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Laffing All the Way to the Bank

Exclusive commentary by Greg Lewis /
April 29, 2003

Let's start with this to put the economic situation in perspective: Add up the annual GDP (Gross Domestic Product) of all the Middle Eastern nations and you'll come up with a number that wouldn't make a pimple on the bottom line of a healthy U.S. tax cut. Of the roughly US$ 620 billion produced yearly by the economies of all the Arab states combined, about 35 percent comes from the sale of oil on the international market. There are no figures available on the revenues produced by terrorism, arguably the second largest Arab export.

Now common sense would seem to point Arab countries in the direction of finding a way to get along with the west. Not only does the west consume an extremely high percentage of the oil these nations produce, it also provides the Bentleys and Benzes, the Learjets, the designer clothes, the wines and champagnes, the caviar, the gambling casinos that really know how to pamper whales, and the institutions of higher learning where their sons can get a decent education. The west is the source of all the things that make the good life the good life, Muslim prohibitions against same notwithstanding.

Middle Eastern economies would be a great deal more credible if 90 percent of the wealth they generated didn't end up in the coffers of royal families and tinhorn dictators. Saddam Hussein's personal wealth has been estimated at US$ 2 billion; the entire Iraqi economy generated less than US$ 6 billion in 1999, the last year anyone bothered to measure it. For that matter, U.S. soldiers recently found nearly two thirds of a billion dollars worth of US hundred-dollar bills in one of Saddam Hussein's safe houses. Saudi Arabia, with a region-best GDP of US$ 185 billion (a little less than one week's GDP for the U.S.), is nonetheless saddled with significant debt and sports by some measures the fastest-shrinking economy in the Middle East, due in no small part to the voracious appetites for pleasures western of the 6,000-plus members of the Saudi royal family, who manage to hold on to the lion's share of their nation's take.

What this run-up is leading to is a discussion of why the idiots who populate the U.S. House of Representatives and Senate can't get off their duffs and pass a tax cut worthy of an economy which generates in excess of ten trillion dollars yearly. Even with modest projected growth, the U.S. economy will produce a GDP of at least of 120 trillion dollars over the next ten years. (There is this caveat, however: If the Democrat Party somehow gets control of the White House and/or one or more houses of congress in the interim, it will no doubt manage to tax us into recession, in which case all bets are off.) But to return to the notion of economic perspective: A $350 billion tax cut over 10 years is not even a drop in the bucket. In fact, it's less than a third of a drop in the bucket (.0029 percent to be precise), where a drop in the bucket is defined as at least one tenth of one percent of our total economic production over the next ten years.

Historically, tax revenue increases and decreases generated by income tax rate changes are described by the Laffer Curve, a model developed by economist Arthur Laffer which can also be used to predict the results of varying levels of taxation. What this model shows, in effect, is that there are levels of taxation beyond which people begin to feel that they're not keeping enough of the money they earn. This creates a lack of incentives for people to try to earn more money. High tax rates also lead people who hold stocks, bonds, mutual funds, real estate, and other revenue-generating assets to manage those assets in such a way as to limit the taxes they pay. The result is a decrease in tax revenues.

On the other hand, when tax rates are lowered and people can keep a higher percentage of what they earn, they tend to be motivated to work harder and to try to earn more. And the people who own revenue-producing assets tend to manage those assets with an eye toward growth rather than toward avoiding taxes. All of which stimulates the economy, increases the tax base, and bumps up tax revenues.

A look at the recent history of tax cuts is instructive. Atypically, it was a Democrat, John F. Kennedy, who implemented the tax cut which gave rise to the economic boom of the 1960s. Following Kennedy's 1962 tax-rate decrease, tax revenues increased by 62 percent over the next several years. Following Ronald Reagan's 1982 tax cut, tax revenues increased by 99 percent. Perhaps as important to leftist naysayers, the percentage of taxes paid by the wealthiest taxpayers increased from 11 to 15 percent after the Kennedy tax cut, and from 48 to 57 percent after the Reagan tax cut.

The lesson is simple: When tax rates go up, tax revenues go down; when tax rates go down, tax revenues go up. Why Democrats (and some "moderate" Republicans) seem unable to understand this is beyond most thinking people. The phrase "tax and spend" is actually an oxymoron, because the more you tax the less you have to spend. The phrase should be "cut taxes and spend," because the lower the tax rates, the more you have to spend. Not that citing facts and figures has ever challenged the fuzzy logic of Democrats.

All of which brings us back to the Arab countries. Bottom line, unless you're in a position to share directly in the windfall revenues produced by Arab countries' oil exports, you might want to put some pressure on that lump of a congressperson or on the weasel-brained senators who represent you to Just Say No! to Charles Grassley, and to find a way to bump up the tax cut legislation to the point where it can do some good for this juggernaut ten-trillion-dollar economy in which we all participate and from which we all benefit.

Come to think of it, even if you are in a position to share directly in some Arab country's oil revenues, you'd be well advised to do the same. It's in the luxury goods area where recession hits first and hardest, and you wouldn't want a slowdown on the Hummer production line to cut into your enjoyment of the good life. My bet is that you, like the rest of us, would rather be laffing all the way to the bank.

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