The Phony Tax Cut Debate

The watered-down tax cut passed in the House of Representatives last week, while predictably small, is better than nothing.  It does reduce taxes on dividends slightly, lowers marginal income tax rates by very small percentages, and increases some deductions available to businesses.  

Still, the speeches on the House floor showed the current tax cut debate is strictly about politics and not serious economics.  Both sides use demagoguery but don’t propose truly significant tax reductions.  Both sides use the outrageous expression “cost to government” when talking about the impact of tax legislation on revenues.  This implies that government owns everything, and that any tax rate less than 100% costs government some of its rightful bounty.

Republicans argue that tax cuts will raise revenues by increasing economic activity, thus providing Congress with even more money to spend.  It should hardly be the goal of conservatives to increase federal revenues!  Real income tax cuts of 30 or 50 percent would reduce revenues, which is exactly what Congress needs to restrain its terrible spendthrift habits.  Increased revenues or not, however, no one argues for serious cuts in spending.  After all, the latest Bush budget spends 22% more than the last Clinton budget only three years ago.

Democrats argue that lowering taxes simply lowers revenues and increases deficits.  They repeat the tired and false argument that only the vaguely defined “rich” benefit from tax cuts.  They ignore that $500 in tax savings for a low-income family might mean more to them than $100,000 saved by a wealthy person.  They only see a villainous “rich” person getting away with paying less than what they consider to be his “fair share.”  They also don’t understand that a poor family may aspire to become wealthy or have wealthy children and grandchildren.

One way to silence the class war argument would be to cut payroll taxes, which are paid through FICA withholding by even minimum-wage workers.  This is never suggested because to do so would expose the Social Security “trust fund” lie.  Since there is no trust fund and all government revenues are spent immediately, a payroll tax cut could make it impossible for the government to pay current Social Security benefits.

Throughout last week’s debate, some very important points were purposely ignored:

· The money people earn is their own and they have a moral right to keep as much of it as possible.  It does not belong to Congress.

· Government spending is the problem!  Taking a big chunk of the people’s earnings out of the economy, whether through taxes or borrowing, is always harmful. The real issue is total spending by government, yet this is ignored or politicized by both sides of the aisle in Congress.

· Whether or not people can keep what they earn is first a moral issue and second an economic issue.  Only people pay taxes; taxes are a very definite “cost” to individuals.  Taking less in taxes from those individuals should never be viewed as a cost to government.

· The real issue for the ages, namely “What is the proper role for government in a constitutional republic?” is ignored by both sides in the tax cut debate.  And yet the bigger question is:  “Are the American people determined they still wish to have a constitutional republic?”