A budget defying economic history

Mona Charen

June 28, 1993|By Mona Charen

WATCHING Democrats make economic policy is like watching a blindfolded man steer a tractor-trailer.

President Clinton and his allies in Congress have built their economic house on two planks: distortions about the 1980s and envy.

The Democrats advance two arguments in favor of raising taxes. The first is economic (and economically illiterate). The second is psychological. The economic argument goes like this: Twelve years of Republican administrations featuring tax cuts for the rich left us saddled with a terrible debt.

The solution is to raise taxes to cut the deficit.

This is gobbledygook. The Reagan tax cuts were not just for the rich; they were for everyone. And everyone benefited. All income groups saw their incomes rise during the period 1980-1989.

As economist Alan Reynolds has pointed out, "The mean average of real income rose by 15.2 percent from 1980 to 1989 . . . compared with a 0.8 percent decline from 1970 to 1980."

The middle class shrank during this period, it's true. But not because people fell into poverty -- those earning less than $15,000 per year (in 1990 dollars) declined from 17.5 percent in 1980 to 16.9 percent in 1990.

No, the middle class shrank during the '80s because more people got rich.

OK, so everyone had seven fat years during the '80s, but surely cutting taxes robbed the Treasury of needed revenue, causing the deficits. Wrong. Just as the supply-side economists had predicted, cutting tax rates actually increased the flow of tax revenues into government coffers. Between 1981 and 1987, federal revenues increased by 42 percent. Unfortunately, spending increased by 50 percent during the same period.

Remember that the next time a Democrat blames Mr. Reagan's tax cuts for the deficit.

If you want to collect more money from the rich, just cut their tax rates -- particularly the rate on capital gains -- as was done in the '80s. This increases taxable economic transactions, decreases income sheltering, and pumps up the economy. Indeed, the much-maligned "top 1 percent" of earners -- who, according to Clinton and Co., are supposed to have enjoyed 60 percent of the income gains of the '80s -- increased their share of the total tax burden dramatically. In 1981, the top 1 percent paid 18.2 percent of federal taxes. By 1988, the top 1 percent was paying 28 percent of total taxes.

If the data from the 1980s were insufficient to prove the case against raising taxes to decrease the deficit, we have the example of the 1990 budget act -- the prequel to the Clinton budget. Using all of the same arguments heard today about the "rich" and deficits, the government raised taxes -- and the deficit ballooned.

I hold no brief for the rich. I am not among them (though I'd sure like to be), and their welfare is not my concern.

But experience and common sense show that those the Clintonistas are labeling "rich" -- those earning more than $200,000 per year -- are the most productive members of society. They are the job creators in this economy. If they are taxed more steeply, they can afford to pay without denting their lifestyle much. But they will be much less likely to create or maintain jobs for those in the middle class.

The liberal Democrats have a psychological need to punish those they believe "profited" unjustly from the Reagan prosperity.

So even if they believed it would hurt the economy, they'd aim their tax pen with gusto. The irony is, they may miss their target. Income is extremely fluid in this country. Assigning people to quintiles is a sterile exercise, because many of those who were in the top percentile in the 1980s have moved down, and many of those who were somewhere in the middle in the 1980s have moved up.

Mr. Clinton brags that this budget will reduce the deficit "compared with what it would otherwise have been."

That is meaningless. The Clinton budget adds $1.7 trillion to the national debt. Besides, is there a shadow Congress out there making policy that this tax overrules?

No, the only thing this budget overrules is economic history.

Mona Charen is a syndicated columnist.

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