Taxes: Prescription for Prosperity


"Mr President! Mr. President!" The entreaty rings out among the surly snarls of the assembled press. The president pauses, turns his head, even while showing irritation at this typical display of boorish media aggression.

"Well, Mr. Condon, we've been trying to train you journalists in better manners since my first term." He pauses, displaying his famous aw-shucks half-grin, then continues: "But since you do speak for REASON, I guess we'll entertain your question."

"Mr. President," I answer, "meaning absolutely no disrespect to you or your office, I urge you, on behalf of everyone who believes in the future of capitalism, ignore the deficit! Continue with your tax-simplification program, but cut taxes more!"

A roar of disapproval rises from the assembled reporters. "Shut up, you idiot," snarls a Washington Post reporter. "Let's get the sonofabitch!" shouts a respected New York Times columnist. The Secret Service starts moving in, reaching for their pistols. Above it all comes the command from the president himself: "Let him alone. He's right."

And I wake up in a cold sweat, the sheets soaking wet. Did the president listen? Would he?

The two big political issues this year are cutting the budget and tax simplification. Both are intimately allied.

The struggle over setting the budget has come first. For the last two years that inane process, with a Congress to match, has extended right through to December with no resolution. For those who love the welfare state, this is fine: no budget resolution means, ultimately, a busted budget (that is, a budget with increased spending). True, Reagan is an even bigger social spender than Jimmy Carter was. But those seeking to scuttle Reagan's budget want to increase spending even more than he already has.

But there's something more important by far riding on the outcome of the budget battles: the fate of tax reform. I mean the prospect of real tax reform, not the vicious tax-raising slanders of the last 20 years. I mean a relatively flat-rate and relatively simplified tax system.

And I mean the prospect of further tax cuts.

If the budget is busted, the already-bloated deficit, projected at $190 billion plus and changing almost weekly, will further mushroom. The Democrats, seeking Republican blood, will wail incessantly about the ballooning deficit (which they more than anyone else have created). With such rhetoric, they'll "draft" the GOP traditionalist, non-supply-side conservatives into the increased-spending orgy. Weighted down with conventional, static economic assumptions, these traditionalists will turn against and scuttle any tax-simplification, "revenue-neutral" plans—not to mention any tax-cut plans lurking around—all in the name of "fiscal prudence."

Therein lies the real struggle, for budget-busting is also useful for blasting tax simplification and tax cuts out of the water. Why would someone want to do that? Because (1) tax cuts mean to welfare statists that government won't have the power (read "money") to do all those good things for us; and (2) tax simplification and further tax cuts could mean an explosively expanding American economy, thus benefiting…Republicans. (Don't take my word about such economic growth. Just look at the economy of Japan since 1945, which for 23 out of 25 postwar years cut taxes. Look at Singapore, Taiwan, Hong Kong.)

What about the deficit? Everyone wants to know. At this point, the deficit must be put on the back burner. It is smaller now as a percentage of US GNP than it was at the end of World War II, and it is smaller now as a percentage of GNP than Japan's has been for most of the postwar years.

What will happen if Congress scuttles the Reagan budget and prevents tax simplification? America's economy will slow through the last half of 1985 and into 1986, perhaps even begin to contract. The Democrats can then call the result of their work "the Reagan recession" and run against it, picking up further strength in the House and possibly seizing control of the Senate once again. With a solid majority in the House and a working or real majority in the Senate, the Democrats can then block any economy-saving attempts—that is, further tax cuts and simplification—in the last half of the Reagan administration. Armed with the resulting economic shambles, which will be blamed on "the free market" and "disproven supply-side economics," the Democrats will then be in a position to mount a serious effort toward expanding the welfare state, implementing an "industrial policy," and on and on.

If the administration is to resist that tide of events, Reagan must ignore the deficits. And he can't be satisfied with just "simplifying" taxes with a milquetoast "revenue-neutral" bill. He's got to move decisively and cut taxes further this year. Those who think such a move would wreak havoc are prisoners of static assumptions. Workers and taxpayers do not stand still, and changes in tax complexity and marginal tax rates make them move faster than anything else. To understand the very basic truism that people react to different tax rates—and this is the theoretical foundation of all of supply-side economics—is to throw off the voodoo curse of static assumptions and unreasonable fear of deficits that can prevent this economy from taking right off.

If Reagan moves decisively now to simplify the entire tax system and to reduce marginal tax rates to a flat-tax percentage even below the currently proposed rates of 30 or 25 percent, American history will witness two momentous events. Economically, there will be a burst of growth, productivity, and entrepreneurship such as this country has never in its history seen. Politically, the American people will support in the 1986 elections and beyond candidates committed to furthering the incipient supply-side revolution.

The resulting explosive economic growth will pave the way, throughout the remainder of the 20th century and into a good stretch of the 21st, for the forces of capitalism and freedom.

Tim Condon is an attorney and tax specialist practicing in Florida.