How we can pay for what we need

Mario Cuomo

How we can pay for what we need

This is the fifth installment in a series by former Governor Mario Cuomo.

mario cuomo.jpg Lincoln reminded us that if the market were not providing all we need and charity wasn’t able to do it either, then government would have to. But the Republicans and some Democrats say we don’t have the resources needed to beef up the most important of our domestic programs and still keep the deficits down, all the while balancing the budget. No doubt if we had the treasury and the $5.4 trillion potential surplus President Clinton left us in 2000 it would have been easier. But that has been given away by what everyone agrees has been reckless spending and many believe promiscuous tax cuts, especially those for people who didn’t need them, while the government desperately did.

We should start by curtailing our runaway deficit-creating spending. President Bush and the Republican leadership ushered in or are seeking to pass more than $5 trillion in tax cuts and entitlement expansions over the next decade without any attempt at finding a way to pay for them. (See The Pro-Growth Progressive, Gene Sperling, pg 225.)

A large part of our spending is in the form of entitlements, including Social Security and Medicare. The main purpose of these programs should be to see that no American is left utterly destitute in his or her old age. That objective can be met while also reducing benefits in both these programs that go to people rich enough not to be injured by the reductions. Or, alternatively, we can apply the Social Security and Medicare taxes to all income including non-salary income. I suspect Bill Gates, Sr., Warren Buffett and several hundred of American billionaires and millionaires would approve of the deduction of benefits to the very richest 10% of our tax payers, judging by the testimony they have already given in connection with the proposed “death tax.” Buffett has made clear that Class Warfare is real but he says, “It is a war by the rich against the rest of America and the rich are winning”: they pay a lower percentage of their income than do the non-rich tax payers.

At the same time we should at least try to return to the formula used in the nineties, implementing President Clinton’s design for pay-as-you-go budgeting. We should also make the most of a perennially attractive target that Congress is shy about dealing with, a reduction in waste, including what John McCain calls “Corporate Welfare,” enabling us to finance the useful investments we need to make. The more egregious “earmarked” “perk” grants to favored special interests should be eliminated from the budget. Under the Republicans, perks grew more than 60 percent. So called earmarks expenditures for specific projects pushed by individual members more than doubled to 14,000. Democrats have declared a moratorium on earmarks in fiscal 2007. We should also increase the number of auditors to examine high-income taxpayers which Senator Chuck Schumer estimates would yield $100 billion a year.

Another huge source of revenues was demonstrated for us by Republican and Democratic politicians in the nineteen eighties and nineties. Most Republicans in power continue to insist that tax cuts for the investor class automatically pay for themselves by the magic of “Supply-Side”. They claim the cuts produce so much new income the Federal Treasury gets back the costs of the cuts plus much more. They also argue that any increase of taxes on the investor class would automatically create economic decline.

Yet the empirical evidence for the supply-side theory is thin and unpersuasive. Martin Feldstein, one of the leading supply side theorists admitted as much, concluding that expansion of nominal GDP in the two years following the 1981 Reagan cuts was explicable without any reference to fiscal and tax policy. (The American Dream vs. The Gospel of Wealth, Martin Garfinkle, Yale University Press; 2006; p. 187.) Tax cuts for consumers are much more effective. (id at pp 172 et seq.) No one with half a brain believes that “tax cuts pay for themselves,” said Sebastian Mallaby in The Washington Post. Yet that’s the “free lunch” fantasy promoted by “supply side” politicians from Ronald Reagan to our current president, George W. Bush. The theory is that by cutting taxes to corporations and the wealthy, the government encourages so much economic growth that the Treasury actually winds up with more tax revenues. One problem: experience proves it’s just not true. Numerous studies from nonpartisan sources have proved that when government has reduced the amount of money it raises through taxes, it has ended up – surprise! – less money. Even Harvard’s N. Gregory Mankiw, a strong tax-cut proponent and former Bush/Cheney advisor, found that at best, cuts in income taxes bring back only 17 percent of lost revenue. Yet even with our national deficit soaring, President Bush’s rationale remains, “Cut taxes and our tax revenues will increase.” (See also The Pro-Growth Progressive; Gene Sperling; pp. 226-228.)

