Opinion: A Few Facts on Tax Cuts and Deficits

(July 14) -- As we speak, Congress and the media are debating whether to let President George Bush's income tax cuts expire at the end of 2010, as they will do without congressional action. The leading Democrats are in favor of allowing taxes to rise on taxpayers with incomes of (roughly) $250,000 a year for families, but want to keep taxes low on other, lower-income taxpayers.

The GOP leadership says that allowing taxes to rise on the more well-to-do will stymie the fragile recovery and discourage investment. They say that keeping taxes low encourages growth to an extent that it actually raises government revenue. The Democrats say the government needs that revenue to make a slight start in closing the gaping deficit window and thus encouraging investment and growth.

Herewith, from your old professor, a few facts and much more of what we do not know.

We know that cutting taxes feels great to the taxpayers. But we also know it does not stimulate growth to an extent large enough to generate more revenue than it loses. That concept, known as "supply side" economics (a phrase actually coined by my father, Herbert Stein, a well-known and super-smart economist), has been completely discredited by history.

However, again, it does feel good to have lower taxes, and that might make some people spend and invest more.

We also know that keeping taxes low, at least within reasonable limits, while raising spending astronomically, as President Barack Obama has done, will generate immense deficits. It was once believed that this would "crowd out" private investment by raising interest rates. We now know that this is not true and that we can have spectacularly high deficits and still very low interest rates -- at least for a long time. So this argument in favor of letting tax rates rise does not seem to hold water, at least in the short run.

In the long run, we do not know the effects of running a very large federal debt, except we do know it will require taxpayers to pay a lot to finance interest on the debt. We actually do not even know that for sure, because it looks as if we can have the Federal Reserve buy much of the debt by printing money and then return the interest on that debt to the Treasury.

How long that can last is simply unknown, but economists suspect that it cannot last long and that when it ends, it will end in tears ... tears of grief at high inflation.

We also know that for the Democrats -- with the colossal make-work stimulus program costs -- and the GOP -- with its spectacular tax cuts for the rich while fighting two wars -- to claim to be prudent about the economy is just plain sad.

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A little addendum.

This summer, my wife and I live in Southern California and in North Idaho, in a glorious town called Sandpoint on Lake Pendoreille. In Sandpoint, a town of roughly 6,000 souls, the government is spending roughly $160 million to build a highway bypass around the tiny downtown that will save a few moments of traveling at midday. At any other time, the streets are deserted. To me, this is startling extravagance.

Here near us in Beverly Hills, where the streets are paved with Bentleys and Rolls-Royces and there is not a pothole in sight, the roads are jammed with construction workers and machinery putting in new gutters where the old, absolutely pristine gutters were.

Six construction workers are standing around watching for every worker doing anything. The air is choked with dust. There are mammoth traffic jams. All at breathtaking taxpayer expense.

This is stimulus? This is insanity.

Ben Stein is an economist, lawyer, actor, comedian, public speaker and university teacher, and he was a speechwriter for Presidents Richard Nixon and Gerald Ford. He has also written several books, the latest of which is "The Little Book of Bulletproof Investing," written with Phil DeMuth.