The bulk of President Bush's tax cut won't take effect until at least 2004. It is scheduled to disappear in 2011. The president may have been pushed into this deal politically last year, but it was a mistake. Fortunately, in his State of the Union address last week, he asked Congress to correct this problem by speeding up the tax cut and making it permanent, even though opponents like Senator Edward Kennedy want to head in the opposite direction, proposing to postpone tax rate reductions scheduled to take effect in 2004 and 2006.

Lower tax rates increase incentives to work, save and invest, and these rate reductions will provide a significant stimulus when they take effect. Consider the historical pattern. Cuts in tax rates during the 1960's and 1980's resulted in faster growth, rising incomes and more job creation. Critics in those decades complained that rate cuts would allow the rich to keep too much of their money, but upper-income taxpayers actually wound up paying a greater share of the tax burden during those decades, in part because lower rates reduced the incentive to hide, shelter and underreport income.

In the 1960's, President John F. Kennedy cut the top rate to 70 percent from 91 percent. Between 1961 and 1968, as the economy expanded by more than 42 percent and tax revenues rose by one-third, the rich saw their share of the tax burden climb to 15.1 percent from 11.6 percent.

In the 1980's, the top marginal rate was cut to 28 percent from 70 percent. Critics charge that this caused higher federal budget deficits, but they misread the evidence. Although the Reagan tax cut was approved in 1981, it was phased in slowly (much as the Bush tax cut is scheduled to be). Once the cuts were in place, the economy grew and tax revenues soared. Revenues from personal income taxes increased 28 percent (adjusted for inflation) by 1989. And yes, the rich wound up paying more. The share paid by the top 10 percent jumped to 57.2 percent from 48 percent of total income tax revenues. The share for the top 1 percent rose to 27.5 percent in 1988 from 17.6 percent in 1981.

Unfortunately, few members of Congress seem to understand how taxes affect the economy. They cling to the belief that tax cuts boost growth by putting money in the pockets of consumers. Because they think consumer spending is the way to jump-start a weak economy, they focus on temporary tax cuts like last year's tax rebate checks.

But government can't inject money into an economy unless it first takes the money out. So even if rebates succeed in slightly boosting consumer spending, the funds for the rebate came from a reduction in spending elsewhere in the economy (probably from private investment). This explains why last year's rebate was a flop - and why Japan, for example, despite repeated stimulus packages intended to pump up spending, has been mired in a 10- year slump.

Last year's tax cut included the politically popular rebate checks, but those checks didn't have much impact on the economy. Only tax cuts that make saving and investment more attractive, like lower income tax rates and a repeal of the inheritance tax, will have a measurable impact.

Even the Organization for Economic Cooperation and Development has noted that the United States has relatively high top rates for income and estate taxes. It also suggests that tax revenues from high-income taxpayers might rise if their tax rates fell.

The Bush tax cut is reminiscent of Clint Eastwood's old spaghetti western "The Good, the Bad, and the Ugly." Last year's tax bill included very good provisions to boost the economy. But the vast majority of the good provisions don't take effect until 2004, 2006 and 2010. That's the bad news.

President Bush has won tremendous public support for his leadership in the past five months. He is right to insist that his pro-growth tax provisions be made permanent. President Bush is right to say that any effort to undo his tax cut is "wacky," but having a tax cut that's only good between 2004 and 2010 isn't much better. The president wants to fix this mistake. He should also push to speed up the tax cuts immediately. Congress should rally to support these important improvements to last year's tax bill.

 

Daniel Mitchell is a senior fellow in political economy at the Heritage Foundation.