Tax Fraud: Facts disprove claims that Dole cuts would deepen deficit

When Bob Dole announced his proposal to offer a 15 percent tax cut, Bill Clinton accused him of "blowing a hole in the deficit." In one stroke, he reduced the idea of an across-the-board tax cut to an exercise in fiscal irresponsibility which it decidedly is not.&127&127

Senator John Kerry called the Dole plan "voodoo redo" and "a huge mistake at this moment in our economy. Our first obligation is to balance the budget."

At the Beacon Hill Institute, we don't think so. In fact, our analysis shows substantial benefits for Massachusetts.

For those of us who toil in the economic vineyards, there is a rich irony in all of this. Sixty years ago, John Maynard Keynes revolutionized economics with the idea that government can cure depressions by deliberately running budget deficits. His apostles among politicians and economists bastardized that insight into the notion the economy will expand whenever government runs a deficit. The idea is still found in some textbooks and in the yellowing class notes of the professors who use them, but is actually anathema to almost all politicians and many economists today.

Why the irony? The very politicians who condemn the Dole tax cut for increasing the deficit are unknowingly buying into the Keynesian argument that tax cuts automatically increase deficits and interest rates.

Supply-side economists, for whom Jack Kemp and now, belatedly, Bob Dole, are the political embodiment, reject this argument. For them, lower taxes encourage work and saving and, in that way, lead to economic growth. Tax cuts do not automatically imply higher deficits or interest rates.

Bill Clinton may have good reason to reject the supply-side approach, but if he's going to use the Keynesian approach, he can't argue the case both ways. If he wants us to believe that Dole will raise interest rates through a higher deficit, then he has to admit that Dole will not hurt the economy in doing so, because lower interest rates (in the Keynesian view) come from a weakening economy. If Clinton wants us to believe that Dole will hurt the economy, then he has to admit that Dole will also bring lower interest rates.

Clinton is not alone in lacking consistency. If Kerry were consistent, he would not have cast a decisive Senate vote in defeating a balanced-budget amendment. If President Bush had been consistent, he would not have broken his "read-my-lips" pledge. And, given his own epiphany on the road to San Diego, Bob Dole can also be accused of inconsistency.


Our analysis of the plan concludes that the incentives of lower federal taxes would generate 112,307 new jobs (an increase of more than 3 percent), increase state payrolls annually by $8.03 billion, bring about $5.5 billion in new capital spending and annually bring in an additional $478 million in state revenue.

As for Dole's proposed tax cut ($548 billion over six years), consider two periods: the Reagan tax-cut years, 1982-1989, and the Bush-Clinton tax-increase years, 1989-1996. Looked at this way, Clinton's $260 billion tax boost was merely the completion of a policy that Bush began when he raised taxes by some $225 billion.

What Dole promises is to bring federal tax policy essentially back to where it was at the end of the Reagan era - - what voters thought they were getting when they elected George Bush.

We should therefore be able to assess the Dole tax cut by comparing the effects of the Reagan years with the effects of the Bush-Clinton years.

The federal government deficit rose under Reagan (although it was slightly lower in 1989 than it is today). But the federal deficit does not represent the entire picture. State and local governments account for about 44 percent of all government receipts. In comparing the Reagan and Bush-Clinton eras, we need to know what happened to the combined federal, state and local government deficit.

The combined deficit was $83 billion or about 2.6 percent of gross domestic product in 1982, the first year of Reagan's income-tax cuts. It was $18 billion or about 0.3 percent of GDP in 1989. The combined deficit fell both absolutely and as a fraction of GDP under Reagan.

In the first quarter of 1996, the combined deficit stood at $64 billion, about 0.9 percent of GDP. It rose both absolutely and as a fraction of GDP under Bush-Clinton.

That evidence suggests just the opposite of what Clinton would have us believe: The high taxes of the Bush-Clinton era are associated with bigger overall deficits than the low taxes of the Reagan era. Because the economy grew more rapidly under Reagan than it has under Bush and Clinton, state and local government tax revenues also rose more rapidly, thus causing the combined federal, state and local deficit to fall.

The chart on this page compares the average annual growth rate of selected economic indicators in each era.

What about interest rates? At the start of the Reagan era, AAA corporate bond yields stood at 13.79 percent. By 1989, the figure was 9.26 percent. Currently it stands at 7.71 percent.

By this measure, therefore, interest rates fell by 33 percent under Reagan and by 17 percent under Bush-Clinton. If we compare rates after adjusting for inflation, the results are even more striking. The real interest rate fell by 39 percent under Reagan but rose by 7 percent under Bush-Clinton.

What would the Dole tax plan do for Massachusetts? The incentives of lower federal taxes would generate 112,307 new jobs (an increase of more than 3 percent), increase state payrolls annually by $8.03 billion, bring about $5.5 billion in new capital spending and annually bring in an additional $478 million in state revenue.

In comparing Reagan with Bush and Clinton, it appears that the supply-siders are right. By cutting those federal taxes that did the most to discourage work and saving, the government was able to increase work and saving, reduce interest rates and raise new tax revenues.

It is thus the record concerning deficits that blows a hole in Bill Clinton's views on tax policy.

David G. Tuerck is executive director of the Beacon Hill Institute for Public Policy Research at Suffolk University, where he also serves as chairman and professor of economics. This article first appeared in Boston Sunday Herald on September 29, 1996.

Tax Fraud: Facts disprove claims that Dole cuts would deepen deficit

David G. Tuerck

September 1996