Tax-Cut Fever!

What's really in it for us?

Not at all unexpectedly, the politicians are at it again, hoping to buy our votes with "big tax cut" proposals.  Anyone who dares question the wisdom of such a move is sure to be labeled an advocate of big government and probably a rotten socialist to boot.  Never mind that the proposed tax cuts are to come from a projected surplus, which may or may not materialize over the next several years, depending upon how many earthquakes, floods, hurricanes, wars, crop failures, economic downturns, and other unforeseen calamities the nation will face during that period.  Never mind that, in terms of personal income, Americans are already the lowest-taxed people in the industrial world.  And never mind that at least 90% of the money from Republican tax-cut schemes somehow always winds up in the pockets of the wealthiest 10% of the population; it's "tax relief," and all good Americans are supposed to want that, even those who aren't likely to see a dime of it.

Now, the trillion-dollar figures being talked about in Congress nowadays tend to make most people's heads spin.  Although the term "trillion" has now become a familiar part of our vocabulary, most humans can't really fathom numbers in the "billions," let alone "trillions."  So let's take a look at what some of the latest tax proposals might mean to us personally, in figures which we can appreciate and deal with.

SUPPLY-SIDE SCHEMES

Cutting the tax rate on capital gains:  The people who benefit most from capital gains tax cuts are those who derive most of their income from investments rather than from salaries, wages, tips, and interest on savings:  the comfortably retired and the extremely wealthy.  But long-term capital gains are already taxed at a lower rate than earned income.  True, some of this tax cut would go to deserving retirees who could use a few extra bucks, and much will be made of this by political demagogues in (or aspiring to) Congress and the White House.

But the folks whose bank accounts will really balloon from this one — the real intended target for most Republican-sponsored tax cuts, after all — are the ones who need it least:  the megabuck investors, people who gain or lose in a day more than most folks earn in a year, and whose idea of "an honest day's work" is an hour or two on the phone with their stock brokers.  No matter how prettily such schemes are packaged, in the end virtually all such GOP strategies still boil down to more "welfare for the wealthy."  (No, profit is not a dirty word, and there's nothing wrong with the good old capitalist tradition of making the most of a legitimate opportunity.  But when the hogs at the trough demand to be spoon-fed, that's a bit much, in my humble estimation.)

Changing from income brackets to a flat rate:  With the federal tax code now more complex than ever before, any appeal for simplicity is bound to fall upon eager ears.  However, simplicity has its price.  Tax brackets have the express purpose of shifting the tax burden from those who cannot afford to pay to those who can.  (Or we could say, from those who benefit least from our socio-economic system to those who benefit most.)  By eliminating income tax brackets, the heavier tax burden is automatically shifted from the upper income levels to the lower.  Some have suggested establishing a "floor" level of exempted income to provide relief to the poor.  But although this is certainly a good idea, it has the disadvantage of necessitating a substantial increase in the flat-tax rate.  It also shifts the main tax burden to those in the middle-income range, whose buying power is crucial to sustainable growth of the national economy.

Replacing the federal income tax with a national sales tax:  The idea of being taxed only on what we spend instead of on what we earn might initially sound like a great idea.  Until we realize that a sales tax rate would have to be substantially higher than an income tax rate to generate sufficient revenue to operate the government.  (After all, simply changing what is taxed alters neither the size nor the expense of government, and revenue requirements remain the same.  Thus, if we taxpayers spend less than we earn, the effective sales tax rate must be correspondingly raised to generate the required revenue.)  And until we realize that the people shouldering the greatest part of a sales tax burden would be those who must spend most of their income just to survive — the poor.  Even excluding sales of "necessities" as non-taxable would merely notch the main tax burden up one more level to the lower middle class.

In any case, only one income group would clearly benefit from replacing the income tax with a sales tax — the extremely wealthy.  For although a rich person can be expected to spend somewhat (but not proportionately) more dollars than an average person, the greatest part of the wealthy person's income typically goes into savings and investments, which would be virtually untouched by a sales tax.  For anyone hoping to initiate or expand a program of welfare for the wealthy, it would be hard to imagine a scheme better tailored to the desires of the unabashedly greedy!

Lowering the bottom income bracket tax rate from 15% to 14%:  This is the one current proposal which politicians can honestly say will affect everyone with earned income.  Although it's only one percentile point difference in the tax rate, it's actually a 6.7% cut (1/15) — not too shabby!  For an average American family, with an income near the upper limit of the 15% tax bracket and currently paying $6,000 annually in federal income tax, that amount would be reduced to $5,600, a $400-per-year savings.  For the average wage earner, that translates to almost $8 weekly in reduced payroll tax.  Can't send the kids to college on that, but it's maybe enough to buy an extra six pack of Bud, a few packs of Camels, and a couple of lottery tickets.  Hail, life don't git much better'n 'at, Bubba!

A BETTER APPROACH: PROFIT FROM DEBT REDUCTION

A far more lucrative, long-term alternative:  This plan requires a degree of foresight and an attention span somewhat greater than a five-second sound byte, so it's not for the faint-of-mind.  But just for fun (since, for the time being, the national economy is doing well enough that we don't really need a tax cut to maintain the steady, low-inflation, low-unemployment progress of the past seven years), let's consider another, somewhat less glamorous possibility.  Let's see what could happen if we used a sizeable chunk of the projected surplus to pay down the national debt, instead of frivolously blowing it on a tax cut.

Remember the NATIONAL DEBT?  In 1980, the final year of the Carter administration, it had just nudged the 1-trillion-dollar mark (that's $1,000,000,000,000, or a million millions, boys and girls) for the first time in history.  We old-timers thought that was pretty staggering at the time.  Even today's calculators will choke and die if you try to make them crunch a number that big, and even Pentium III computers have to digest such astronomical figures using scientific notation.

