Some dumb ideas about tax policy

By W. James Antle III
web posted February 26, 2001

As President George W. Bush prepares to unveil his first budget proposal, he is getting all kinds of advice about the kind of tax policy his administration should promote- most of it quite bad.

President Bush's present situation invites comparison with President Ronald Reagan's in 1981. Reagan inherited an economy in decline and was prepared to both reduce taxes to reverse this decline and arrest federal spending to impose fiscal discipline. The primary difference is that even today's teetering economy, overburdened by government and distorted by central bank credit manipulation, is fundamentally healthier than it was 20 years ago. Moreover, President Reagan was already faced with budget deficits when he took office (the last surplus had been in 1969) in contrast with the anticipated $5.6 trillion surplus over the next ten years that greets President Bush.

Had Reagan and a bipartisan conservative majority in Congress succeeded in limiting the growth of federal spending to the inflation rate, he would have been able to balance the budget even with his record tax cut and sizeable military build-up. Indeed, if federal outlays had increased at the rate of inflation from 1979 to 1989, the resulting surplus would have been large enough to either cut Social Security taxes by one-third or repeal the corporate income tax entirely. With burgeoning budget surpluses at hand, President Bush is in an even more fortuitous position and on firm ground in his stance that the budget should be limited to a 4 percent growth rate. (Four percent seeming rather a lot to this writer.)

Nevertheless, Bush is receiving a barrage of complaints that his tax cut is too big and unaffordable. Given that the federal government now annually exceeds the cumulative inflation-adjusted federal expenditure of 1787 to 1940, the projected 5 to 6 percent reduction in federal revenues seems quite affordable indeed. Considering that this revenue reduction is being calculated on the basis of static analysis, which assumes that economic behavior is unchanged by changes in tax rates, we have no idea that they will be reduced even this much. Since the private sector utilizes money more efficiently than the public sector and increased incentives for production is likely to increase production, the amount of taxable economic activity is likely to increase thereby enlarging the tax base subject to the lower rates. It is worth remembering that the surpluses themselves are largely the result of economic growth increasing from about 2.4 percent annually during Bill Clinton's first term to the 3.5 percent to 4 percent range during his second. A cut in the capital gains tax rate to 20 percent played a role in this faster growth, and revenues from that particular levy alone have climbed $100 billion.

It also must be again stated that the surplus is in fact a tax overpayment. Those who have paid more taxes than is necessary to fund even this bloated government should receive their money back. It is, after all, their money. If the surplus is not returned to the taxpayers who generated it, it will be spent. Federal spending is now escalating at double the rate of inflation.

Liberal Republican Sens. James Jeffords of Vermont and Lincoln Chaffee of Rhode Island have signaled their opposition to the Bush tax cut as presently formulated. Perhaps they are seeking atonement for their votes to confirm John Ashcroft, or perhaps they really are this misguided about tax policy. In any event, they have recommended that tax cuts be tied to reduction in the national debt. Tax cuts will be permitted as the surplus allows debt reduction, the argument goes, and "triggers" will be in place to reduce or stop the tax cuts if the revenues aren't there.

This is a bad idea on many levels. First, a large part of the stimulus tax cuts provide the economy is through the expectation of higher after-tax income. People will work more if they believe their after-tax incomes will rise. Injecting uncertainty into the tax cuts will obviate this effect and lessen the positive impact of any cut enacted. Second, federal revenues generally decline only when the economy falters. This policy would in effect raise taxes whenever the economy weakens, a counterproductive idea if ever there was one. Third, the best way to deplete the surplus is for Congress to increase spending. This policy gives those who prefer increased spending to reduced taxes an effective veto power over future tax cuts by allowing them the option of boosting spending enough to prevent them from taking place - thereby leaving even more money for spending.

Those who doubt the last scenario could occur need only look at recent history. The Balanced Budget Act of 1997, an agreement between congressional Republican leaders and the Clinton administration that ended decades of red ink, set spending caps to promote fiscal responsibility. So far, those spending caps have been exceeded by $83 billion. The Republican-controlled Congress increased non-defense discretionary spending by $22.5 billion more than the Democratic administration requested in the past fiscal year. Appropriations are set to increase 8 percent for a year that experienced a 3.4 percent inflation rate.

The debate is not really between people who wish to cut taxes and those who wish to cut the debt. The option is really cutting taxes versus increasing spending. The National Taxpayers' Union recently noted that House Minority Leader Richard Gephardt (D-Mo.) decries a $1.6 trillion 10-year tax cut as too large, but in the past year voted for a $161 billion net spending increase - amounting to $1.6 trillion over ten years. The Bush administration and those of us who endorse even larger tax cuts do not wish to erase the surplus. If the surplus is not returned to the American people, it will be spent.

Finally, the best example of dumb advice on taxes came from those scions of the super-rich who took out an ad in the New York Times opposing a cut in the estate tax. The estate tax confiscates accumulated wealth built by already-taxed income. It has destroyed family businesses and farms and frustrated the wishes of those who wished to leave their estates to their families. It reaches as high as 55 percent and is one of the most socialist aspects of the US tax code.

Many of the arguments they used were a little more than absurd (one Rockefeller who signed the petition was quoted in Newsweek as saying that he personally did not think it was "healthy" to leave large sums of money to one's children). A RAND Corporation study authoritatively concluded that 90 percent of wealth in America is not inherited. Two-thirds of the positions on the Forbes 400 list of wealthy Americans change annually. A similar percentage of Americans today in the bottom income quintile will progress to another bracket over the course of the next decade, with more reaching the top quintile than staying in the bottom. The notion that a $30 billion a year levy is all that keeps America a meritocracy is rather daft.

But aside from these millionaires and billionaires' clumsily recommending that the tax code reflect their personal preferences regarding the transmission of wealth to one's children, their proposals aren't as selfless as they appear at first glance. First, they are defending an estate tax that many of them will never have to pay, given that many at their level employ attorneys with expertise in evading the awful thing. Second, they are motivated by guilt about their wealth and a lack of understanding of the free market that allowed them to create it. Third, they are attempting to prevent the use of inherited wealth in ways that will allow more people to compete with them. Not everyone has the resources to build businesses that one day might compete with their empires; the estate tax helps to keep it that way. It is much the same as huge corporations that accept federal subsidies from the government and then lobby for anti-business regulations that will strangle their competitors but largely leave them unharmed.

The fourth and most important reason many of the super-wealthy defend socialist contraptions that seem hostile to their personal interests is this: Many of these people have accumulated as much wealth as a person can in their lifetimes. The only thing left to gain is power, particularly through government policy. Government affords people the power to control vastly larger sums of money than any one person or family will ever be able to earn or possess. You needn't have the money yourself if you can still control how it is spent.

Tax cuts, however, are part of a free-market economic policy that affords many people the opportunity to better themselves and even become rich. This is why the president should ignore the bad advice he has been getting and press ahead with a truly fiscally responsible policy.

W. James Antle III is a former researcher for the Rhema Group, an Ohio-based political consulting firm. You can e-mail comments to wjantle@enterstageright.com.




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