Crazy But Able

How Bush’s tax cuts screw the rich.

I know there’s a lot of hype to the contrary, but look at the numbers. If you and your spouse have a taxable income of $60,000 a year, you’ve had almost a 24 percent income tax cut since President Bush took office. (And ditto if your income was just $20,000.) Meanwhile, the folks who make $350,000 a year got a cut of only about 12.5 percent; those who make $1 million a year got an even smaller cut.

Pre-Bush, the $1 million a year couple paid 33 times as much as the $60,000 couple; today they pay more than 38 times as much.

UPDATE: Lots of people wanted to know my take on this, so here it is.

First off, I don’t necessarily agree with his argument, but I did think it was an interesting one. I read so many economists and link to them not because I necessarily agree with them but because I think they’re asking the right questions. Whether they’re right or not, economists ask the best questions and have the best arguments.

More broadly, in terms of tax cuts, I’ve never met one I didn’t like, and here is why. My position on this has nothing to do with income re-distribution or the growing gap between the rich and poor in this country. I’m very skeptical of the effectiveness of tax policy in remedying this problem because some people will remain poor no matter how much money you throw at them. As evidence, I offer up the dozens and dozens of lottery winners who get millions of dollars all at once and blow through the money in a year or less. If you can’t be rich a year after you get a few million dollars handed to you then you won’t be rich through any tax scheme the government comes up with. While I believe that rich people can be very rapacious and downright evil, I don’t believe that there is any government policy which would be very effective at fixing that. I think the best shot we have is to make the playing field level (in the sense that everyone follows the same rules, rich or poor) and go from there. In other words, I don’t believe in embedding my notions of fiscal morality into the tax structure.

The government is the single most powerful entity in the country, hands down. They have the guns, okay? Whatever laws the government enacts, they can enforce. Special interest groups use their asymmetrical knowledge advantage to push forward legislation to force other people to act in ways which are pleasing to the special interest groups. This is true whether the special interest group is composed of creationists trying to force schools to teach creationism, or anti-Wal-Mart activists trying to force their economic preferences on others.

So I approach the tax question from a purely utilitarian perspective. The fewer the taxes, the smaller the government, the less influence the government has. Sure, that means the government has less influence to “do good”, however you define “good”, but it also means the government has less influence to “do bad”, however you define “bad”. Of course, the government can simply increase deficit spending to get around tax cuts, which is exactly what the Bush administration has done.

[A case can be made for increasing taxes to limit the power of rich people and corporations. It’s not a very good case though because increasing taxes just funnels more money to the government. Plus corporations don’t have guns (at least, not in this country) so that rather limits their effectiveness. Nobody can force me to drive a gas guzzling SUV. Nobody can force me to shop at Wal-Mart. I think of it this way: every day I vote: I vote with my dollars as to what kind of world I want to live in. (In my opinion, that’s one of the best arguments for buying organic produce and letting environmental concerns dictate spending habits, but that’s outside the scope of this post.)

Yes, sometimes corporations get in bed with the government to force people to do things (I’m thinking of the egregrious misuses of emminent domain at this point, as well as bills forcing the public to pay for massive sports stadiums), but I believe that’s a fault of the government, not business.

Corey asked about raising corporate taxes. A huge problem with raising corporate taxes is that it’s not very effective. In the age of multinational corporations who can incorporate in whatever country they please, raising corporate taxes will just cause corporations to flee to other countries with less burdensome tax structures. There’s not much we can do to prevent that.

Which brings up another pedantic point: taxes are never “cut”, in the sense that a 3 percent cut will represent a 3 percent decrease in revenues. The only thing that is cut is tax rates; the amount of taxes actually collected may increase, decrease, or stay the same, depending on the strength of the economy and whether the tax cuts were significant enough to shift behavior in one direction or another. Tax cuts in one area may encourage more people to invest their money in that area and so increase total tax revenues, even though tax rates had been cut. This is what happened in the Reagan administration; some conservatives believe that cutting tax rates will always generate additional tax revenue but obviously beyond some point this cannot happen.]

Now, as far as Bush’s tax cuts are concerned, they’re really rather small, and they are positively dwarfed in comparison to the vast amount of deficit spending and future obligations the Bush administration has heaped upon the taxpayers. In other words, Bush has not cut taxes in any meaningful sense. Economist Alex Tabarrok points out that we should call it the Bush tax shift instead of the Bush tax cut. The rates may have changed, but without a corresponding decrease in spending, then either taxes have to go up in the future, or inflation (which is another form of tax) has to increase.

So I think most of the arguing over tax cuts one way or the other is a bunch of hooey. The real question is, how much is Congress going to cut from the budget? And the answer is, probably not much, if anything, ever.

The fact is, the top 50 percent of income earners in the US pay 96 percent of the (federal) taxes. The bottom 50 percent pay 4 percent of the taxes. This is as of a few years ago; I’d have to dig up my source to find out exactly when, but I doubt the landscape has changed much since then. My question is, if changing the tax structure helps reduce the gap between rich and poor, after years and years of a so-called progressive tax system, why does the gap between rich and poor still exist?

This entry was posted on Thursday, March 31st, 2005 at 12:53 am and is filed under general foofiness. You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.