Americans hate taxes, but they like national defense, social security, Medicare, education, highways, health research, a clean environment, Sesame Street, and lots of other things the Federal government provides. This creates a tremendous problem for President Bush and the Republican Party. While Republicans have an easy time campaigning for tax cuts, if they actually reduced spending significantly on all those services Americans love, they would return to their old status as the minority party faster than you could say “Barry Goldwater”.
Thus Republicans turned to the “supply side” tax policies of Ronald Reagan. The idea behind Reagan’s tax policies, supposedly, was that reducing marginal tax rates would give people the incentive to worker harder and invest more, which would ultimately create higher economic growth and higher tax revenues. This was, of course, too good to be true, but it solved the Republicans electoral problem: by promising lower taxes and no cuts in services, they could get elected.
I say “supposedly” because the Reaganites knew quite soon after they slashed taxes in 1981 that they had created huge deficits as far as the eye could see. But they kept with the plan because they knew a ballooning budget deficit would keep Democrats from spending tax money on things like healthcare for the uninsured and daycare subsidies for working families.
The problem was that the major costs of government, healthcare and defense, grew so fast during the 1980s that yearly deficits and the overall national debt began to get out of control. Deficits meant higher interest rates, because the government was soaking up all the investment capital and foreign investors needed an incentive to fund all our borrowing. These higher interest rates were a drain on economic growth, and the deficits meant a larger and larger share of the budget was being used to pay for interest on the debt rather than for such things as tanks and college loans.
Things only got under control when first President Bush I and then Bill Clinton raised taxes (mostly on the wealthy), largely wiping out the Reagan tax cuts. Spending also declined, mostly because the end of the Cold War allowed military spending to fall off. Finally, despite the huge tax increases of 1990 and 1993, economic growth and the stock market skyrocketed in the 1990s, bringing much greater tax revenues. Thus, in the 2000 election, with sudden budget surpluses Americans had a clear choice after over a decade of staightjacketed budget politics. They could go with Gore who wanted to spend the surplus on Social Security, healthcare, and fostering middle class saving or Bush who wanted to spend the surplus on tax cuts. Fifty-two percent of the voters chose Mr. Gore or his more left-wing opponent, but nonetheless we got President Bush II and his agenda of tax cuts.
Thus we have déjà vu all over again. President Bush justifies his tax cuts as economic stimulus measures, but this is old Reaganite trickle down economics. Pushing American government into receivership allows Republicans to carry out their radical privatization agenda under political cover. Starved of taxes, the government (they will say) simply will not be able to afford social security, healthcare, a safety-net, education, and environmental protection, so these things will be privatized, scaled back or eliminated. We’re right back to 1981.
President Bush’s Social Security policy is a good example. Republican ideologues know that Social Security will require large infusions of general tax revenues in order to keep paying promised benefits. In 20 years the political pressures to do so will be unbearable. And who will pay the bill? Wealthy Republicans. The only way to keep this from happening is to create humungous long-term deficits now, so that it will be so difficult to fund Social Security that Americans might be willing to agree to the drastic cuts envisioned by President Bush’s privatization program. Let me be as clear as I can. The President’s tax cuts are a Trojan horse for cuts in Social Security in the future. They create huge budget deficits as far as the eye can see in order to give Republicans the political leverage to enact their radical agenda of cutting the programs Americans overwhelmingly favor and depend on.
But what about stimulating economic growth? A study released May 8 by Congress’ Joint Tax Committee predicts that the Republicans’ current round of tax cuts will create lower long-term growth because the deficits will reduce the capital available for private investment and stimulate the economies of the foreigners who will receive lots of the interest from that debt. When Americans finally see this, like they did starting in 1990, there will be another round of tax increases until the government is again solvent. I expect that to happen around 2020. What will we do then? I think that may depend on whether Americans have grown up enough to reject the Republicans’ habit of playing budget politics as a game of chicken. It may also depend on whether the Electoral College has been scrapped by then.