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Tax-Cut Deceptions

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The Republican collapse on taxes is about as surprising as an elephant’s fleeing a mouse, which, come to think of it, may be exactly what happened.

It looked as though the congressional Republicans were going to make a 10 percent across-the-board unconditional tax-rate cut the centerpiece of their agenda. It was supposed to contrast with the Clinton administration’s insistence that any tax reduction be “targeted,” which means laden with conditions on the taxpayers. The Republican cut was miserly to put it mildly. It would reduce rates, not taxes, by 10 percent, not 10 percentage points. Thus, the 15 percent rate would be reduced by 1.5, to 13.5 percent. Yawn.

But at least it was unconditional. While President Clinton was saying, “You, Mr. Citizen, may have a small amount of your own earnings back only if you behave as I decree,” the Republicans were in effect saying, “Mr. Citizen, it’s your money, you can have a tiny bit of it back with no strings attached.”

But the Republicans have now caved. I’m beginning to get used to this.

Why did they cave? They let themselves get snookered by the old class-warfare trick. As soon as someone says “across-the-board tax cut,” the Democrats and their running dogs cry, “Unfair! The rich will get more than the poor!”

Citizens for Tax Justice attitudinized that a 10 percent tax cut would shrink the tax bill for families making less than $38,000 by an average $99. Yet people with incomes over $301,000 would find themselves $20,697 richer. The Center on Budget and Policy Priorities calculated that 27 percent of taxpayers wouldn’t get a dime! That shameful tactic worked again.

“An across-the-board cut isn’t the right policy for this time,” said Republican Representative Nancy L. Johnson of Connecticut. “While we’re for tax cuts, this must be a modest bill and it can make more difference in people’s lives if it’s targeted. When you do an across-the-board cut it tends to help the top earners the most.”

Notice that Johnson focuses on how a tax cut helps people. For her and her colleagues, cutting taxes has nothing to do with property rights and justice. It’s a creative government measure to help citizens, another form of government spending. Therefore, the help should go to those who “need it most.”

This attitude toward the taxpayers’ money is common. For example, economics columnist Robert Samuelson writes that “in a recession, a tax cut might be justified.” His newspaper, the Washington Post, agreed: “An across-the-board tax cut makes no economic sense. Fiscally, it’s a tool that ought to be reserved for times when a stimulus is needed, certainly not the case as the U.S. economy glides through its longest-ever postwar expansion.”

Where is there a hint that the money belongs to the individuals who earned it? What happened to the idea that the government is the servant?

This sophistry neatly rigs the game against any plain old general tax cut, not to mention repeal. A few facts will demonstrate this. First, people making less than $20,000 pay no personal income tax. In fact, many people at that end of the income ladder receive money through the misnamed and redistributive Earned Income Tax Credit. That handout last year totaled $12 billion. Obviously, if you pay no taxes, a tax cut can’t save you money (though you’ll benefit from economic growth).

Second, the rate structure is progressive. As you earn more, you move into higher tax brackets and pay a bigger percentage of your marginal income than people making less. Today there are three brackets, but since various deductions are phased out as people make more money, the system is more progressive than it looks. Because the rates are progressive, it is necessarily true that a general cut will save higher-income people more both in absolute and relative terms. Look at this example, showing how much different people save in taxes after a 10 percent cut in tax rates.

JONES SMITH

Rate 10% 20%

Income$30,000 $100,000

Tax$ 3,000$ 20,000

New Rate 9% 2%

New Tax$ 2,700$ 18,000

Savings$ 300$ 2,000

Percent of

Inc. Saved 1% 2%

When the rates are cut, Jones’s tax bill is reduced $300, or by 1 percent of his income. Smith’s tax bill is reduced $2,000, or 2 percent of his income. Thus a cut in rates lets the richer Smith keep more money than the poorer Jones, both in absolute and relative terms. But in another sense, the cut is equal: in both cases, the savings is 10 percent of the former amount owed.

There’s no injustice here. Any disparity is merely the result of the partial removal of a prior injustice. There is something cleverly evil about a tax system that not only steals and steals a larger percentage as people earn more, but also, by its very nature, makes any undoing of the system look unfair!

