The Reagan tax cut did coincide with a significant upturn in the economy in the early 1980's. But economists have never been able to sort out whether that was a result of the tax cut, Federal Reserve policy, the rapid rise in military spending, or all of the above and a few other factors as well. The Reagan tax cut was also much sharper than the cut President Bush proposes. The top income tax rate in the Reagan era went to 50 percent from 70 percent and finally to 28 percent in 1986. Tax cuts that large are more likely to encourage people to work harder and entrepreneurs to take more risks than Mr. Bush's relatively modest reductions.
Many liberal economists go further.
They expect the Bush plan to have no impact at all on work incentives and entrepreneurial activity. Not only is the Bush cut too small, they say, but it is also phased in over too many years. In addition, one-third of the work force earns too little now to pay any income tax. Those who endorse the Bush tax plan do not see any need to maintain a large federal budget surplus. Global capital markets are now large enough for American companies to tap them to finance capital spending, Mr. Makin says, adding that companies do not have to rely on a growing supply of private savings at home, as Mr. Solow says.