As any healthy liberal will tell you, in times of war, pestilence, recession or social disorder, government spending must increase to meet the challenge. And so taxes must increase as well to pay the costs of government intervention.
But what of good times? In times of peace, prosperity, growth and harmony, should government spending and taxes still increase?
Surely the answer is no. In good times the rate of government should shrink. And so it is time for a significant tax cut.
There are many ways to cut taxes: end the marriage penalty, reduce the capital gains tax rate, or eliminate death taxes, for example.
But the best way is to cut income tax rates across the board by 23 percent. Why that amount? Because that would bring tax revenues as a share of gross domestic product (GDP) back to what they were when President Clinton took office. But since government tax receipts have increased 35 percent since 1993, the 23 percent tax cut is far less than the five-year increase in revenues.
Recall that when President Clinton took office in 1993, one of his first legislative acts was to increase taxes. Revenues have increased by approximately a tenth of a percent of GDP every single quarter since Bill Clinton became president.
Revenues were 19 percent of GDP in the first quarter of 1993 when he took office. They have risen almost continuously each quarter since then and federal revenue now stands at 21.5 percent of GDP as of the fourth quarter of 1997. With the GDP at $8 trillion, this is equivalent to a tax increase of $8 billion every three months for the last five years.
But suppose instead the fiscal policy of the Congress had been to hold the percentage of GDP consumed by taxes constant. Government revenues would have increased over the five years by $292 billion (24 percent), and the taxpayers would have received a tax cut of $419 billion, which is $1,558 per person or $6,230 for a family of four. We could have cut federal taxes by $172 billion last year, and taxes as a share of GDP would have been no lower than they were before Clinton became president.
Despite the small tax cut enacted by Congress in 1997, forecasts indicate revenues as a share of GDP will remain at historically high levels for the foreseeable future. Last month, the Congressional Budget Office reported that revenues will be at least 21 percent of GDP until at least the year 2000, and are expected to be at least 20 percent of GDP until the year 2050. To borrow a phrase, rapidly increasing revenues stretch as far as the eye can see.
We are living in the best of times, in peace and prosperity. Our budget is balanced, our revenues are in surplus. Yet our tax burden is as high as it has ever been – in times of peace and war, in good times or bad. Now is the time to restore some balance in our fiscal policies. Now is the time to reduce the percentage of GDP taken by taxes back to its 1992 level.
Congress could do many things with the tax code to reduce its burden on us. But the best thing, the fairest thing, is to enact a 23 percent cut in federal income taxes. By reducing federal income tax rates by 23 percent, we would effectively restore the tax burden to its pre-Clinton level.
The United States is experiencing an unprecedented economic boom, and an unprecedented period of peace. Our current federal tax levels reflect neither of these realities. When the world is a peace, the budget is balanced and the economy the strongest it has been in decades, tax policy should reflect the times in which we now live: peace and prosperity.
The time for a tax cut is today.