The implications of progressivity are stunning and sadly unappreciated. People with higher incomes pay most of the taxes. Folks who made more than $100,000 in 1998 (the top 10 percent) paid 62.4 percent of all federal income taxes. According to the IRS, in 1996 the top 50 percent of earners paid more than 95 percent of the income taxes.

In other words, the bottom 50 percent — those making about $23,000 or less — paid less than 5 percent of what the income tax took in!

If an across-the-board tax cut “favors” wealthier people, it is only because those people pay most of the tax to begin with. How, then, can a cut be unfair?

Frank Levy, an economist at M.I.T., and Iris J. Lav, deputy director of the Center on Budget and Policy Priorities, think they have an answer. In the New York Times of February 24, they wrote, “Since good times don’t automatically benefit everyone, winners need to use some of their extra income to compensate losers.” If they don’t, the authors state, “more people will stop supporting policies that encourage growth.” The most that this argument can prove is that “winners” should voluntarily help “losers,” not that the state should force them to do so.

But the “winners” and “losers” terminology is inappropriate. In a game, the winners are responsible for the losers’ being losers; the Padres lost the World Series because the Yankees won. In an economy that is free (or even semi-free), the “winners,” that is, those who prosper the most, are not responsible for the fact that some people don’t prosper or don’t prosper as much. Quite the contrary: high incomes are largely the result of people’s producing values for everyone else. Levy and Lav look at free exchange through the eyes of primitives, assuming it is a zero-sum game in which one man’s gain is another’s loss.

Virtually everyone in America has been getting richer in real terms. W. Michael Cox and Richard Alm, in Myths of the Rich and Poor: We’re Better Off Than We Think, document that the labor time it takes to acquire all kinds of goods has fallen steadily for decades. Of course, we’re not all getting richer at the same rate. Levy and Lav think there is something wrong with that. As noted, they say that increasing income inequality (even if the “poor” are nevertheless getting richer) is wrong because low-income people will stop supporting pro-growth, pro-market policies. That’s a dubious argument, but one gets the feeling that they don’t really mean it. Their article reeks with the stale odor of egalitarianism. They are simply offended that some people have more than others.

In today’s economy, even as everyone benefits from increasing productivity and abundance, some people prosper to a greater extent. It’s not an injustice. It has much to do with education and such character traits as ambition, self-restraint, entrepreneurial alertness, and the ability to contribute to consumer well-being. Only envy would drive someone to complain that people are rewarded on those bases. Only hatred of ability would prompt “humanitarians” to oppose measures to let all people keep their own money unconditionally.

The Republican crime is to have surrendered to the sordid appeal to ignorance, envy, and class hatred. Most people in this country earn their incomes. The tax system seizes those earnings and gives them to politically favored groups, be they low-income people or rich corporations. That is wrong. Therefore, when people are able to keep their income, it is a good thing. The complaint that “richer” people (that is, people making more than $23,000) get to keep more than poorer people is shameful and dishonest.

Whose blasted money is it?

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    Sheldon Richman is vice president of The Future of Freedom Foundation and editor of FFF's monthly journal, Future of Freedom. For 15 years he was editor of The Freeman, published by the Foundation for Economic Education in Irvington, New York. He is the author of FFF's award-winning book Separating School & State: How to Liberate America's Families; Your Money or Your Life: Why We Must Abolish the Income Tax; and Tethered Citizens: Time to Repeal the Welfare State. Calling for the abolition, not the reform, of public schooling. Separating School & State has become a landmark book in both libertarian and educational circles. In his column in the Financial Times, Michael Prowse wrote: "I recommend a subversive tract, Separating School & State by Sheldon Richman of the Cato Institute, a Washington think tank... . I also think that Mr. Richman is right to fear that state education undermines personal responsibility..." Sheldon's articles on economic policy, education, civil liberties, American history, foreign policy, and the Middle East have appeared in the Washington Post, Wall Street Journal, American Scholar, Chicago Tribune, USA Today, Washington Times, The American Conservative, Insight, Cato Policy Report, Journal of Economic Development, The Freeman, The World & I, Reason, Washington Report on Middle East Affairs, Middle East Policy, Liberty magazine, and other publications. He is a contributor to the The Concise Encyclopedia of Economics. A former newspaper reporter and senior editor at the Cato Institute and the Institute for Humane Studies, Sheldon is a graduate of Temple University in Philadelphia. He blogs at Free Association. Send him e-mail.