While Donald Rumsfeld talks about Old Europe and New Europe, here in Washington, on Capitol Hill, we have Old Congress and New Congress when it comes to the budget and President Bush’s tax proposals.
Old Congress is comprised mostly of Democrats, but there are some Republicans in its ranks. They have become so inured to a concept called “static scoring” of budgets that they cannot see beyond the current fiscal year. “Scoring” refers to the budget items projections submitted by the White House to Congress. For many years “static scoring” has been embedded in the system. It works this way: If the president proposes $1 of tax cuts, that dollar is assumed to be lost to federal revenue forever. This is based on the quaint notion that when taxpayers get to keep a little more of their money as a result of tax cuts, they will stuff the money under a mattress; out of circulation, more-or-less forever.
The real world does not work that way. The history of the 20th Century shows that across-the-board tax cuts generate new economic activity and, in due course, result in more — not less — revenue to the Treasury. This was true of the Coolidge tax cuts in the Twenties, the Kennedy tax cuts in the Sixties and the Reagan tax cuts in the Eighties.
Old Congress Democrats in particular like static scoring for it makes tax cuts look scary and permits them to say, “We can’t afford it.” They also use the old chestnut that it will benefit “the rich.” In 2000 the top 25% of taxpayers paid 84% of the taxes (and the top one percent paid 37.4%). These people, if they get their share of across-the-board tax cuts, are also the ones who will invest, making more capital available for businesses to use for growth, creating jobs. Conversely, nearly 40 million Americans pay no income taxes. How can the government give income tax relief to people who pay none?
All of that logic does not dent Old Congress thinking, for the Democrats, even when they are in the minority in Congress, are still the party of government. They prefer government solutions to nearly all problems and are very resistant to tax cuts of any kind. They consider the aggregate income of the people as the government’s money, except that which the government decides to let people keep.
Despite the resistance of Old Congress, New Congress leaders are pushing for “dynamic scoring” to take into account the economic activity that would be generated by tax cuts. California Republican Bill Thomas, chairman of the House Ways and Means Committee, has put in place a House rule requiring the Joint Committee on Taxation (a House-Senate group) to put dynamic scoring projections alongside the traditional static ones on each new tax-cutting measure to be considered.
Meanwhile, House Budget Committee Chairman Jim Nussle of Iowa has nominated a dynamic-scoring advocate to head the Congressional Budget Office, replacing the retiring director who opposed dynamic scoring.
Back in 1981, when President Reagan proposed his sweeping across-the-board tax cut program, his administration used only static scoring; hence, a projected net loss of revenue. Within 15 months of its enactment, however, the nation had entered into what became it largest, longest economic expansion up to that time.
Wrapped up in arguments over budget projections is the deficit debate. Old Congress Democrats (aided by the media imperative for drama and oversimplification) have engaged in much hand-wringing over what they call “a record” deficit. The dollar figure, however, is not the one to watch (in any case, because of static scoring, it is almost certainly overestimated). The key figure is the deficit as a percentage of Gross Domestic Product. It is projected to be 2.7% at most.
Historically, for many years under Democratic Congresses and several Democrat administrations, we managed annual deficits in the 2-3% range without difficulty. Republicans, impotent, ranted. Now Old Congress Democrats rant. Robert Rubin, former Clinton Administration treasury secretary, has contended that the deficit will cause the government to crowd private borrowers out of the capital market. That would be true after a point, say deficits well above 3%, but not under present circumstances. Indeed, interest rates remain low and much capital goes begging these days.
Old Congress Democrats rant partly because they don’t control things and have no alternative plans to offer. There is another reason they don’t like budget deficits: It puts a lid on federal spending. New Congress Republicans can say, “We can’t afford it,” and who can say nay?