Ten Years Later, Opinion Still Split on Tax Cuts
Though 10 years have passed since Congress enacted the Reagan tax reductions, substantial disagreement remains about how the cuts have affected the U.S. economy.
The differences of opinion emerged clearly in a two-hour debate last week that had six prominent economists hurling statistics at one another like so many hand grenades.
To keep the fight fair, the sponsor - the Cato Institute - divided the panel equally between supply-siders, who fervently supported the 25% reduction in personal income taxes, and those adamantly against them. But because they cited data from different time periods, the economists made it impossible to judge who was correct.
Finally, an exasperated Rudolph Penner blurted: "I think we should declare a moratorium on economists throwing around numbers." Mr. Penner, a former director of the Congressional Budget Office, is a senior fellow at the Urban Institute.
"That's what the losers always say," retorted Arthur Laffer, president of Laffer and Canto Associates and one of the architects of the Reagan plan to spur economic growth by putting more money in consumers' hands through lower taxes.
Both Sides Blame Congress
The economists generally agreed that when Congress passed the 1981 tax law it should have done something to clamp down on government spending.
"The big mistake of the 1980s was not getting good spending controls," Mr. Laffer said.
Robert Shapiro, vice president of the Progressive Policy Institute, said 20% of the nation's tax receipts are spent covering interest on the debt. The deficit, he said, "paralyzes the innovation and will of government."
Robert S. McIntyre, director of Citizens for Tax Justice, agreed.
"The deficit has really put the government in a situation where it's not doing its job," he said.
And the problems have not gone away.
"What we have suffered is a series of mistakes in policy making in Washington," concluded Richard Rahn, chief economist of the U.S. Chamber of Commerce. "Great increases in federal spending, increases in taxes, huge increases in regulation, and an uncertain monetary policy have combined to put us back in recession."
Each economist had his own plan for reform. Mr. Rahn would focus on the Social Security system.
"We are taxing the young poor to support the old rich in this country," he said. "It's been a huge transfer of income from the young to the wealthy, from the young to the old."
Lawrence Kudlow, chief economist at Bear Stearns and Co., hawked his plan to index government bonds to inflation.
"If the expected inflation is low, 3% or 4%, there is no reason to be issuing government bonds with coupons of 8% or 9%," he explained. "The combination of low inflation and an inflation-indexed financing program would probably save $100 billion over five years."
Mr. Laffer pushed a flat 12.5% tax on personal unadjusted gross income and on the value of businesses. As he put it: a flat tax with "no deductions, no exemptions, no exclusions. None of this nonsense.
"Do the dream we had at the beginning of this period," Mr. Laffer urged, "which was to get rid of all the tax shelters, all the inflation, all the nonsense, and have one flat tax across the board."
Mr. Laffer, Mr. Kudlow, and Mr. Rahn all backed cutting the capital gains tax.
"There is nothing wrong with the rich getting richer. They are not our enemies." Mr. Laffer said.