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from NewsLink, Vol. 5, No. 2, Winter 2001
As the debate over President Bush's proposed tax cut intensifies, consider the major arguments being made by opponents:
• The tax cut goes mainly to the rich.
• The tax cut will prevent us from paying down the debt.
• By not running surpluses (and therefore not paying down the debt), we will drive up interest rates and thus stymie economic activity.
The first point should be a warning sign to anyone who appreciates the dangers of majority rule. That's right, I said majority rule. At the heart of any constitutional democracy are certain checks on the power of majorities to run roughshod over minorities. The First Amendment, for example, protects religious minorities, as the Fourteenth protects racial minorities.
We protect the rights of religious and racial minorities, not just out of concern for their welfare, but out of concern that a policy of exploiting minorities can do grievous harm to the greater society. The frequent reminders that the greatest share of the benefits of the proposed tax cut would go to another minority – the rich – should raise a similar concern.
The reason that any across-the-board tax cut would benefit mainly the rich is that, by accident or design, the vast majority of the federal income tax burden has been shifted to them. The top 10% of federal taxpayers now pay about 2/3 of all personal income taxes and the top 1% pays 1/3. This is partly due to tax rate hikes under the first Bush administration and the Clinton administration and partly due to economic expansion.
The result is a state of affairs in which a candidate for national office can garner a political majority by the simple expedient of promising increased federal spending on domestic programs. Since the rich, who pay most of the freight for these programs, are in a minority, the same candidate can ignore their welfare and, indeed, condemn any tax cut redounding to their welfare as “unfair.”
Let the rich see federal tax policy as political exploitation and their willingness to work and save will soon disappear.
This threatens both our economic and our political security. The rich got that way mainly by hard work and saving. Let these same rich begin to see federal tax policy as political exploitation and their willingness to work and save will rapidly disappear, with severe consequences to the very fiscal stability of which tax-cut opponents are the self-appointed guardians.
Which leads to points two and three about the public debt and the supposed economic advantages of surpluses. On these issues, I am compelled to be emphatic: Paying down the debt does little, probably nothing, to strengthen the economy.
The reason for paying down the debt is to increase the rate at which the nation, as a whole, saves – this in order to spur domestic investment and to lower the trade deficit. Yes, in order to pay down the debt, government must increase the rate at which it saves. But the greater the rate at which government saves, the lower the rate at which private businesses and individuals save, so that the rate at which the nation as a whole saves remains unimproved. We might wish to pay down the debt to free up more of the budget for government spending, but we cannot hope, by doing so, to strengthen the economy.
Some would argue that the tax cut will diminish government surpluses and thus drive up interest rates. But the evidence (as well as the foregoing analysis) says otherwise. Tax-cut opponents credit the Bush/Clinton tax hikes with repairing the damage done by Reagan deficits and, by doing so, bringing down interest rates. But interest rates fell by more than 40% under Reagan and are higher now than they were at the beginning of the Clinton administration.
State of the Household Survey 2001
For those of you who took time to return our State of the Household Survey in January, thank you for your help. You'll find our tabulations beginning on page one.
DAVID G. TUERCK
dtuerck@beaconhill.orgNewsLink is the quarterly newsletter of the Beacon Hill Institute for Public Policy Research at Suffolk University. © 1996-2003. All rights reserved.
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