I am here today to discuss the tax relief that was passed by Congress and signed into law by President
Bush in 2001 and 2003. Since that tax relief was enacted, and especially since last November, we
have heard from the liberal establishment in Washington and elsewhere that this bipartisan tax relief
must be ended and that taxes should be increased on millions of Americans of all income levels.
Today I am going to look at what is driving the tax increase crowd, and talk about why they are
wrong and why increasing taxes is a very bad idea.
The liberal establishment uses deficit reduction as the primary excuse for their craving to raise taxes,
but before we applaud their efforts to balance the budget, let’s think about their solution. When
anyone says that we need to increase taxes to balance the budget, what they are saying is that they
are unwilling to cut government spending. In actuality, the tax increase crowd wants to increase
government spending.
Yesterday, I focused on what extending the bipartisan tax relief package means to nearly every
American who pays income tax. Today, I want to examine tax relief and look at the impact that it
has had on our economy. Regardless of whether you look at federal revenues, employment,
household wealth, or market indexes, the impact of tax relief has been overwhelmingly positive.
This first chart illustrates the growth of revenues, with the red line, and the growth in GDP, with the
green line. As we can see, revenues are currently increasing and are projected to increase in the near
future, even before tax relief is scheduled to sunset under current law. Clearly, tax relief has not
destroyed the government’s revenue base. I want to point out that this chart shows percentage
changes in revenues and GDP, so if the lines are flat in places it means that revenues and GDP are
increasing at a constant rate.
This next chart graphs the S&P 500 equity price index over a period of several years. The lowest
points of both the red line, representing the weekly S&P, and the green line, representing an average,
seem to correspond closely with May of 2003, which, not coincidentally, is when dividend and
capital gains tax cuts were signed into law. Aside from benefiting Americans directly invested in the
stock market, this is good news for anyone with a pension that invests in the stock market as well.
According to the Federal Reserve, net wealth of households and nonprofit organizations has
increased from a low of around $39 trillion in 2002 to more than $54 trillion in the third quarter of
2006. Since tax relief went into effect, our nation’s households and nonprofit organizations have
benefited from more than $15 trillion of new wealth.
This trend is also apparent when looking at employment. Total nonfarm employment was calculated
to consist of around 130 million jobs in the summer of 2003, but is projected to be 137 million jobs
in January of this year. This shows a 7 million increase in nonfarm employment since the 2003 tax
relief bill was signed into law.
I have just described to you four indicators of prosperity, and all four of them have increased since
bipartisan tax relief was passed by Congress and signed into law. Federal revenues are growing
steadily at a rate greater than GDP. The S&P 500 ended a downward slide and began moving upward
around the time the 2003 tax bill was passed. Also since the 2003 tax bill became law, household
and nonprofit wealth has steadily increased and literally millions of new jobs have been created. I
think it is more than a coincidence that all of these positive economic indicators are correlated with
tax relief. I don’t think anything short of willful ignorance could lead someone to say that tax relief
has been bad for this country.
Now going back to what I was saying before, the liberal establishment wants to reverse the tax relief
that has done all the good things I was just talking about in the name of deficit reduction. However,
this same crowd has not expressed any interest in reducing the deficit through reduced spending. The
reason for this is that this crowd, comprised of lobbyists, the big city press, and an entrenched
Federal bureaucracy, wants to raise your taxes to spend your money on growing government rather
than work to trim spending. In fact, the more government spends, the more power these interests are
able to accumulate.
The Federal bureaucracy gets to control more money, which will lead to more people hiring high-
priced lobbyists to apply pressure to take a bigger piece of the pie that taxpayers are paying for.
While these interests have no trouble thinking of themselves, they are not thinking of families,
seniors, small business owners, and workers across America. These people may not be able to hire
lobbyists or write syndicated columns, but their welfare should be our top priority. I’m going to talk
in greater detail about America’s families, seniors, small business owners, and workers. But for now
I want to talk some more about our economy as a whole and how rolling back the 2001 and 2003 tax
relief will have dire consequences for our whole economy.
There is an old saying that goes “figures don’t lie but liars can figure." This saying is especially true
in Washington. Any given issue has champions on both sides of the aisle able to generate studies and
research that just happens to support their position. I say this because the source for the information
I am going to present now is not one of those groups, but rather The Goldman Sachs Group.
Goldman Sachs is an enormously successful and well-respected financial services firm. I don’t think
it is possible for any Democratic politician, liberal think tanker, or liberal journalist to accuse
Goldman Sachs of being a tool of the Republican Party.
Clinton Treasury Secretary Robert Rubin served as Co-Senior Partner and Co-Chairman, and current
New Jersey Governor and former Senator John Corzine served as Chairman and CEO of Goldman
Sachs. Our current Treasury Secretary also enjoyed a prominent career at this firm, so I would
recommend that Republicans, and especially Democrats, pay attention when a Goldman economist
sends up a red flag.
