Santayana’s warning that those who forget the past are condemned to repeat it has become a stock cliché of political criticism. But what about those who remember the past all too well yet choose to repeat its mistakes nonetheless?
One of the more remarkable developments of the 1996 presidential campaign has been the resurrection of a call for a large across-the-board tax cut, a plan once again justified by “supply-side economics.” Sixteen years ago Ronald Reagan endorsed the proposal, introduced by then-Congressman Jack Kemp and Senator William Roth, for an across-the-board 30 percent reduction in personal income tax rates. Mr. Reagan continued to advocate this idea after taking office; and that summer Congress voted to cut rates by 25 percent in three steps. Of course a lesson one might draw from this earlier episode is that proposing an across-the-board tax cut helps get a candidate elected president; but in retrospect it is hard to believe that Mr. Reagan defeated Jimmy Carter just because he had endorsed the Kemp-Roth plan.
The more compelling lesson to be drawn from the tax cut and what happened afterward is not political but economic. In conjunction with the Reagan administration’s other tax and spending policies, the Kemp-Roth tax cut led to record-size budget deficits and borrowing, higher real interest rates, and reduced investment in new factories and machinery. US productivity growth was also disappointing despite several favorable developments—such as falling energy prices and the increasing experience of American workers—that should have boosted it. That experiment from fifteen years ago, moreover, has left behind a legacy of swollen government debt, a shrunken capital stock, depressed productivity and real wages, and a large net balance that we now owe to foreigners in place of the balance foreigners used to owe to us.
Remarkably, Bob Dole has now proposed that we try a similar gamble once again. Almost simultaneously with his selection of Jack Kemp as his running mate in August, Mr. Dole called for a 15 percent across-the-board reduction in personal income tax rates. Since then he has made the tax cut proposal central to his election campaign. Is there serious reason to think that an experiment that failed in the 1980s would work differently today? And what, aside from his opposition to cutting tax rates by 15 percent, is President Clinton offering as an alternative?
Apart from the obvious fact that nobody likes paying taxes, a sizeable tax cut is especially appealing for many Americans today. During the last two decades, the real incomes of most families in our country have stagnated, and the real wages of most working Americans have declined. Last year a family just at the middle of the US income distribution earned $40,600. Despite the healthy increase both last year and the year before, the median US family income was still almost unchanged from twenty years earlier after allowing for inflation.
The average family with $40,600 in gross income has taxable income of about $24,400 …