During the Reagan and Bush administrations, the fabled "prosperity" of the period was achieved, not by improved productivity and increased buying power of the general public (unemployment was up around 8% back then), but by cavalierly pumping dollars into the upper echelons of the economy.  As it turned out, the immediate effect of this "trickle-down" policy was not the anticipated massive increase in investment and consequent expansion of the overall economy, but simply a mass upgrade from Buicks to BMW's among the moderately well-to-do.  And the ultimate effect was to quadruple the national debt, to a whopping $4 trillion by the end of the Bush administration.  (The anticipated tax windfall, which would ostensibly have paid for the scheme, never materialized—to the surprise of no one with even a modest understanding of human nature and a reasonable competence in elementary math.)  "Trickle-down" felt good at the time, at least for the people positively affected by it—mainly those with six- and seven-digit incomes.  For them, reaganomics was like the kid's dream of being able to eat ice cream and candy instead of vegetables.  But in the end there is no free lunch; there would inevitably be a pay-back.  While copiously lining the pockets of a few, "voodoo economics" piled up an enormous debt for future generations to deal with.

Subsequent tightening of fiscal policy during the Clinton administration, under the unprecedentedly capable and foresighted (though not always popular) leadership of Treasury Secretary Rubin in cooperation with Federal Reserve Chairman Greenspan, drastically decreased the annual deficit.  Even so, it took years for the sheer momentum of runaway deficit spending to be reined to a halt without risking a wreck of the national economy.  Thus the national debt had swelled another $1.5 trillion by the time the current budgetary surpluses finally appeared on the horizon (with the grudging cooperation of Congress, which twice had to be bludgeoned with government shut-downs to get its attention).  So today we are looking at a national debt of $5.5 trillion.

WHAT DOES THE NATIONAL DEBT MEAN TO US?

Now let's crunch a few numbers. (Don't worry, we'll make it painless!)

Despite the huge numbers, the math is so simple that even a high-school drop-out could do it in his head!  (Even so, it is evidently far over the heads of most conservative politicians.)  Now that we have reduced those astronomical figures to a personal level, they are much easier for most people to comprehend in terms of "what it means to me."  So, as we can see, for a typical family of three the share of the national debt interest burden is about $3,000.  And that's not just a single payment, but every damn year, for as long as that debt remains at its current level!

Now, whatever else happens, that interest absolutely must be paid; there is no getting around it.  Some of the money (I don't have an exact figure, but let's be optimistic and say about one-third) comes from other sources—fees, tariffs, etc.  But the rest must come out of general revenue—our income taxes.  Which means that if our middle-American family of three is now paying $6,000 in federal income tax, about a third of it—$2,000—ultimately goes to paying the interest on the national debt.

Let that sink in for a moment:  In one form or another, each year the typical American family (yours?) pays $2,000, not for defense, not for health care, not for education, not for disaster relief, not for scientific research, not for law enforcement, not for welfare, not even for debt retirement, but just for interest on debt (mostly incurred during the 1980's to drive the artificial "prosperity" of reaganomics).  In other words, for the amount of benefits which we currently derive from our federal government, our income tax bills are about half again what they would need to be if that debt weren't there!

WHAT ARE OUR OPTIONS?

By now you've probably already guessed where this is leading.  If we were to forgo the 7-10% tax cut with which Washington politicians are eagerly trying to buy our votes, and instead demanded that that part of the budgetary surplus be used to pay down the national debt, our foresight and forbearance could eventually pay off in a combined package of tax cuts and enhanced benefits on the order of 30%.  WHAT!? (By now even the little light in Bubba's skull has come on:  Even if we have to wait a bit for it, doesn't $2,000 a year sound a lot better than a measly $400?)

Can this be for real?  Well, true, it almost certainly wouldn't all show up as a tax cut.  But government debt reduction has other benefits, such as driving interest rates down.  Consequently it becomes easier for individuals, businesses, and local governments to borrow money, for everything from college and cars and new homes to capital improvements and local projects.  This boosts innovation, production, and market values, as well as individual purchasing power and living standards.  In addition, lower interest rates have the effect of "weakening" the dollar somewhat in global markets, thereby boosting demand for American products and easing our international trade deficit.  Ultimately everyone would benefit from paying down the national debt—the rich, the poor, business, labor, families and individuals.  And yes, even government itself.

WHAT WILL YOUR VOTE COST YOU?

But Republicans, it seems, can't be bothered to look that far ahead.  They need our votes now, so that they can continue and enhance their short-sighted and narrow-based "welfare for the wealthy" programs.  And frankly, besides vague allusions to "family values," there is little else in their right-wing platform that they can hope to sell to average, moderate Americans.  So (as usual) they hope to buy our votes by dangling an attractive little tax cut in front of our gullible noses.  We've heard it time and again, from the likes of Newt Gingrich, Phil Gramm, Orrin Hatch, and many others, until our ears have grown numb.  And you can bet it will be a standard spiel in Campaign 2000:  "Republicans are doing Americans a big favor, by letting you keep more of your money that you earn!"  Right.  And further postponing the responsibility of paying off your debt, which your friendly politicians did you the big favor of running up in the first place, and which now stubbornly refuses to go away by itself.

Yes, a nice little 7-10% cut now.  But as a result we can kiss a future 30% cut good-bye!  Are we that short-sighted?  Conservatives are betting on it.

Presidential candidates, and ladies and gentlemen of the Congress, please do us all a big favor, and don't do us any big favors.  We can't afford 'em!

=SAJ=