Federal deficits finally are getting action in Washington this year. President Bush attacked them in his State of the Union speech Jan. 31, calling for spending restraint. And Democrats are upset that President Bush’s 2003 tax cuts supposedly are not producing enough revenue and will mandate spending cuts in favored programs.
“Democrats will fight the president’s anti-widow and anti-children agenda,” House Minority Leader Nancy Pelosi, D-Calif., said last week. “After creating record deficits and debt with his budget-busting tax breaks, the president is asking our seniors, our students and our families to clean up his fiscal mess,” said Senate Minority Leader Harry Reid, D-Nev. Both were quoted in Monday’s San Francisco Chronicle.
But they ignore something important: Since the 2003 tax cuts, federal revenue has not declined, but has risen sharply. That’s just as supply-side economists have said for years. The reason: Tax cuts help spur economic activity, broadening the economic base from which taxes are generated.
From 2003 to 2005, federal revenue rose to $2.15 trillion, a 20 percent rise. Yes, there’s a problem with the deficit, which the president’s budget proposal projects to be $354 billion for fiscal 2007, which begins Oct. 1. But with revenue growing 20 percent in two years, it’s obvious that revenue is not the problem. Spending is.
And Americans had best pay attention to something else — competitiveness, said Chris Edwards, director of tax policy at the Cato Institute.
Edwards said the European Union, despite the problems of a bigger welfare state and more controls on labor, has an advantage in having an average corporate tax rate of 27 percent. By contrast, the U.S. corporate tax rate is 35 percent, plus state taxes.
We wish Democrats would come to understand this. Needed now, at a minimum, is an extension of the Bush tax cuts that soon will expire. In 2009, the top capital-gains tax rate will rise by half, to 20 percent of the gain; and the top dividend tax rate will more than double, to 35 percent from the current 15 percent.
If Rep. Pelosi is so concerned about “widows,” she might take mercy on those widows who depend on capital gains and dividend revenue in retirement and so would be hit hard by this tax increase.
Tax increases are not the solution to deficits, but would only hurt the economy and reduce revenue. The solution to the deficit problem is to make permanent the Bush tax cuts and exercise spending restraint.