President George W. Bush wasted no time in attempting to make good on his campaign promise of massive tax cuts. In the few weeks he’s been in office, Bush has concentrated his efforts on promoting his $1.6 trillion tax cut package. He’s even been able to garner the qualified support of Federal Reserve Chairman Alan Greenspan, who does not easily lend his support to tax cuts or spending programs.
No doubt the time is ripe for some prudent tax cuts to help rally our slowing economy. Nevertheless, the new president should be careful not to fall into the tax trap experienced by one of his predecessors , President Ronald Reagan , who, exactly 20 years ago, came into office with a similar eagerness to push through a tax reform package.
The former California governor was swept into office on a campaign platform focused on Reaganomics , a belief that major tax cuts combined with spending cuts would stimulate the economy to such a degree that everyone would share in the bounty, including the national treasury.
Also known as “trickle down economics” , or, as the current president’s father called it, “voodoo economics” , Reagan’s plan called for personal income taxes to be cut 30 percent in 10 percent increments over three years. As with President Bush’s current plan, Reagan’s was criticized by Democrats as favoring the wealthiest taxpayers.
Nevertheless, within months of his inauguration, Reagan was able to sign into law a tax bill implementing a $750 billion tax-cut package comprising a 25 percent cut in personal income taxes and a host of business tax cuts “Christmas-treed” onto the bill by Congress.
Unfortunately, Reaganomics never provided the economic spur envisioned by the Reagan administration. Despite deep cuts in domestic spending, Reagan’s accelerated defense program combined with the massive tax cuts grew the national debt to historic proportions and stunted the country’s economic recovery. Within six months, President Reagan was reported to be considering a tax increase.
By the summer of 1982, Reagan was forced to reduce his own military spending plans, and the fiscally conservative president found himself in the unenviable position of pushing for passage of a tax-increase package totaling $98.3 billion over three years , in constant dollars, the largest peacetime tax increase in history. That was followed by similarly large tax increases by the first Bush administration, then the Clinton administration.
Certainly, the economic picture is different today than when Reagan entered office. Despite a slowed economy, the country enjoys a large budget surplus. Yet that surplus has allowed the country to pay off some of its national debt, and that paying-down of the debt has been credited with spurring the economic growth we’ve enjoyed for several years. Greenspan’s support of the president’s plan is contingent on assurances the country can continue to pay down the debt despite reduced federal income.
Also, some of the same pitfalls that plagued Reagan’s tax program are already appearing to confront Bush’s , namely a fight in Congress to enlarge the president’s tax cut proposal by hanging on it a variety of tax loopholes for special interests.
To his credit, President Bush appears intent on not repeating history. Despite campaign pledges to increase defense spending, he has not yet proposed any increases. Instead, the president is waiting for a review of the Pentagon’s war-fighting strategies to determine what its true needs are rather than accept dollar figures thrown at him by senior officers intent on protecting their own service’s special interests.
No doubt, too, the new president is fully aware Congress controls the nation’s purse strings and, despite being controlled by the GOP for most of the past decade, the Legislature has been reluctant to raise the defense budget too much, too quickly.
The country may well be ready for a little relief from taxation. Yet, however the president and Congress go about reducing our tax burden, it is imperative the means be both judicious and fair. Otherwise, the price may be too steep.