Facts often are the first casualty of any political battle, and
never more so than during an election year. But sometimes the
debate shifts from routine exaggeration and distortion and becomes
flagrantly misleading. As with Al Gore's recent fusillade,
including his speech yesterday, against the Bush team's economic
policy:
* Myth #1: The sluggish economy proves tax cuts
do not boost growth.
Fact: The economy began to weaken in 2000, almost
one year prior to the enactment of tax-cut legislation. The economy
began to weaken in the middle of 2000, according to Commerce
Department figures, averaging less than one percent growth in the
final six months of the year.
This anemic performance occurred long before the 2001 tax cut was
enacted. Even more important, the economy started to contract in
the first three months of 2001. This decline began while President
Clinton was still in office, certainly well before any tax cuts
were approved.
Fact: The vast majority of the pro-growth
provisions in the 2001 tax cut do not take effect until 2004, 2006
and 2010. It is preposterous to say supply-side tax cuts do not
work when they have yet to take effect. Repeal of the death tax,
meanwhile, will not occur until 2010.
* Myth #2: Tax cuts are driving interest rates
higher by increasing the budget deficit.
Fact: Fiscal policy has shifted from large
surpluses to large deficits, yet interest rates have dropped
dramatically.
In 2000, the federal government had a record budget surplus of
$236 billion dollars. The same year, the average interest rate on
10-year government bonds was 6.03 percent, according to the Federal
Reserve Board.
According to the latest projections, the budget will have a $157
billion deficit in 2002, a shift of nearly $400 billion. But
instead of rising, as tax cut critics argue should have happened,
interest rates have declined. The Federal Reserve Board reported
that the 10-year government bond rate in August was only 4.26
percent.
Fact: Tax-rate reductions mean investors can
achieve a desired rate-of-return at a lower rate of interest.
High tax burdens drive up interest rates because investors require
a higher return to compensate them for the money taken by
government. This relationship is clearly seen by examining the
difference between interest rates charged on tax-free municipal
bonds and interest rates charged on taxable government bonds.
* Myth #3: Fiscal discipline requires a balanced
budget.
Fact: Limiting government is the best way to
demonstrate fiscal discipline. Special-interest groups seek to
obtain unearned wealth by convincing politicians to give them other
people's money. Resisting these demands is the correct way to
demonstrate fiscal discipline.
It is not a sign of fiscal discipline, by contrast, for
politicians to impose high tax burdens in order to fund excessive
spending. Many European nations maintain this version of fiscal
balance, for instance, and tax burdens sometimes consume 50 percent
of economic output.
These nations inevitably suffer from sluggish growth and high
unemployment. Nations that limit the size and growth of government,
by contrast, enjoy more growth and create more jobs, regardless of
whether their budgets are balanced.
Fact: Tax-rate reductions help control the growth
of federal spending. The shift from budget deficits to budget
surpluses in 1998 significantly undermined fiscal discipline.
Budget surpluses were viewed as extra money and lawmakers
dramatically increased the growth rate of federal spending. Indeed,
federal spending has grown about twice as fast in the four years
since 1998 as it did in the four years prior.
This is one of the best - albeit unintended - consequences of the
Bush tax cut. It took money out of Washington so it would not be
used to fuel even bigger increases in government.
* Myth #4: The bush tax cuts caused the
deficit.
Fact: The weak economy is the main reason the
deficit has reappeared.
According to Congressional Budget Office figures, lower tax
revenues from the tax cut account for just 8 percent of the change
in fiscal balance. The vast majority of the change is due to the
economy's sluggish performance and forecasting errors - much as the
budget surpluses of the late 1990s were caused by strong economic
growth. Spending increases, primarily for domestic programs, also
has contributed to deficits.
Fact: The economy drives the budget, not the
other way around.
Fiscal balance should not be the goal of fiscal policy. Instead,
lawmakers should control the size of government and lower tax
rates. These policies will boost growth by leaving more resources
in the productive sector of the economy and giving people greater
reason to work, save and invest. As a result, the amount of taxable
income will increase and government will collect additional
revenue.
Daniel J.
Mitchell is a Heritage Foundation senior fellow in
political economy.
Originally appeared in The New York Post