In addition, the empirical evidence shows that supply-side theory is not true. Three Presidents in recent history, two of them Republicans, have proven that it isn’t true. Certainly there are situations when tax cuts would be stimulative or tax increases would be retardants to economic growth. I did the one and avoided the other aggressively myself as Governor of New York for 12 years. But the Supply-Siders have pushed those simple truths to simplistic and absurd extremes. That’s what happened in the Ronald Reagan and first Bush years and is happening again in the Bush II years. He has frequently suggested that America was on the right track economically because his tax cuts for the rich were succeeding so dramatically. Shortly after the President’s first such announcement, it became clear that the only real beneficiaries of the tax cuts had been the wealthiest ten percent of the tax payers and no one else. The temporary reduction of deficits the President pointed to will be replaced by a return to previous levels by next year according to governmental predictions. His tax cuts have failed to supply the magic he promised just as they did in the Reagan-Bush years.

Conservatives, including the highly intelligent and fiercely logical George Will, sometimes point to the tax cuts by President Reagan as stimulating a strong economy, demonstrable even today, 25 years later. Here’s the whole truth. President Reagan started his Administration in 1981 with the biggest tax cut in history, cutting tax rates principally on the highest earners. At the same time he added massive new expenditures, particularly in the military budget. Having reduced government’s income and increased government’s spending, he then made the promise that by virtue of Administration magic those tax cuts would speed the economy’s growth so dramatically that it would balance his swollen budget in three years. He miscalculated badly. The cuts helped produce the serious recession of 1982 and what was then the largest deficit and debt in American history.

How did President Reagan seek to solve the deficit and debt problem caused by his excessive tax cuts and spending without reducing military expenditures? By doing what he said he would never do because Supply-Siders said he shouldn’t: by raising taxes—mostly on the wealthy corporations and individuals. He never signed another tax cut. His first increase was by far the largest tax increase in American history and it reversed about 30% of the damage caused by his cuts. In 1983 he raised taxes on payrolls. Altogether he raised taxes seven times. (See John Farrell’s Tip O’Neill, pg 605.)

President George H. W. Bush followed suit in 1990 renouncing his “read my lips” pledge by reversing the Reagan tax cuts and raising taxes, again at the top. He left the tax rate into the 30’s from Reagan’s 28% providing nearly $100 billion in tax increases. Then President Clinton imposed still another tax increase of about $100 billion, mostly on the investor class, the top earners, corporate and personal.

Republicans, Conservatives – and some Democrats, who are not as familiar with the Reagan/Bush years from 1981 to 1992 as those of us who were in government then – are shocked or even disbelieving when they are confronted with the history of tax increases in that period. Their doubt can be easily dispelled by reading the authentic and admirably candid books by major figures in both the Reagan and Bush Administrations, Richard Darman’s Who’s in Control? Polar Politics and the Sensible Center, Simon and Schuster 1996, and also David Stockman’s book, Triumph of Politics, Why the Reagan Revolution Failed, 1986.

What happened after all those tax increases on our richest taxpayers? Eight years of economic growth, the four best stock market years in our history, twenty-two million new jobs, a five trillion dollar projected budget surplus, an upwardly mobile middle class, fewer poor and the discrediting of Administration “magic.” In the long run, the increased taxes on our wealthiest tax payers proved to be a good investment for America – and especially for the wealthiest Americans – because it helped produce even more billionaires and millionaires than ever.

This should have come as no surprise. America thrived for half a century under a level of federal taxes higher than the one we face today. Bush’s second term will see the lowest tax as a percentage of G.D.P. since Truman… 16.5% of the Gross Domestic Product.

In a progressive tax system like ours those who have benefited the most from the economy should contribute the most in taxes and those who need the most because the market system failed to provide what was necessary should receive the most from government. But the current Bush administration like the early Reagan administration operated on the “Supply Side” theory that those who are already benefiting the most should receive the most in tax cuts. That’s both unfair and counterproductive.

The conclusion is irresistible: our current deficit and debt situation is like the Reagan-Bush and early Clinton years, only worse. So in keeping with the instruction of history, another place to go in providing federal investments today is mitigating President Bush’s huge tax cuts – not the part of them that goes to the struggling middle class because they will put the money back into the economy buying things – just the part that goes to the one-or-two million wealthiest taxpayers, who average a million dollars a year income.

If the public is told precisely what the purposes are – to cut deficits, support education and healthcare, to further stem cell research and to beef up Medicare as examples – and if we make clear that only people who average $1 or $2 million would pay increases, I believe the public would find the increases acceptable. Indeed, so should the wealthy because in effect, we would be helping our wealthiest tax payers make another fruitful investment in America like those called for by Presidents Reagan, Bush Sr., and Clinton…which helped produce more millionaires and billionaires than ever by the year 2000.