In a report titled “Fiscal Policy: Marking Time until the Tax Cut Sunsets," the US Economic
Research Group at Goldman Sachs projects a recession if the 2001 and 2003 tax relief is allowed to
sunset. This study actually came out in November of 2006, so I’m a little surprised we haven’t heard
more about it.
For this report, Goldman Sachs economists used the Washington University Macro Model. To give
a little background on the Washington Model, it is a quarterly econometric system of 611 variables,
442 equations, and 169 exogenous variables. The Washington Model was developed and is
maintained by Macroeconomic Advisors, LLC out of St. Louis Missouri. Macroeconomic Advisors
is where former Congressional Budget Office director Douglas Holtz-Eakin serves as a Senior
Advisor. Plus, the firm won the prestigious 2005-2006 National Association for Business Economics
Outlook Forecast Award for its accurate GDP and Treasury bill rate forecasts.
Of course, Macroeconomic Advisors and their Washington model must be accurate enough for
people to pay to use, which is not true for every organization that has been modeling the effects on
the economy of letting tax relief expire.
Getting back to the Goldman Sachs study, the authors assumed that Congress would let the 2001 and
2003 tax relief expire, so they reset taxes to their 2000 levels, grossed them up slightly to match the
CBO’s estimate of the revenue impact of letting the tax cuts expire, and allowed for an appropriate
monetary response. For monetary policy, the study’s authors assumed that the Federal Reserve would
call for interest rate cuts when output falls below its trend and for interest rate increases when
inflation rises above its comfort zone.
The study states that “In the first quarter of 2011, real GDP growth drops more than 3 percentage
points below what it would otherwise be. Absent a strong tailwind to growth from some other
source, this would almost surely mark the onset of a recession." If tax relief is allowed to expire, this
study shows that a recession is the likely result. By not extending or making tax relief permanent,
Congress will be deliberately inflicting a recession on the American people. Is a lot of hollow, high-
sounding rhetoric about balanced budgets worth the job losses and business closures that would
result? The study eventually predicts higher output, but notes that consumption would be lower. So
that everyone has the opportunity to review this study, I ask unanimous consent that it be printed in
the record, along with one of the very, very few news stories to note its findings.
The Goldman Sachs study was clearly not written by cheerleaders for tax relief; indeed the authors
seem to share the point of view of many in this chamber that a cut in spending is not an option. The
authors regard an eventual drop in consumption as a forgone conclusion of tax relief and equate it
with the necessity to pay back what had been borrowed over the previous decade. At the very least
the study says, and I quote, “The economy suffers a lot of short-term pain." Congress needs to act to extend or make permanent tax relief enacted in 2001 and 2003, or risk plunging the country into
a frivolous recession. I say frivolous because the recession will be the result of vanity on the part of
those who use balancing the budget as a cover for their tax-and-spend politics.
More cause for concern of the impact of tax increases comes to us from China. I’m sure everyone
is aware that the Shanghai Composite Index lost 8.8 percent of its value this past Tuesday. According
to various news reports, including a dispatch from the Associated Press, a factor in the drop may
have been rumors that a capital gains tax on stock investments was in the works. I ask unanimous
consent that the AP dispatch I am referring to be printed in the record. The same AP report notes that
regulators have already denied those rumors and that Shanghai Securities News ran a front-page
report to the same effect yesterday. Incidentally, the Shanghai Composite Index gained 3.9 percent
yesterday.
I think the Chinese regulator’s swift debunking of rumors that a capital gains tax was going to be
enacted show the negative impact such a tax could have on growing markets and expanding
economies.
As I have said before, what is missing from the debate on extending tax cuts and clearly missing
from the reasoning of the authors of the Goldman Sachs study is the option, and necessity, of
reducing government spending. The right thing to do is to let Americans keep as much of their own
money as we can, and not seize it from them to promote special interests, encourage high-priced
lobbyists, or give free reign to the big-city press to tell everyone else what to do.
It is often said by the Democratic leadership that “tax cuts are not free." That statement is true. Tax
cuts score as revenue losses under our budget rules. What is equally true, if you listen to economists
and more importantly, the American taxpayer, is that tax increases are not free either. Taxpayers
have to write the check to Uncle Sam.
Tax increases change taxpayer behavior. Tax increases will affect work, investment, and other
economic activities. From an economic policy standpoint, tax increases, especially those that are
used to cover more government spending, have a policy cost. Tax increases are not free to the
taxpayer and are not free to a growing economy.
As the Democratic leadership draws up its budget resolution, hopefully, it will keep this in mind. Tax
increases have consequences to the American taxpayer and the American economy.
I yield the floor.
