Forgotten Reform

Posted 2/8/2006 in IBD:

Fiscal Policy: Forget tax reform, says Democratic Sen. Max Baucus. "The thing's dead," he told Treasury Secretary John Snow this week. "That's dead, Mr. Secretary." We hope not, for the economy's sake.

Wasn't it just last year that President Bush's commission on tax reform issued its report, calling for sweeping changes in the interest of fairness, simplicity and growth? That report contained many sound ideas. But Bush, perhaps shying away from a fight in an election year, hasn't pushed them very hard.

Pity. Because tax reform is important to the economy. So far, much of the debate has centered on the income, capital gains and dividend rate cuts approved in 2003 and whether they should be extended to 2010 or made permanent.

The argument is that the economy's three-year boom is due largely to those cuts. We concur. That's why we think it would be wise not just to extend them, but also to make them permanent by reforming the tax code once and for all.

That the Bush cuts have worked is no longer in dispute. The chart tells the story of two economies: one before cuts and one after. We chose to show GDP, the broadest measure of economic health. But other data points — investment, personal wealth, jobs, anything — serve just as well. All tell the same story: Bush brought the economy back to life with his bold tax initiatives.





Critics respond that the cuts also created massive new deficits. But as a news feature in IBD pointed out last week, that's not true. The cap-gains cut, for example, seems to have paid for itself in classic supply-side fashion. When the cut was approved in 2003, they assumed it would "cost" $3 billion over three years.

Instead, the government took in $45 billion more than forecast.

Ditto for cuts in income taxes and other levies. Maybe one of these years, someone in Washington will connect the dots: When taxes are cut, the economy grows, creating new jobs, more income and, yes, more tax revenues.

The record is clear. Since mid-2003, and in contrast with puny gains up until then, we've added 4.6 million jobs, $1.1 trillion in GDP, $400 billion in business investment, $738 billion in consumer spending and a whopping $12.1 trillion in personal wealth.

Imagine the possibilities if even broader tax relief were enacted and if the code was purged of its absurd biases against savings and investment. (We won't even go into the savings for Americans who shell out $140 billion each year just complying with the tax code's many rules.)

Sure, we'd love to see Congress extend the tax breaks until 2010. But we'd much prefer broader reform — the kind that will bring benefits for decades. That's why we hope reports about the death of tax reform, like those of Mark Twain, are greatly exaggerated.