The $5.7 Trillion Myth
The Democrats' fuzzy math.
Jul 21, 2008, Vol. 13, No. 42 • By STEPHEN MOORE
Then there's the other giant flaw in the $5.7 trillion tax cut myth. The models that come up with this number assume that there will be zero change in the economy from lower tax rates. So a roughly one-third reduction in the corporate tax rate translates into a one-third decline in corporate tax receipts. Conversely, a 33 percent increase in the capital gains tax means a 33 percent rise in capital gains receipts. This defies common sense because the reductions in the capital gains tax in 1997 under Bill Clinton and in 2003 under George W. Bush more than doubled capital gains receipts on both occasions.
The same forecasters who say that McCain's tax plan will lose $5.7 trillion also assured us five years ago that the investment tax cuts of 2003 would blow a $1 trillion hole in the budget. Oops. Instead the deficit fell in half from 2003-07 as federal revenues soared by a record $750 billion.
Do economists on the left really believe that the economy's response to a reduction in tax rates is zero? Can it be that moving the U.S. corporate tax rate from the second highest in the world to the international average won't help the competitiveness of U.S.-based firms at all? If that's the case, how does one account for Ireland, which cut its corporate tax rate from 48 percent to 12.5 percent but now has so much economic activity, its tax receipts have soared?
So we have a clash of visions on tax policy here that will be played out on center stage in the months ahead. The left wants a tax system that redistributes $130 billion of the tax burden from the rich to the poor. Good luck to them. Almost every attempt by the Democrats for the past 50 years to increase tax payments by the rich by raising their tax rates has led to the top 1 percent and top 5 percent shouldering smaller shares of overall taxes.
McCain has proposed a tax code redesigned to "increase the growth potential of the economy" by flattening tax rates and keeping taxes low on savings and investment. In the near term, the McCain tax plan will lose revenue, but it's a good bet that in the long run a tax system that increases jobs and growth and incomes will generate more revenues than Obama's priority of putting "fairness" ahead of prosperity. That usually delivers neither.
Stephen Moore is senior economics writer for the Wall Street Journal editorial page.