Reaganomics redux

The tax cut proposal submitted by President Bush relies on surplus projections that may never materialize. The surplus projection they're using is $5.6 trillion. But if you take out the Social Security and Medicare trust money that's popular with both Democrats and Republicans, it's down to $2.1 to $2.3 trillion. Bush's proposal would really be at least $2 trillion, because it increases the interest we have to pay on the federal debt, because we're not paying it down as fast. So basically you spend the whole tax surplus -- and that's a projected surplus. How can we even be sure it will materialize?

What they're looking at is a projection of 3 percent growth over a 10-year period, which is very reasonable, even if the current quarter were to be zero. The historical average is about 2.7 percent growth for the past 60 years. It's been higher over the past 10-to-20 years. Even if one quarter is zero, there are others that are as high as 5 or 6 percent. There are different macroeconomic and global factors that increase or decrease economic growth. It's not just the interest rate cut.

I think the forecast figures for the next 10 years are very reasonable. It's possible that they err on the side of caution. In the past 10 years, you've had a much higher average growth rate, and there's no reason to see that slowing down.

In an editorial in the New York Times last weekend, former Treasury Secretary Robert Rubin said there's also a threat that between the tax cut, Social Security, Medicare and new programs proposed by President Bush like the missile defense and the popular prescription drug benefit, we could be pushed into a deficit.

It's very difficult to forecast levels of these expenditures. We've been surprised at the high levels of tax revenues during the past four years. Even though it might be possible that the Social Security and Medicare numbers would come in higher, tax revenues might come in higher also. This whole forecasting business is a black box. Economists think they know more than they do.

But what if the tax cut does eliminate the surplus and we run into deficit problems. Won't there be a risk of cutting social programs? And won't it be politically difficult to raise taxes again once you've made a dramatic cut?

We have never eliminated any government spending or entitlement programs as a result of tax cuts. On the other hand, we have raised and lowered taxes frequently over the past 20 years. In 1981, we lowered taxes. We raised them again in 1982. We restructured the tax system in 1986; we raised taxes in 1990, and we raised them again in 1993.

But that 1990 tax increase former President Bush promoted also helped lead to Clinton's victory in 1993.

Absolutely. Here Bush had made such a big deal of saying, "Read my lips: No new taxes." And then there was a tax and he was very badly advised. But it wasn't Bush's fault -- he was very badly advised by [then White House Budget Director] Richard Darman to sign this budget agreement that would raise taxes. You'll notice, by the way, that Darman has come nowhere near the new Bush administration. He hasn't been asked for advice; he hasn't appeared.

But wouldn't Bush's defeat suggest that raising taxes once you've cut them is, in fact, is a dangerous political strategy? Or was Bush just an exception?

In his convention speech, he got elected on the basis of not raising taxes. He made a promise that he wouldn't raise taxes. Clinton didn't do that. When he raised taxes, there weren't political consequences. The bottom 50 percent of taxpayers only pay 4 percent of the income taxes. And since the vast majority of Americans don't pay any federal income tax anymore, raising the taxes on, say, the top 5 percent, didn't have that much effect Clinton politically, which is why he got reelected in 1996. That 5 percent was certainly paying a lot more than their proportion.

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