Why Not Cut Taxes?

George Bush wants to cut marginal tax rates—that is, the rate spent by families on the last dollar they earn. Al Gore says this is a giveaway to the wealthy. Instead, he would rather give “targeted” tax cuts to people who spend money on things he approves of, such as education, energy efficiency, and health care.

Denouncing a cut in marginal rates as a payoff to the rich is political rhetoric that is only loosely based on facts. Today, taxes collected from people earning over $100,000 a year produce more than 60 percent of all personal income taxes. Almost any cut in marginal rates is going to benefit upper-income workers more than others because they pay most of the taxes. If you oppose helping more affluent workers, then it becomes virtually impossible to cut marginal rates, ever. And that would be a mistake, because lower marginal rates encourage entrepreneurship, supply more investment capital, and create opportunities for financing both children (with intergenerational transfers) and philanthropy (with gifts to charity).

In any event, the Bush plan, by cutting marginal rates for everyone, eliminates all income taxes for every family with two children until their income hits $36,500 a year. An unmarried parent with two children would pay no taxes until she earned over $31,000 a year.

Gore’s plan is based on the assumption that he knows better than citizens how their money should be spent. If they spend it in the right way, they get a tax cut. If they spend it the wrong way, they don’t. And if they work hard and manage to make $100,000 a year or more, they become “wealthy” and hence ineligible for any tax cuts.

Do those people think they are rich? It seems unlikely to me. When the husband and wife are both working and trying to save money for their children’s education, $100,000 is not a lot of money.

And if, like many people, they are lucky in their investments, they get hit with the death tax. Suppose you bought a house in 1975 that by 2000 had quintupled in value. Suppose your employer’s 401k plan grew rapidly with the stock market. Suppose your own IRA grew just as fast. Suddenly you discover that you will leave well over a million dollars to your children if you and your wife should die in a plane crash. Now you pay the estate tax.

Eliminating the estate tax has nothing to do with helping “the rich.” For one thing, though only a small fraction of people pay the tax, many more hire an army of lawyers and accountants to help them avoid it. Abolish the tax and you can fire them and get rid of the trust schemes and life-insurance policies designed to evade the tax. But the most important reason for abolishing it is that it is manifestly unfair. You have already paid taxes on your estate. You were taxed on your personal income. You were taxed on the interest, dividends, and capital gains you earned. You paid capital gains taxes in the increase in the value of your home when it was sold. Now the government comes along and says that, though we have already taxed that money once, we want to tax it again.

You could reduce the death tax just for people who own farms or small businesses, as Gore suggests. But again, he is telling you that he knows better than you how to spend your life. It is all right to own a farm but not all right to invest money in the stock market.

The main problem with tax cuts is not the agitated oratory about the wealthy but the problem of paying for it. Both candidates assume that we will have a budget surplus that will make cuts possible. This is especially important for Bush, since his plan would be phased in over five years. And he, like Gore, wants to use no Social Security surplus for any tax cuts. That trust money would be put into what Congress calls a lockbox.

But how much of a non-Social Security surplus are we likely to have? We have no idea. President Clinton has taken credit for creating one worth a gazillion dollars, but when Bush proposed his tax cuts, Clinton responded by saying the surplus may not really be there. He was right the second time.

Nobody knows how much of a surplus we will have five years from now. In 1993 the White House projected we would have a deficit of $202 billion in 1998. In fact we had a surplus of $70 billion, an error of over a quarter of a trillion dollars. Forecasts, whether by the White House or by Congress, of what will happen five years from now are not very good.

In a rational world, we could manage our inevitable uncertainty by having Congress, at the end of each fiscal year, decide how to spend the surplus, if any. So much for new programs, so much for inflationary pressures on government spending, and so much for tax cuts. But of course we do not live in a rational world, and nothing can make it rational. So we have to guess. I think Bush’s guess is a lot better than Gore’s because it will probably liberate more resources to continue the economic growth that have produced the surpluses in the first place.