In contrast to his father, George W. Bush seems serious about a tax cut. Factor in the promised support of Congressional Democrats and an across-the-board rate reduction might actually become a reality. With the impending economic slowdown, this is welcome news to many Americans, who routinely pay around 30 to 40 percent of their income to the government. But does the cut make good political sense?
Before a reduction is seriously considered, a few factors must be addressed. First, the Bush administration cites a looming recession as the reason to lower the tax burden. The logic is simple - let people keep more of their money and they will spend and invest more, boosting the economy. Although this is certainly true in the long run, tinkering with tax policy is a crude instrument for short-term economic tuning. Even if a new tax code were legislated tomorrow, it would not be in place until around 2002, and would be phased in over ten years, meaning little or no immediate economic effect.
Second, it is uncertain how much of the projected budget surplus will be around in ten years. The current number is about $2 trillion - Bush's plan calls for a $1.3 trillion cut, (though that figure is likely to be closer to $1.6 trillion because debts will not be paid as quickly, increasing interest payments) leaving under $1 trillion to spare. If the predicted surplus turns out to be less, the government will have less money to use without going further into debt.
Budget projections can be dangerous things. Congress went on a spending-spree this year because of the heady predictions, giving out an unprecedented $650 billion in a pork-filled bill - about $100 billion more than they are supposed to spend according to the 1997 balanced-budget agreement. If this continues, a tax cut could plunge the government well into deficit spending.
To give some idea of how crazy Congressional spending can get, consider $176,000 for Alaskan reindeer herders, $1.5 million to restore a statue in Alabama, or a Nevada project to study how air passengers can get boarding passes in their hotels. Or take the spending for the Pentagon alone, which is more than the next 12 largest defense budgets combined, according to the Center for Defense Information. Even worse, once you give a program money, it becomes hard to deny it funds in the future. This is the Law of Program Inertia - programs being funded will continue to be funded unless acted upon by a concerted political force. If you want to talk tax cut, you also have to talk about more fiscal responsibility on the part of Congress.
Finally, the Bush tax plan says nothing about simplifying the ridiculously complex tax code, something that it urgently needs. Beyond mere dollars and cents, there are also larger implications of a significant tax cut. First, around 30 percent of Americans do not pay income tax because their earnings are too low. On top of that, a large number pay only about 15 percent in income tax. Although the "earn more, keep more" slogan is quite nice, a tax cut is essentially meaningless for a significant portion of the population when it comes to direct benefits.
If you buy the "trickle down" argument, increased spending and investment from the wealthier classes will eventually benefit the lower classes. Currently, one in ten adults and one in five children live below the poverty line in the US. Furthermore, it is estimated that one third of Americans have incomes less than twice the poverty threshold. Trickle down is cold comfort to the quarter or so of Americans who are "working poor", struggling to support their families on what little they earn.
Cuts directly affect only the top half of income earners, who carry 97 percent of the tax burden, according to a recent Economist article. That is fine as long as you also give the lower half a hand as well. Income inequality continues to increase, with the average income of the lowest fifth $126,000 less than the upper fifth; to talk about lowering the burden on the wealthy without talking about helping out the poor is irresponsible. I would be much happier accepting Bush's cut if he also proposed increasing the minimum wage and increasing the earned income tax credit EITC - the program which gives a hand to working Americans earning less than about $30,000 a year - even if it meant a more modest reduction.
There is broad public support for progressive taxation, meaning the wealthy pays a higher percentage of their income than the poor. And although everybody loves to complain about high taxes, rates in America are far lower than in pretty much every European country. For the vast majority of families, taxes are as low as they have been in the past 20 or 30 years, according to the Brookings Institution. Additionally, the US lifts only 29 percent of its poor out of poverty through wealth redistribution, lower than almost any other developed European country. Although it can be risky to compare different countries in such a way, it should suffice to generally demonstrate that Americans pay lower taxes and have less effective anti-poverty programs than do Europeans.
Thus, the Bush cut will have little immediate economic effect, is based on optimistic assumptions about the surplus (and Congress not spending that surplus), and does nothing to simplify the tax code. Everyone wants lower taxes, which is completely understandable. However, cutting the burden on the rich without helping out the poor is a selfish policy. To sum up, a tax cut is great as long as it also addresses rising income inequality and runaway Congressional spending, as well as simplifies the complex taxation laws. Budget predictions must be reasonable and must not be viewed as gospel. For me to buy a new Ferrari now, anticipating earning massive amounts of money when I am 30, is irresponsible. As the government lavishly spends its citizens' money and enacts a huge tax cut based on anticipated future earnings, it is mortgaging the future for short-term political benefits.
