The Cato Institute
Tax increases won't cure federal deficit
By Veronique de Rugy
WASHINGTON -- President Bush's critics say tax cuts are unreasonable because the Congressional Budget Office projects a 10-year deficit of $1.8 trillion. Instead, those critics want to raise taxes, arguing that it will balance the budget.
Both President Hoover and President Roosevelt tried such a plan in the 1930s. It failed then. And such a policy today will fail again.
After the 1929 market crash, a sharp monetary contraction pushed the economy into the Great Depression. Overnight, everyone forgot how effective the large tax cuts implemented by Treasury Secretary Andrew Mellon were in restoring economic growth and how, in turn, deficits had disappeared.
Obsessed about deficits, Hoover had raised individual tax rates at all income levels -- the top rate rose from 25 percent to 63 percent. Following Hoover, Roosevelt signed into law a series of tax increases. At the bottom end, personal exemptions were reduced and an earned income credit was eliminated. At the top end, the highest marginal rate was increased to 79 percent in 1936.
Between 1930 and 1940, the corporate income tax rate was doubled from 12 percent to 24 percent and an "excess profits" tax was added on top. In addition, Roosevelt imposed an excise tax on dividends, a capital stock tax, liquor taxes, and he increased estate taxes. Finally, the Social Security payroll tax was imposed with a 2 percent rate starting in 1937.
Interestingly, while the federal budget was balanced throughout the 1920s, the tax increases of the 1930s coincided with increasingly large deficits. On the campaign trail in 1932, Roosevelt noted: "For over two years, our federal government has experienced unprecedented deficits, in spite of increased taxes." Yet, much like California's Gov. Grey Davis today, Roosevelt decided to increase taxes more. He found out that a tripling of tax revenues did not balance the budget because the deficit soared from $2.2 billion in 1932 to $2.9 billion in 1940.
A key problem in trying to balance the budget with tax increases is that higher taxes fuel more spending. As Milton Friedman has said, "Raise taxes by enough to eliminate the existing deficit and spending will go up to restore the tolerable deficit."
Another reason why tax hikes don't balance the budget is because the hikes contract the tax base by reducing economic growth and spurring greater tax avoidance. As a result, the government gains only a fraction of the revenues it hopes to receive.
And the 1930s tax return data for high-income individuals reveals a lot. For instance, as the marginal tax rate on those earning over $100,000 was hiked from 25 to at least 62 percent, the share of overall taxes paid by that group fell from 50 to 27 percent. That happened, in part, because taxes went up at all income levels. But those high rates at the top end stifled the economy and sparked tax avoidance and, thus, suppressed tax revenues. Here again, the analogy is clear: Californians can expect a continued exodus of high income and economically productive citizens for more tax-friendly states such as Arizona, and tax receipts will continue to fall.
Roosevelt's ideological devotion to soaking the rich blinded him to the economic reality unfolding around him. He claimed that increasing the tax paid by individuals in the higher brackets was "the American thing to do." Yet that and other anti-growth policies killed incentives for work, investment and entrepreneurship. As a result, while the U.S. unemployment rate fell during the tax-cutting 1920s, it soared to 25.2 percent in 1933, and remained high through 1940, at 14.6 percent.
The tax increases of the 1930s coincided with large deficits and economic stagnation. While high taxes should not be blamed for all the problems of the Great Depression -- monetary and trade policy mistakes also deserve some blame -- it should be clear that raising taxes to balance a budget is like drinking a six-pack to cure a hangover.
As the California Senate grapples with the state's budget deficit and mediocre economic growth, it should look to the tax cuts of the 1920s for inspiration rather than the failed "budget balancing with high taxes" approach of the 1930s.
(Veronique de Rugy is a fiscal policy analyst with the Cato Institute.)
The Heritage Foundation
President Reagan and missile defense: the realization of a vision
By Baker Spring
WASHINGTON -- "What if free people could live secure in the knowledge that their security did not rest upon the threat of instant U.S. retaliation to deter ... attack, that we could intercept and destroy strategic ballistic missiles before they reached our own soil or that of our allies?"
Exactly 20 years ago, President Reagan posed this intriguing question. His goal was to end America's vulnerability to ballistic missile attack by launching a program named the Strategic Defense Initiative, or SDI.
President Reagan was probably the only man with the ability to propose SDI. Even though his vision was based on realism about the threat facing America -- at that time the Soviet Union's nuclear arsenal -- it was balanced by hope and great foresight.
His vision soon will be realized. The Bush administration plans to field a limited ballistic missile defense system in late 2004 and 2005. The system will become operational despite intense opposition over the last two decades in Congress and in the executive branch during the administration of President Bill Clinton.
