Mises Daily Articles
Are Tax Cuts Risky?
If one needs further proof that the current political climate breeds sophistry should have been listening to a recent television interview featuring former U.S. Secretary of Labor Robert Reich.
To cut current taxes, Reich commented, would be "risky" and "irresponsible." Any tax cuts would endanger economic growth and starve the government, he said. Besides, he added, the American people don’t want tax cuts.
While all of Reich’s pronouncements need to be examined, we should first begin with his last reason why tax cuts should not be enacted: Americans would rather pay more than less. While Reich's supporters have called him an economist, one should wonder about the man’s qualifications if he cannot comprehend some basic principles of human action.
Should Reich be correct, this would be a major breakthrough in the study of economics, for it would signal the discovery of the Giffin Good, the thing for which price and quantity demanded have a positive relationship. (The higher the price, the more we want.) If we are to believe Reich, a typical American if given a choice between paying $2,000 or $1,500 in taxes would prefer to pay $2,000. Of course, such a proposition violates every law of human action as outlined by Ludwig von Mises.
Assuming that even Reich believes in some immutable laws of human action, it is doubtful that someone would want to pay an extra $500 in taxes when he didn’t have to do so. Therefore, Reich must have something else in mind: poll results in which people are asked leading questions in order to give answers that politicians want to hear.
According to recent political polls, "representative samples" of Americans have said that they believe it is more important to use the so-called budget surplus to "pay down the national debt" rather than to cut taxes. Vice President Al Gore, along with former presidential candidates Bill Bradley and John McCain also have derided any notion of cutting taxes. In his television advertisements for the South Carolina primary, for example, McCain declared that tax cuts "would only benefit the rich" and were "risky."
Given the propaganda campaigns by the political classes against cutting taxes, it is a wonder that Americans don’t insist that government confiscate all of their income. The current weapon of choice seems to be the position given McCain and Gore that if Congress decides to cut tax rates, some people will benefit more than others. Apparently, the majority of people who have talked to the pollsters agree.
Envy is the powerful engine behind what seems at first to be a violation of economic principles, as noted earlier. This mentality seems to work in the following way: Joe knows that if Congress cuts his tax rates by 10 percent, he will pay less in taxes. However, Joe knows that his neighbor, John, pays much more in taxes than he does, and that if John's tax rates are also cut by 10 percent, John’s savings will be greater than Joe's.
The Robert Reichs want Joe to reason that even though a 10 percent tax cut will make him better off, the same tax cut will make John even better off than him. Therefore, the proposed tax cut is unfair and should be defeated, at least according to the politicians.
Such inference is not possible, according to economic theory. To reach such a conclusion from an economic point of view requires what economists call interpersonal utility comparisons, something that no one with competent training in economics will do.
For example, while a casual observer might assume that an extra dollar of income will mean more to a poor man than to Bill Gates, an economist cannot know whether or not it is true. Therefore, no economist worth his salt can state that a tax cut, while allowing John to retain a greater dollar amount of his own earnings than Joe, will make Joe relatively worse off. To do so requires a different agenda than the promotion of sound economics.
What about the argument put forth by Reich, Gore, and McCain that tax cuts will be tilted toward the "upper classes"? According to the Internal Revenue Service, in 1997 the top one percent of income earners pays a third of federal income taxes. The top 25 percent (earning $48,000 or more) pay a whopping 82 percent of taxes. The bottom 50 percent (making $24,000 or less) pay 4.3 percent the total tax take.
One doubts that either Bush or Gore will put forth such statistics in the presidential debates next fall, nor can we expect many of the congressional candidates to tell the truth about taxes. Instead, we will be hearing politicians tell how "the rich are not paying their fair share of taxes."
The other tact that the political classes will take is declaring that tax cuts are "risky." According to numerous economic "experts," if Congress cuts tax rates, the federal budget deficit will reappear, triggering an avalanche of government borrowing. The pressure on capital markets will push up interest rates, thus triggering a recession.
The "experts" are halfway right. Deficit spending does force up interest rates, but that does not create downturns in the business cycle. As von Mises and Murray Rothbard have written, the cycle of boom and bust is created by government policies that force down interest rates to artificially low levels. Deficit spending that results from unwarranted government spending may be unwise, but it does not necessarily cause an economic bust, at least following the scenario as laid out by the political "experts."
A tax cut would not pose a risk to the economy, but it certainly would cause problems for the political classes, and that is why they are fighting against even Bush’s very modest proposal. Politicians cannot give us their "gifts" unless they first loot our pockets. And what "gifts" they are! They include substandard schools, decrepit healthcare facilities, pothole-ridden roads, crumbling bridges, regulatory nightmares, not to mention regular attacks upon legitimate business enterprises and religious groups.
The Reich-McCain-Gore strategy is easy to comprehend. First, demonize the most productive people in a society, the ones who pay the bulk of all taxes. Second, make the false claim that the nation’s prosperity depends upon the heavy hand of government. Third, employ bogus economic theory expounded by people with academic pedigrees from the nation’s most highly-regarded educational institutions (which receive a huge chunk of those taxes).
Politicians and their media and academic allies have perpetrated numerous frauds for the last six decades. But perhaps their greatest accomplishment has been convincing the lower half of American earners that they are overtaxed (which they are) and that the top quarter of taxpayers pay too little. It is time to expose that rhetoric for what it is: a sham perpetuated by charlatans, most of whom have Washington, D.C., addresses.