuts had this goal in mind, but Congress didn't trim outlays.
Wyss holds that from an economist's standpoint, a more attractive option would be to cut spending without cutting taxes - thereby lowering the deficit and interest rates and providing more capital for private enterprise. "From a politician's standpoint, this is attractive only if he wants to collect his pension early."
Given all the popular middle-class entitlements, Wyss figures it would be politically unrealistic to get sufficient spending cuts to offset a 15 percent tax cut.
Those who benefit most from an income tax cut are the rich and relatively affluent, people most likely to vote Republican. Those with incomes in the bottom half pay only 6 percent of total federal personal income taxes. But they pay about one-third more than their share of income in Social Security taxes, Wyss says.