Virtually every issue before the U.S. Congress generates a negative argument from some special interest group, except one. It is difficult to find anyone who is against cutting taxes. Having the government taking less from our paychecks, having more money in our pockets to spend, and having a government spending less and moving toward a balanced budget, all sound like really good ideas.
The party in power in Washington D.C. is hoping to rally the nation with a plan to reduce individual and corporate tax revenue by $1.5 trillion over 10 years. They plan to do this without any corresponding cuts in spending. The reason they think this can be done is because they believe that the tax cut will generate so much economic growth that it will effectively pay for itself. Will it? Can we “cut” ourselves into an economic boom so strong that it will pay for a tax cut of $1.5 trillion dollars?
Cutting taxes sounds like a really good idea until you evaluate what history teaches us about our economy when we cut taxes as a stimulant. We also have to consider the potential growth of our national debt, already more than $22 trillion. Let’s see if we can get our economic vocabulary into real English and evaluate the possibilities of this issue.
Are we overtaxed as a nation as compared to other industrial nations? According to statistics from the 35 nations who belong to the Organization for Economic Cooperation and Development, the United States ranks 31st in taxation as a share of gross domestic product (GDP). Only South Korea, Ireland, Chile, and Mexico levy lower taxes on their citizens than the U.S.
Can tax cuts generate economic prosperity? History remains the best teacher of possible future effects of tax cuts. We have had two significant tax cuts over the past 35 years. What happened to the U.S. economy following the tax cuts of the Ronald Reagan and George W. Bush administrations?
President Ronald Reagan delivered a 25 percent reduction in individual taxes in 1981 and 1983. By 1990, we were in a year long recession. President George W. Bush created a tax reduction in 2002-2003 and by 2008 we had entered the strongest recession the United States had experienced since the Great Depression. To be fair, both tax cuts stimulated the economy for a while before it began to slide.
Both the Reagan and Bush tax cuts were larger than those projected by the administration this year. In the 1980s and again in the 1990s economic experts predicted that the GDP growth stimulated by the tax cuts would generate only enough tax revenue to replace about one third of the tax revenue lost. By contrast those calling for tax cuts in 2017 predict that an economic boom will totally pay for the tax cuts. History says that will not be the case.
President George H.W. Bush called Reagan’s tax cut proposal of 2001, “Voodoo Economics.” He was oddly silent when George W. Bush followed Reagan’s lead and did the same thing in 2001. The sad but true outcome of that set of cuts was to have us in major recession and fighting the potential bankruptcy of several of our largest employers such as General Motors and Chrysler by 2008. Why should we expect more positive results here in 2017-18?
One additional negative of tax cuts on top of tax cuts is that the national debt, now exceeding $22 trillion, grows substantially with each tax cut. Sadly, we are leaving our grandchildren to “pay the piper,” for our indiscriminate spending.
Our economy is already growing and unemployment is at less than 4.5 percent? History tells us a tax cut will get us in trouble down the line. An old southern saying is appropriate here, “If it ain’t broke, don’t fix it.”