Bright Economic Future Calls for Extending Tax Cuts

As I’ve often said before, the only thing one learns from history is that no one ever learns from history. While I don’t accept this Hegelian pessimistic view of human nature, it’s increasingly clear that the Republican Party may prove the German philosopher Hegel correct. How so? Republican members of Congress are floundering around in a post-Tom DeLay world, wondering what to do about an agenda when they have yet to extend the Bush tax-rate cuts.

It’s still about “the economy, stupid!” And as the economy grows robustly, unemployment drops to 4.7 percent, 225,000 jobs are being created every month, inflation is relatively low, and revenues are up by 16 percent or more, the party of Ronald Reagan can’t seem to recall the lessons most of us learned two decades ago – that lower tax rates on income from work and capital investment will produce more revenue availability to government.

Memo to the GOP in Congress, the White House and the Statehouse: We (the United States) didn’t cut taxes, we didn’t cut tax revenues, we didn’t pass tax relief for the rich; we lowered the tax rate on labor and capital, and that is why the economy and revenues have surged since 2003. As The Wall Street Journal pointed out last March in a prescient editorial on the static analysis model of the Congressional Budget office, they (the CBO) estimated cutting the capital gains tax rate from 20 percent to 15 percent would cost revenue. Indeed, the CBO recently projected that extending the 15 percent rate for but two years would cost the U.S. Treasury $20 billion. But as Senate Finance Chair Charles Grassley, R-Iowa, showed recently, tax receipts from capital gains are now expected to be $87 billion more than CBO originally projected for the years 2003-2006.

To appreciate just how wrong Washington bureaucrats have been over the years with their static revenue-estimating methodology, check out the section on dynamic scoring at the Web site of the Institute for Policy Innovation, which houses more than 40 examples of dynamic scoring in action.

Consider a few of the more outrageous instances. One infamous episode occurred during the last major tax reform in 1986, when the tax rate on capital gains was increased from 20 percent to 28 percent. Congressional revenue estimators hugely overestimated capital gains revenues because their static analysis failed to take into account investors’ behavioral response to the hike in the tax rate. Not only did capital gains revenues not increase as much as the Joint Committee on Taxation estimated, they actually declined.

The surest way to harm the economy, slow our growth, raise unemployment and reduce revenues would be to allow capital gains and dividend taxes to rise to pre-2003 levels.

And by the way, the capital gains tax is not a tax on the rich, who are already rich; the capital gains tax is a tax on the poor and the workers who want to get rich. You can’t get rich on wages. The only way to create wealth is to work, save, invest and make a profit, then reinvest.

If the Republicans in Congress can’t articulate this essential ingredient of free enterprise and democratic capitalism, they should go back and reread Abraham Lincoln, Calvin Coolidge, John F. Kennedy and Reagan. Every cut in tax rates on the factors of production, i.e. labor and capital, has resulted in more economic growth and an increase in tax revenues.

Arthur Laffer of the University of Southern California was correct back in the mid-’70s, when he drew a curve on a blackboard for me showing that the two places on the curve at which no revenue is raised are at 100 percent tax rate and zero tax rate. The purpose of leadership is to find the level of taxation at which workers, savers, investor and entrepreneurs are willing to maximize this output. History says anything above 20 percent or 25 percent loses, not gains, more revenue.

If you want to “soak the rich,” lower the tax rate to a point at which they have no incentive to invest offshore or in tax shelters or to play golf on Fridays as dentists and doctors did back in the 1970s, when the top income tax rate was 70 percent and the top capital gains tax was 50 percent.

Reminder to the Republicans in Congress and to the White House speech writers, as well: Stop worrying about a so-called post-DeLay vacuum, stop worrying about ’06 or ’08 elections. Just get back to a pro-growth, pro-trade liberalization, pro-ownership society in which every child and family in America can own a share of the American dream and a stake in America’s future.

We want our nation to be a place where every child can grow up, as Mr. Lincoln envisioned, where he or she can work, save, own and someday hire others to work for them and maximize their output. That, Lincoln observed, is the true American system.

Now, more than ever, Republicans must halt this drift into protectionism, anti-immigration, static analysis of tax policies and xenophobia, all of which will consign our nation to decline and our party to defeat.

We must prove Hegel wrong and Abraham Lincoln right.