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The Tax-Cut Circus

Mises Daily: Monday, July 26, 1999 by

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Ladies and gentlemen, your attention please to ring number three. Before your very eyes, Republicans will pass what appears to be a tax-cut bill, while Democrats will denounce the plan as fiscally irresponsible. This will set the stage for the final act next year: that great civic fiction we call the election. Yes, it’s the greatest show on earth, if you happen to be endlessly gullible

Polls are showing that 3 in 4 people think taxes are too high, but very few actually trust politicians to do anything about it. There’s a reason for this. The GOP has squandered its credibility on the issue many times over, using fabulous rhetoric to back legislation that collapses into nothingness on closer inspection. Republican prattle about tax cuts has become the white noise of American politics.

At this point, the only way the GOP could get the voters’ attention would be to pass legislation abolishing the income and estate taxes, starting right now, and replacing them with nothing. Even that might not be enough, since irritating and unavoidable payroll taxes take a larger bite out of the average paycheck than income taxes. To really get attention, the Republicans might also propose to make Social Security voluntary.

Instead, their tax-cut bill is riddled with a grab bag of gimmickry, some of it familiar and some of it new. The major ruse involves exaggerating the size of the proposed cuts. At first glance, a $792 billion tax cut sounds enormous. A closer look reveals that this cut is "phased in" over ten years.

This is fraudulent on its face. This Congress cannot bind a future Congress any more than this Congress feels itself bound by the budgetary priorities of the previous one.

Given this reality, there’s no reason to restrain the propaganda. Why not claim to be cutting taxes by $10 trillion over the next fifty years? Why not announce a $100 quadrillion cut over 100 years? It sounds more impressive and makes just as much sense.

But let’s say this Congress can in fact bind future ones. Would taxes be cut by $79.2 billion in each year? Sorry. The first cut is 1 percent of the total tax reduction—effective in 2003. That comes out to about $32 per person, four years from now. And who can doubt that the federal government’s tax take will increase far more per capita?

True, the cuts are supposed to accelerate and culminate in 2009, but to gain some perspective, think about all the ways that the 1989 Congress matters to current lawmakers. Answer: not at all. Backloaded tax cuts, invariably coupled with frontloaded tax increases, are the political equivalent of a shell game that taxpayers can never win.

The bottom line is that these tax cuts are illusory; they are offered only as a political drama to be played out in front of the voters next year. And yet some "moderates" in the party supposedly needed reassuring to this effect. So the Republicans added a trick no previous Congress has been brazen enough to propose.

Under the bill, taxes can only be cut if the interest payment on the national debt—-which is supposed to serve as a proxy for the size of the debt itself—-is lower from one year to the next. On the other hand, if interest payments rise, tax cuts are off the table. So, to the Republicans, it is far more important to force taxpayers to subsidize the government’s fiscal mismanagement than allowing them to keep a little more of their own money to spend or save for themselves and their children.

Keep in mind that we are talking here about the House version. By the time this bill is chewed up in conference, there will nothing left of nothing.

The final act of treachery in this circus was performed by Alan Greenspan. He told a House committee that it’s not a good time to cut taxes, because a tax cut might unleash inflationary forces. The only way to understand his remark is in light of Keynesian economics—-a series of big- government myths that attribute inflation to productivity instead of increases in the money supply.

If we needed any proof that Lord Keynes still rules Washington, this was it. Ten years ago, no living economist (apart from those associated with the Austrian School) would have predicted that the economy could have grown so much without sparking inflation. A tiny tax cut sometime in the future certainly isn’t going to make the difference. If anything, prices tend to face downward pressure in periods of high growth.

Was Greenspan, in parroting the Clinton line on tax cuts, being entirely honest? Well, he comes up for reappointment next year, so it isn’t a good time to irritate the Appointer-in-Chief. In the end, however, his testimony will not endanger an actual tax cut but a staged one. But at least it puts to rest the myth that Greenspan is a champion of free-market theory.

Meanwhile, as any man on the street could tell you, neither party is genuinely interested in doing anything for average people that would require Washington to give up revenue or power.

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Llewellyn H. Rockwell, Jr., is president of the Ludwig von Mises Institute in Auburn, Alabama.