Cutting taxes more beneficial than cutting debt

July 31, 2012

Free Market Foundation

Ever since the U.S. federal government began running budget surpluses, politicians, economists and others have been debating whether to cut government debt or cut taxes. Now that President-elect George W. Bush approaches the White House, the issue has come to a boil.

The Wall Street Journal argues there is no reason to pay down the national debt and there are several reasons to maintain it.

Maintaining a debt would satisfy people who want to own U.S. debt securities; the Federal Reserve uses Treasury securities to conduct open market operations; they serve as benchmarks against which other assets and derivatives are priced; pension funds are required to hold them; and taking on debt is appropriate when the government purchases long-term assets.

On the other hand, tax cuts improve incentives for people to work harder or look for a better job, to save and invest, and to start new businesses.

As the American Enterprise Institute’s John Makin has pointed out, if a $1 trillion tax cut added 0.5 percent to average annual growth over the decade, it would lift the underlying average growth rate from 3.5 percent to 4 percent thereby adding $3.4 trillion to gross domestic product, a return of 13.1 percent.

That $3.4 trillion would generate $689 billion in federal revenues, leaving the net revenue reduction at $311 billion or enough to leave the currently estimated surplus of $5 trillion intact.

This represents an amazing return of 27 percent a year.

But there is a third factor in the surplus debate. If it is not returned to taxpayers, does anyone doubt Washington will spend it, rather than retire debt?

Source: Editorial, The Debt Mirage, Wall Street Journal, January 8, 2001.

For more on Effects Of Tax Cuts http://www.ncpa.org/pi/taxes/tax21.html