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April 15 is the real April Fool's Day

By W. James Antle III
web posted April 14, 2003

April 1 is traditionally known as "April Fool's Day," but the real day for foolishness to be apparent is April 15, when U.S. federal income taxes are due. Despite all the man hours put into filing and the amount of private wealth forked over to the government, there is stiff resistance to proposals that would mitigate the foolishness by lowering tax rates.

The Senate voted to cut President George W. Bush's tax-cut proposal in half, with key moderate Republicans voting with the Democrats. Inexplicably, the Associated Press reported that a poll found 61 percent of Americans opposed to tax cuts at this time. These questions are sometimes misleadingly phrased and tax-cut opponents read more into such results than they should – voters still reward tax-cutters and even this poll still found a majority believing that taxes are too high – but they do show that some of the anti-tax-cut talking points have taken hold in the public's imagination: Segments of the public were concerned about whether we could "afford" a tax cut while we are at war and running budget deficits.

As would befit the real April Fool's Day, much of the tax cut debate is transparently phony. One is example is the disproportionate focus on the supposed cost of a $670 billion tax cut. This number is largely fictitious. First of all, it is stretched out across a time period in which the federal government will collect some $25 trillion in revenues and the economy, as measured by gross domestic product, is expected to be $140 trillion. Second, nobody knows that this is actually what the tax cut will cost. Static estimates ignore the real-world effect changes in incentives have on people's propensity to save, work, invest and produce, in addition to their likelihood to report income they would otherwise shield through tax avoidance or outright evasion. Some parts of the president's tax cut plan are likely to be net revenue losers, but other aspects have the potential to improve incentives and increase economic growth, regaining revenues in the long run. These are the very portions of the plan that those who profess to be worried about the deficit most frequently try to jettison.

In his congressional testimony in favor of the Bush proposal, economist Stephen Moore of the Cato Institute pointed out that "Opponents of the tax cut continue to tout the results of economic models that have a perfect batting record of being wrong in predicting the future." Many of them are also relying on a fictionalized version of history. They simplistically note that there were deficits after tax cuts during the 1980s, surpluses after taxes went back up in the 1990s and deficits again after the first Bush tax cut was passed in 2001. But this ignores that there was an economic boom that actually increased federal revenues during the 1980s, reducing the deficit from 6.3 percent of GDP in 1983 to 2.9 percent in 1989. There was a recession in 1990-91 and the deficit ballooned to $290 billion in 1992 despite a deficit-reduction tax increase. When surpluses finally came in the late ‘90s, it was after the first major federal tax cuts since the Reagan years, including a capital gains tax cut.

It's accurate to say that marginal tax rates are not as high as Ronald Reagan found them and thus not as far out on the Laffer Curve. This means that the revenue "reflow" effects of Bush's tax cuts may not be as great as Reagan's. Economist Alan Reynolds estimated in his syndicated column that only 60 percent of the latest tax proposal and 45 percent of the 2001 tax cut would have any supply-side impact. But there are some clear areas where the Bush tax plan offers some incentive enhancements. One is an end to the double-taxation of dividends. Heritage Foundation economic forecaster Bill Beach estimates that this tax cut will recapture 50 to 70 percent of the foregone revenue. Lower tax rates can increase incentives without the previous rates being confiscatory: When the capital gains tax rate was cut from 28 percent (a lower top rate than applied to "earned" income) to 20 percent, those subject to it responded dramatically and capital gains tax revenues doubled in just four years.

But it is important to note the context of this debate to understand that we are not simply arguing about a cut in next year's taxes. We are arguing over whether we want to moderate an increase in the tax burden that is going to take place over the next decade due to a combination of real income bracket creep and the alternative minimum tax. Without some type of tax cut, the individual income tax burden will grow by 35 percent over the next ten years. Reynolds, in the same column quoted earlier, observed that for "every $1,000 you now pay in taxes, the baseline expects you to eventually cough up $1,350." Moreover, allowing the 2001 tax cut to expire will itself effectively raise taxes and have considerable disincentive effects. The estate tax would return while the top four tax brackets would be increased by as much as 13 percent and the bottom tax rate increased by 50 percent. Opponents of significant, permanent tax reduction today are objectively in favor of tax increases tomorrow.

Many taxpayers have also been fooled into believing any pro-growth tax cut is exclusively for the rich. To the extent that the rich benefit from tax cuts, it is because they pay such a large share of income taxes presently. According to the Tax Foundation, the top 1 percent of income earners earn 20.8 percent of the nation's income but pay 37.4 percent of federal income taxes; the bottom 50 percent of income earners earn 13 percent of the income but supply only 3.9 percent of income tax revenues. But even under these circumstances, a tax cut like the one Bush proposes doesn't go just to the rich, regardless of how hazily one defines that term. The share of income taxes paid by those earning more than $100,000 would actually increase from 72 percent to 73 percent. A family earning $60,000 – which could include a married couple earning just $30,000 annually apiece – would get a $1,200 tax cut. Nor would the dividends tax cut accrue solely to a tiny number of plutocrats. Dividends taxes were paid by fully 34 million filers in 2000, representing households that contain 71 million people.

The practical jokes tax-and-spend politicians play on the American taxpayer every April 15 have real economic consequences. The public must not allow itself to keep being fooled. It isn't tax cuts that are unaffordable. It is a constantly expanding tax burden and more years of sub-par economic growth that we truly can't afford.

W. James Antle III is a senior editor for Enter Stage Right.

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