Why has SDI survived, and even thrived? Here are some of the reasons President Reagan's vision has proven so compelling and enduring:
-- SDI is based on common sense. The simple premise behind SDI is that America ought to be able to defend itself against attack -- and, because it possesses this ability, perhaps even prevent one -- instead of simply responding to a successful attack. SDI's grounding in self-defense is why the idea is nearing realization 20 years later, even though the world is a dramatically different place than it was in 1983.
-- SDI is based on conservative principles. In foreign policy, conservatism stands for American strength, leadership and moral confidence. SDI represents all of those.
It was originally a way to become stronger than the Soviet Union, encourage others to stand up to Soviet threats and reassure Americans and others around the world that our cause in countering the Soviet Union was just. President Reagan's SDI proposal allowed no room for arguments of moral equivalency between the United States and the Soviet Union.
-- SDI is a big and powerful idea. Enduring policies are not based on narrow or small-minded ideas. SDI was a big concept that became one of the chief means for confronting and defeating the Soviet threat. Today it remains critical, as a means of countering the threat posed by rogue states and terrorists. Reagan had the vision to propose an initiative as far reaching and flexible as SDI. He focused on getting a handful of big, important things done, rather than spreading his efforts over a broad array of narrow initiatives designed to please special interests, as Clinton so often did. This is why history will judge Reagan as a conservative Franklin Delano Roosevelt and Clinton as a liberal Warren G. Harding.
-- The SDI message is hopeful and uplifting. President Reagan was an optimistic leader. He viewed missile defense as a way to brighten a world that lived under the darkness caused by the threat of nuclear annihilation. It's not surprising the American people found comfort and hope in this message.
-- Reagan demonstrated the courage of his convictions. It's impossible to imagine the pressure Reagan was under at the legendary 1986 Reykjavik summit with Soviet Secretary General Mikhail Gorbachev. Secretary Gorbachev offered to eliminate nuclear weapons in exchange for the termination of the SDI program. How many presidents could have turned that down? Yet by rejecting the disingenuous Soviet offer, Reagan underlined the importance of SDI. That's why, 20 years later, SDI is close to fruition, while the Soviet Union is dead and buried.
President Clinton, by contrast, opposed missile defense as fervently as President Reagan supported it. Crucial research was scaled back severely or canceled outright during the 1990s. Yet when Congress passed the National Missile Defense Act of 1999, which established in law the policy of deploying a missile-defense system, Clinton chose to sign the bill -- assuring that Reagan's vision for would survive after all.
Reagan's idea strengthened our national security and that of our allies by overcoming the Soviet threat. President Bush is likewise demonstrating strong leadership by taking an idea born during the Cold War and using it to defend America against today's terrorists and rogue states. That's why it is appropriate to mark the anniversary of Reagan's 1983 speech (as a congressional resolution sponsored by Rep. John Hostettler, R-Ind., would do) -- and to realize how crucial it is to take the few steps that remain to make SDI a reality.
(Baker Spring is the Kirby research fellow in national security policy at the Heritage Foundation, a Washington-based public policy research institute.)
The Institute for Public Accuracy
(The IPA is a nationwide consortium of policy researchers that seeks to broaden public discourse by gaining media access for experts whose perspectives are often overshadowed by major think tanks and other influential institutions.)
Geneva Convention, Water Supply
WASHINGTON -- "While the U.S. government has objected to Iraq broadcasting photos of U.S. POWs, the U.S. government has allowed the very same thing. ... Photos of Taliban prisoners of war and John Walker Lindh were continually broadcast on U.S. media outlets. The Pentagon is refusing to abide by the Geneva Convention with regards to the prisoners being held at
-- Tom Nagy, a professor of expert systems at George Washington University, wrote the article, "The Secret Behind the Sanctions: How the U.S. Intentionally Destroyed Iraq's Water Supply," for the Progressive magazine. Nagy notes that the Geneva Conventions (Article 54) state that "It is prohibited to attack, destroy, remove or render useless objects indispensable to the survival of the civilian population, such as ... drinking water
installations." Nagy has uncovered a Defense Intelligence Agency document written right before the Gulf War which spells out how sanctions would prevent Iraq from supplying clean water to its citizens: "Iraq depends on importing specialized equipment and some chemicals to purify its water supply," the 1991 document states. "With no domestic sources of both water treatment replacement parts and some essential chemicals, Iraq will continue attempts to circumvent U.N. sanctions to import these vital commodities. Failing to secure supplies will result in a shortage of pure drinking water for much of the population. This could lead to increased incidences, if not epidemics, of disease." Nagy has recently uncovered the Air Force's Doctrine Document 2-1.2 of May 1998 entitled "Strategic Attack," which includes an analysis of Desert Storm: "The loss of electricity shut down the capital's water treatment plants and led to a public health crisis from raw sewage dumped in the Tigris River." This is under the section entitled "Elements of Effective Operations."
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