The Current Crisis

Wild on the Supply-Side

Once again tax cuts create greater wealth and tax revenue -- and Republicans and Democrats alike get increasingly nervous.

By 5.11.06

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WASHINGTON -- It is very reassuring that Republican negotiators in the House and Senate have reached an agreement to extend President George W. Bush's cuts in tax rates on dividends and capital gains. Equally reassuring, the negotiators plan to liberate as many as 15 million middle-income Americans from the impending burden of the alternative minimum income tax. Now the unparalleled economic growth that has characterized the American economy since the early 1980s can proceed. My only question is why?

Why did the Republicans extend these tax cuts? Many of them are the same solons who offered the embarrassing quackery of a $100 rebate to ameliorate the burden of high oil prices. I doubt that politicians who think a $100 rebate is a sound economic response to an oil price increase reflecting the scarcity of oil really understand the value of marginal tax cuts. They put me in mind of President Jimmy Carter offering Americans rebates as a response to his opponent's offer of tax cuts in the 1980 presidential race. Such politicians have enjoyed enormous economic growth since the Reagan tax cuts that followed his election but apparently do not know where the growth comes from.

We saw the growth rev up again early in the Bush administration following his tax cuts, the tax cuts that have now been extended. The President says we cut taxes to "put money into the tax payers' pockets." But there is more to it. We cut taxes to increase economic activity, to reduce the burden of taxation on workers to encourage their increased output. We cut taxes on investments, stocks, and dividends to increase investments, stocks, and dividends -- to increase wealth. That is what has been happening -- FOR TWO DECADES.

Democrats -- and I fear many Republicans -- think we cut taxes to reward the rich. Democrats would raise taxes to punish the rich and to increase tax revenue for their favorite projects. Perhaps they could find some other way to punish the rich. Their demagoguery impedes economic growth and -- as their phrase has it -- "revenue enhancement."

Those of us who favor tax cuts can now look proudly at the recent record of tax payments. According to the Treasury Department's monthly report, tax receipts were up 11.2 percent for the first seven months of Fiscal 2006. That is $137 billion. In Fiscal 2005 tax receipts were up 14.6 percent, which is $274 billion. These increases come as a great surprise to those Democrats and Republicans who insist tax cuts cause deficits. Holed up over at the Congressional Budget Office (CBO), their minions issue predictions of puny revenue growth following tax cuts that are always gloomy and always wrong. The CBO's recent predictions for Fiscal 2006 were $76 billion for the whole year for individual tax receipts and $24 billion for corporate receipts. Seven months into the year the respective figures are already $56 billion and $40 billion.

Unburdened by high taxes, the rich paid more in taxes. By lowering marginal tax rates we have encouraged economic vigor and put more money in the government's hands. This we call Supply-Side Economics. Yet many Republicans remain agnostic and many more Democrats are contemptuous of it. This is a cultural problem. In the culture of economic ideas many on Capitol Hill will not look at the evidence of the past two decades. They are living in an era of great prosperity and do not know how they arrived at it.

There is a bigotry against the term Supply-Side Economics. That is the only way to explain it. The prejudices of those who for decades have believed that what is best for society is a government that taxed and spent restrain them from reviewing the mounting evidence to the contrary. Prejudice and bigotry are not all that unusual in the human condition. In modern governance, however, it is unusual to see an orthodoxy remain influential so long after it has been proven false. That the orthodoxy of tax and spend is still dominant on Capitol Hill I have no doubt. This is why for me the Republicans' extension of these tax cuts is a kind of miracle.

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About the Author
R. Emmett Tyrrell, Jr. is the founder and editor in chief of The American Spectator. He is the author of The Death of Liberalism, published by Thomas Nelson Inc. His previous books include the New York Times bestseller Boy Clinton: the Political Biography; The Impeachment of William Jefferson Clinton; The Liberal Crack-Up; The Conservative Crack-Up; Public Nuisances; The Future that Doesn't Work: Social Democracy's Failure in Britain; Madame Hillary: The Dark Road to the White House; The Clinton Crack-Up; and After the Hangover: The Conservatives' Road to Recovery.