04/11/2017

JFK-Style Strategic Tax Cuts Are Starting To Emerge As Way To Drain The Swamp

Lawrence Kudlow, New York Sun

“Drain the Swamp.” It was one of President Trump’s most powerful messages on the way to victory. Shake up Washington. Break a few eggs to create a new omelet. Overturn the establishment.

Well, hats off to Senate Majority Leader Mitch McConnell for doing some swamp draining when he exercised the “nuclear option” to overturn the filibuster for Supreme Court justices. Mr. McConnell busted an old 19th century rule, which was never in the Constitution, and cleared the path for the confirmation of Neil Gorsuch — as good a candidate as can be found. Good for Mr. McConnell.

Now let’s shift our swamp-draining focus to fiscal policy. In 1974, in the aftermath of Watergate, it was established that House and Senate budget committees would come together to pass a bill with something called “reconciliation instructions.” In this way, they would move a product through the committees that would only require 51 votes in the Senate to pass.

The process was allegedly designed to promote fiscal sanity, such as curbing the nation’s appetite for debt. Well, that didn’t work. Federal debt in public hands was about 23% of GDP back in the mid-1970s. Today it is about 77% of national income.

Not much discipline there.

The key problem with reconciliation is the highly flawed economic model used to score tax bills. Namely, the Congressional Budget Office and the Joint Committee on Taxation score tax relief as a revenue loser and tax increases as revenue gainers. Clearly, such modeling makes it difficult to reduce marginal tax rates.

In recent years, this static modelling has led to the notion that tax cuts need a “pay-for.” If you don’t cut the budget enough, you don’t get your tax cut.

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In Search Of History

The Reagan Tax Cuts Worked

Thanks to "bracket creep," the inflation of the 1970s pushed millions of taxpayers into higher tax brackets even though their inflation-adjusted incomes were not rising. To help offset this tax increase and also to improve incentives to work, save, and invest, President Reagan proposed sweeping tax rate reductions during the 1980s. What happened? Total tax revenues climbed by 99.4 percent during the 1980s, and the results are even more impressive when looking at what happened to personal income tax revenues. Once the economy received an unambiguous tax cut in January 1983, income tax revenues climbed dramatically, increasing by more than 54 percent by 1989 (28 percent after adjusting for inflation).

 

-- Daniel J. Mitchell,

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