Harvard discovers supply side - economist Lawrence Lindsey's tax proposals - column

National Review, April 16, 1990 by William F. Buckley, Jr.

Mr. Dan Rostenkowski has succeeded in ever so slightly moving Mr. Bush's lips, or so we are led to believe. The Chairman of the House Ways and Means Committee proposes a plan to end the deficit by 1994. This would be accomplished by taxing gasoline, cigarettes, and alcohol, and by raising the 28 per cent top tax rate to 33 per cent. The Bush Administration is evidently tempted.

Mr. Bush's freeze on higher taxes made sense, as it was wise to consolidate the 1986 reforms until we could get a little perspective on them. We have this now, and have most pointedly to be grateful to economist Lawrence Lindsey, on leave from Harvard, and now associate director for domestic economic policy at the White House. One hopes he has the presidential ear. (It pays to remind oneself that to have a White House address doesn't necessarily mean that you ever get to see the President, let alone talk to him.)

Professor Lindsey begins his book (The Growth Experiment) with a charming and unusual confession. He began his scholarly inquiries by doubting that supply-side economics was more merely than a superstition. Moreover, he accepted the convention that Paul Volcker's sharp reduction in the money supply, several months before the inauguration of Mr. Reagan, was the critical factor in bringing down inflation. He has discovered that it was otherwise: What reduced inflation and spurred the great growth of the Eighties was: the two tax reforms, 1981 and 1986. Moreover, although these reforms did cost revenue, they were responsible for a 2 to 3 per cent growth in economic output, thereby hugely outdistancing in production what they cost in revenue. Professor Lindsey's point now is that we have learned enough to coach us on where to go. He proposes a tax package which will increase productivity by stimulating sensible economic behavior and by significantly easing the burden on the little taxpayer. Are you ready?

-Eliminate all federal taxes for single persons earning less than $6,000, and couples earning less than $12,000. Increase to $5,000 the exemption for each dependent under age three, $3,000 for each dependent over three. Extend to the lower- and middle-income classes a deductibility on rent, even as upper-income earners enjoy a deductibility on mortgage interest.

-Restore the IRA deductions, eliminated by the 1986 law, and jack them up to $5,000 per year: tax-free savings.

And: lower the tax rate to A single figure: 19 per cent, including capital gains.

So much for the good news. How would the loss in revenue be made up?

-Tax business on cash flow, rather than on Profits," which can approach near-inscrutability.

-Limit the deductibility of home mortgages to $10,000 (now $1 million). It is Mr. Lindsey's point here that home ownership should be encouraged, but not the building of mansions.

-Tax the whole of a wage-earner's income (above the $12,000). This includes health services, e.g. (It is an old saw but true that General Motors pays more for health services for its employees than it pays for steel for its cars.)

-Limit the deductibility of state taxes to burdens that exceed 6 per cent of the taxpayer's income. Such state taxes, it is Mr. Lindsey's point, as provide enjoyable amenities, e.g., good schools, nice beaches, heated swimming pools, are properly taxable.

"If you are like most taxpayers," writes Mr. Lindsey in Forbes Magazine, you want to know what this means for you. Do not count on any big tax cut. What you gain from lower marginal rates you will probably lose through lost mortgage interest and local-tax deductions.... Except for low- and moderate-income families with children, just about everyone will have to pay just about as much tax as now in absolute terms....

What's the point, then? This system changes not total tax bills but the incentives people face.... It takes the lessons of supply-side economics learned through the Kennedy and Reagan tax cuts and applies them to all taxpayers, middle- and working-class as well as well-to-do."

It is time for Mr. Bush to part his lips. Somebody please give him Mr. Lindsey's phone number in the White House.