Devil in the Details



It is an article of faith to supply-siders that budget deficits to do not significantly influence interest rates. This was their consistent position during the debate over President Clinton's first deficit reduction plan, when the administration claimed its deficit reduction would encourage growth by lowering interest rates.

In February 1993, for instance, Daniel J. Mitchell of the Heritage Foundation argued on the op-ed page of the Wall Street Journal that "budget deficits have fluctuated widely in the past 20 years, yet the accompanying shifts in interest rates predicted by theory have failed to materialize."

Now it's the Republicans who are making the same assumption about the deficit and interest rates. If Mitchell and other supply-siders are right, the Republican projections are a fraud.

But don't expect to see Mitchell making this claim any time soon though. "We on the right are happy with the direction the budget is taking," he explains, "so we are not going to nitpick."

Meanwhile, the Journal editorial page is desperately searching for a way out of this intellectual bind. And it may have found one. Republican Senator Connie Mack of the Joint Economic Committee has argued that the balanced budget will put an extra $4,000 in every family's pocket within a decade. Why? Restoring the government to the size it was during the 1950s and early 1960s would reproduce the same economic growth the country enjoyed during that era. The Journal lent credence to this logic in an editorial: "Cutting government back to a simple 17.9 percent of GDP might take us back to an era when we averaged 4 percent growth, instead of recent decades' 2.6 percent."

It might! Then again, of course, the share of GDPrepresented by government was even lower in 1929. Contrary to what you may have been told, research shows no consistent relationship between growth rates and government spending.


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When House Republicans passed their tax cut package in the spring, they included a provision to repeal the alternative minimum tax. Congress created this tax in 1986 to prevent large corporations from using loopholes to avoid paying any taxes whatsoever.

Although repealing the alternative minimum tax will cost the government an estimated $17 billion in lost revenue, the Republicans say the move is justified because the current tax system stifles corporations, and hence economic growth. "We are overtaxing our businesses," declared Representative Nick Smith, Republican of Michigan, on the floor of the House.

But according to a recent report by the nonpartisan General Accounting Office, 37.2 percent of large U.S.-controlled multinational corporations, defined as those having assets greater than $100 million, did not pay a single dollar in federal taxes in 1991. An additional 30.2 percent of these companies offered up less than $1 million for the federal coffers.

The most common way these multinationals escape paying taxes is by claiming that costs their foreign subsidiaries generate are U.S.-related. On paper, these costs reduce their U.S. profits, thus lowering their federal tax bill.

With overtaxation like this, it's a wonder that these large corporations are able to turn enough profit to support their modest lobbying efforts in Washington.

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