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The Growth Experiment: How the New Tax Policy Is Transforming the U.S. Economy.

The Growth Experiment: How the New Tax Policy Is Transforming the U.S. Economy The Growth Experiment: How the New Tax Policy Is Transforming the U.S. Economy. Lawrence B. Lindsey. Basic Books, $21.95. Lawrence Lindsey has actually written two books under one cover. Part I is a detailed apology for Reagan's 1981 tax cuts--the Economic Recovery Tax Act, or ERTA. This "Great Experiment," according to Lindsey, throttled inflation, restored an eroding tax base, increased business investment, barely affected the federal deficit, and led to the current economic boom. He sacrifices consideration of everything--from interest rates to global economic factors to plain old common sense--in pursuit of the proof that low tax rates are the single most important element of economic efficiency. Somehow, Lindsey manages to restrain himself from exploring the beneficial effect lower taxes had on the common cold.

More problematic is Lindsey's Failure to acknowledge that real incomes have fallen since 1973, or that American productivity (a better indicator of economic health than GNP, since it measures technological innovation) is growing at only about 1 percent per year--much more slowly than in either Japan or West Germany. His attempt to discount the prevailing view that the economic expansion has been heavily leveraged depends on the selective use of statistics. Although he points out that the ratio of corporate debt to liquid assets has been fairly constant throughout the 1980s, he omits a more compelling statistic: The ratio of corporate interest payments to cash flow rose 43 percent between 1976 and 1986, from 14 percent to 20 percent.

But The Growth Experiemnt isn't all nonsense. Lindsey is persuasive in arguing that high rates to induce taxpayers to avoid paying taxes. If his analysis proves anything, however, it's mostly that tax shelters and loopholes are as culpable as high tax rates. The supposition that high rates erode the tax base depends on the willingness of individuals to forgo income rather than pay taxes on their extra effort. This depends in large measure on what tax shelters are available, because not working is always less attractive than shifting income into a capital gains shelter or taking compensation in the form of untaxed fringe benefits. Hence, eliminating shelters and taxing fringe benefits are equally viable alternatives to cutting taxes for the rich.

The second book, tucked away near the end, reveals a different Lindsey altogether. This economist has something approaching a social conscience (always refreshing to discover in a Bush administration apparatchik) and several ideas that don't fit the doctrinaire supply-side mold. Although his goal is to "apply the lesson" of ERTA while designing the tax system of the future, Lindsey manages to thoughtfully critique many of the most unfair aspects of the existing tax code.

Two of the decent reforms Lindsey would make are closing the loophole that allows capital gains at death to escape taxation and capping the mortgage interest deduction so that mansions are no longer subsidized by the government. He would also tax corporations on their cash flows (revenue minus production expenses and reinvestment), a move that would not only simplify a needlessly complicated section of the tax code but would also eliminate the tax-based bias in favor of debt financing over equity. Finally, he would increase the deduction for charitable giving, with a double deduction for contributions of more than 5 percent of income.

Lindsey ends up recommending that old Republican standby, the flat tax. But after a decade in which the richest fifth of the population saw its share of national income increase much faster than its share of the tax burden, economic disparity isn't a question that should be swept under the rug. Lindsey and his supply-side friends never ask themselves how much economic disparity is really necessary, and never show why the income tax shouldn't be the mechanism to mitigate--not eliminate--economic inequality.
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Author:Hamilton, David P.
Publication:Washington Monthly
Article Type:Book Review
Date:Apr 1, 1990
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