Tax cuts are based on a politically unsound philosophy, which has never worked in history.

President Clinton took office as the economy was emerging from a recession. The 1993 tax increases significantly lowered growth from what would be expected during a recovery: "In the four years following the Clinton tax hike (from 1993 through 1996): * The economy grew at an average annual rate of 3.2 percent in inflation-adjusted terms; * Employment rose by 11.6 million jobs; * Average real hourly wages rose a total of five cents per hour; and * Total market capitalization of the S&P 500 rose 78 percent in inflation-adjusted terms." [1] The real boom came after tax cuts were passed in 1997. The largest cut was in the capital gains tax rate, which was reduced from 28 percent to 20 percent. In 1995, $8 billion was invested in venture capital. "By 1998, the first full year in which the lower capital gains rates were in effect, venture capital activity reached almost $28 billion, more than a three-fold increase over 1995 levels, and by 1999, it had doubled yet again. ... The explosion in venture capital activity cannot be credited entirely to the cut in capital gains tax rates, as the cut fortuitously coincided with technological developments that gave rise to the Internet-based "New Economy." However, the rapid development and application of these new technologies could not have occurred at such a rapid clip absent the enormous investment flows made possible largely by the reduction in the capital gains tax rate. This experience demonstrated yet again the truth of the axiom: The less you tax of something--in this case, venture capital investment--the more you get of it." Pro is wrong in supposing that the 1993 tax increases led to the balanced budget. The surpluses were in 1998, 1999, and 2000,[2] ... after the tax cuts. "The Clinton years present two consecutive periods as experiments of the effects of tax policy. The first period, from 1993 to 1996, began with a significant tax increase as the economy was accelerating out of recession. The second period, from 1997 to 2000, began with a modest tax cut as the economy should have settled into a normal growth period. The economy was decidedly stronger following the tax cut than it was following the tax increase." The other half of the equation is government spending. We expect the federal budget to rise in proportion to the population and with inflation. If government spends less per household after correcting for inflation, then that is a spending cut. In the 1990's, spending by that measure did not increase. [3] There were no dramatic cuts in spending, but stability is a good test of the theory that tax cuts can produce surpluses. that is exactly what happened. Surpluses appeared under constant spending with tax cuts. There were political reasons why spending was stable in the 90s. There was a large "peace dividend" after the Cold War. Both Parties agreed that the military budget should be reduced substantially, and and it was kept low during the 90s. Further decreases in spending, such as welfare reform, as well as the 1997 tax cuts were a product of House Speaker Newt Gingrich working with President Clinton on a bipartisan basis. The politics are difficult to achieve, but not impossible. Turning to the political theory, Pro claims it is a matter of simple arithmetic: just raise the tax rates and the government gets more money. Experience does not support Pro's idea of simplicity. What actually happens is that taxes reduce the income that people have left over to spend or invest. people adopt tax avoidance strategies over what would have been sound investment, and people are discouraged from working harder for less reward. Tax cuts increase revenues for the opposite reasons; people make sound investments based on the returns. "In 1980, the last year before the [Reagan] tax cuts, tax revenues were $956 billion (in constant 1996 dollars). Revenues exceeded that 1980 level in eight of the next 10 years. Annual revenues over the next decade averaged $102 billion above their 1980 level (in constant 1996 dollars)." [4] Tax cuts in the 1920s and the Kennedy tax cuts both increased revenues. [5] Tax cuts do not always increase revenues. Basically, if taxes are low then raising them does not deter investment, so people's behavior is unaffected. The peaking of revenue at some intermediate tax rate is called the Laffer curve. Laffer acknowledges he didn't originate the concept: Ibn Khaldun, a 14th century Muslim philosopher, wrote in his work The Muqaddimah: "It should be known that at the beginning of the dynasty, taxation yields a large revenue from small assessments. At the end of the dynasty, taxation yields a small revenue from large assessments." [6] Consequently, the correct arithmetic is that if tax rates are set to produce peak revenues on the Laffer curve, called T*, then if the government spends more there will be a deficit and if the government spends less there will be a surplus. There is no tax rate that can catch up to sufficient overspending. Liberal Democrat Erskin Bowles, appointed to co-chair President Obama's Deficit Commission, says it is clear that no amount of taxation or growth can possibly resolve the country's deficit problem. The Washington Post reported that Bowles, White House chief of staff during the Clinton administration, told the governors, "We can't grow our way out of this. We could have decades of double-digit growth and not grow our way out of this enormous debt problem. ... We can't tax our way out. ... "[7] While the Federal government has shown no will to cut spending in recent years, at least stability was maintained under Clinton, and many states have accomplished spending cuts, even profligate California. Which side of T* we are on is debatable, but clearly taxes are high. I think revenue would increase by lowering the tax burden. What is absolutely certain is that spending must be cut. Pro's objection to the political philosophy of cutting taxes and spending is that spending cuts are impossible to achieve politically. I contend that spending cuts are actually inevitable, because otherwise the country will suffer complete economic collapse. It is arguable as to when that reality will set in, but it is inevitable. Look, for example, at Greece and Spain. Long accustomed to unlimited spending, Greeks rioted at the suggestion that government employees might have to retire at 55 rather than 53. Nonetheless, faced with no other choice, Greece and Spain are cutting spending. [8, 9] The political will to cut spending will certainly arise to cut spending as economic disaster looms. The Tea Party movement is an early precursor of that. Tax cuts and spending cuts are both sound political philosophy. The philosophy only says there is a point of maximum tax rates. Past history has shown revenue increases after tax cuts, and Clinton combined tax cuts with stable spending to produce a budget surplus. The political will to cut spending has been demonstrated both by states and foreign countries when facing economic disaster. We will have no choice. The resolution is negated. [1] http://www.heritage.org... [2]http://archives.cnn.com... [3] http://www.heritage.org... [4] http://www.heritage.org... [5] http://www.heritage.org... [6] http://www.heritage.org... [7]From The Detroit News: http://detnews.com... [8] http://seattletimes.nwsource.com... [9]http://news.kyero.com...