Bush Tax Cut Is Affordable

The Dec. 19 editorial, “Reckless Tax-Cut Proposals,” argues that the George W. Bush $792-billion tax-reduction plan is excessive. The plan calls for $100 billion less in taxes each year for five years or $130 billion less each year for 10 years. It would be the equivalent of a 2% increase in wage and salary benefits.

Of course, the federal government could pay the debt down by $100 billion each year, but such efforts would probably be less helpful to the economy than a tax cut. In the Kennedy and Reagan administrations, tax cuts were followed by relatively large increases in employment. The same pattern can be expected in the years ahead. A stable level of debt plus more job growth is generally preferable to less debt and less job growth.

Over the last two decades the economy has shown an average annual real growth of 3%. This long-term pattern probably will be continued in the decade ahead. The Anderson School at UCLA forecast shows growth averaging better than 3% through the year 2002. This means that some tax reduction appears to be affordable.

Financing Social Security will of course be easier with stable growth in jobs, another argument for a tax cut. Thus, prudence calls for a tax cut that will give wage earners an additional 2%. Most of the projected surplus of $3 trillion would still be available for other purposes. Furthermore, the ratio of the national debt now held by the public to national income would decline from its present level of 48% to 38%.

THEODORE A. ANDERSEN

Professor of Finance, UCLA

Anderson School of Management