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There is a time and a place for everything, as the saying goes. This is as true with tax changes as everything else. The latest round of tax cuts have once again brought to the surface the debate over whether we should cut taxes again...or at all.

Let me be perfectly clear: I love tax cuts. I think cutting taxes should always be the first choice examined when considering domestic economic policies. Any time analysis indicates that we are on the wrong side of the Laffer Curve, tax cuts should be implemented as soon as possible. Our consumer-driven economy works best when people have disposable income. The more income consumers have, the better the economy performs. Since our system of taxation is based upon the taxation of income and commerce, more income and commerce means more Federal revenues. As any Wal Mart manager knows, lower prices (tax rates) brings in a flood of customers (consumers) who buy, buy, buy and this produces higher overall revenues at the end of the day.

During the Reagan Era, for example, the tax cuts in 1981, 1982 and 1983 meant that revenues during those years were down slightly as the rate cuts were implemented. However, the rate cuts helped spur a record-setting expansion that dramatically increased revenues. From 1983-9, Federal revenues increased at a faster pace than they had during the Carter years: $52.4 billion annually versus $41.6 billion per year, in constant dollars. As Laffer, et al predicted, a lower marginal tax rate could bring in the same (if not more) revenue. The key is whether the government can easily absorb the short-term costs. All signs point to "yes", as one oracle might put it.

What about our current economic situation? Slow growth, deficits growing, and a war looms on the horizon. Opponents of tax cuts state that the "increased costs"—they mean the government many not have as much money, not you—of tax cuts make them inadvisable when we have rising deficits. However, our deficits are from wartime related spending, not long-term structural problems. Once the war is over and terrorism has bee defeated, our deficits will drop rapidly, as they did after the first Persian Gulf War. In an article in the Wall Street Journal, Martin Feldstein stated that even the worst case scenario for deficits put them at 1.4% of GDP:

Even if we increase the officially projected deficits to include the effects of making permanent the tax changes enacted in 2001, extending a variety of other expiring tax provisions, revising the alternative minimum tax so it does not affect most taxpayers, fighting an Iraq war, and increasing the discretionary government spending in line with rising GDP, the CBO's estimates imply that the total cumulative deficit over the next 10 years would be only 1.8% of the corresponding GDP, and the ratio of national debt to GDP at the end of the 10 years would remain at the current 35% level. The budget deficit in 2013 would be only 1.4 % of GDP and the ratio of debt to GDP would be declining. These numbers are fundamentally different from the deficits that averaged more than 4% of GDP in the mid-1980s.

With interest rates at a 50-year low, this is certainly a cheap time to borrow. Higher deficits in the short term can be financed very cheaply. In the long term, higher growth can cause increases in interest rates as the Federal Reserve attempts to control growth. However the phrase "higher growth" tells you all you need to know: by the time the tax cuts have had their desired effects, in other words. Higher growth means the government will be brining in more revenues, and thus can afford to pay down more debt. The key will be to lock in the current low rates with long-term instruments, just as a new home buyer would be smart to use a 30 year mortgage to lock in today's low interest rates. And, of course, fiscal discipline going forward.

The coming Persian Gulf War remains the final variable. David E. Rosenbaum notes in the New York Times that tax cuts and wars usually don't mix. Historically that is true. War costs money and the government usually increases taxes. However, times have changed, both in how the government raises revenue and how we fight wars. In "olden times" we didn't have an income tax. New taxes were usually implemented during a war, such as the Civil War when an income tax was levied. With the passage of the 16th Amendment, our income tax became a permanent feature. World War II saw the advent of "withholding" where the government borrows money from you at the low, low rate of zero percent interest and you have to ask for it back (assuming you overpaid the total amount of taxes owed) after a period of up to 15 months. Finally, our economy has moved to a consumer-base from a manufacturing based economy. So it is just as important to leave money in the hands of consumers as it is to have government tax it and send it to manufacturers in the hopes that it will trickle-down to employees. Our method of waging war has changed as well. No longer are masses of soldiers needed because our arms are inefficient. Today's weapons are several times more effective than their World War II counterparts, and today's soldier is much better equipped trained, and supported. It simply costs less to wage war these days. What Mr. Rosenbaum also forgets to mention is that those "war-time" taxes, like all "temporary" taxes, tended to stick around. We are, in effect, paying war-time level taxes whether we are at war or not.

What about when the war is over? There are those who claim that an occupation of Iraq will be prohibitively expensive, but any occupation can be partially funded through the sale of Iraqi oil. A "peace tax" if you will. (Tax cut opponents should love that part.) In addition, a peaceful, democratic Iraq can once again be a market for U.S. goods, just as Europe and Japan became markets for U.S. goods after World War II. Thus any occupation of Iraq should cost along the same lines as our current foreign aid levels to our major allies. Which, by the way, Iraq can become. The stability that a new Iraq will lend to the region would be another asset for the U.S. Overall, the cost of a peaceful, democratic Iraq should be far less than a hostile Iraq willing to use weapons of mass destruction.

Another saying goes: those who fail to learn from the past are doomed to repeat the mistakes of the past. It is just as wise to note that we should also strive to repeat the successes of the past. Historically tax cuts have helped foster greater economic growth, including our current era of short, mild recessions and record-setting expansions.

Let me be perfectly clear: I love tax cuts.

From 1983-9, Federal revenues increased at a faster pace than they had during the Carter years: $52.4 billion annually versus $41.6 billion per year, in constant dollars.

...our deficits are from wartime related spending, not long-term structural problems.

With interest rates at a 50-year low, this is certainly a cheap time to borrow.