Politically Correct Tax Talk

by | Jan 7, 2003

There’s a big tax debate coming, with President Bush scheduled to announce a package of new tax cuts today. And it looks like we’re not going to be able to talk about it without falling into the morass of politically correct speech. I’m not talking about the usual class warfare arguments, though I’m sure there […]

There’s a big tax debate coming, with President Bush scheduled to announce a package of new tax cuts today. And it looks like we’re not going to be able to talk about it without falling into the morass of politically correct speech.

I’m not talking about the usual class warfare arguments, though I’m sure there will be plenty of those. I’m talking about a subtler element of political correctness that infects the seemingly objective dollars-and-sense analysis of tax policy — the idea that any tax-cut must be discussed as a dollar-for-dollar deadweight loss against the federal deficit.

It has now become an automatic element of politically correct style for both the Wall Street Journal and the New York Times to refer to the aggregate value of any proposed tax-cut as its “cost.” For instance, the very first words of the New York Times coverage are “President Bush will propose eliminating taxes on corporate dividends paid to shareholders, a measure that could cost the government $300 billion…” The Wall Street Journal writes, referring to the possible tax package in toto, “It’s now expected to cost $600 billion over the next 10 years, administration officials say…”

Thankfully, the Washington Post does not automatically equate the amount of a tax-cut and its cost, writing, “the economic package would include spending and tax cut proposals totaling about $600 billion over the next 10 years.”

It is naive and incorrect to equate the amount of a tax-cut with its cost. The world just isn’t that simple — when tax rates change, human behavior changes, and that feeds back into the ultimate cost of a tax-cut. Simple common sense dictates that when tax rates fall, some people will be motivated to work more and invest more, all else equal — overall taxable economic activity will increase, and will buffer or perhaps even reverse the “cost” of the tax-cut. When tax rates rise, some people will work and invest less, all else equal — overall taxable economic activity will slow, so the revenue gains from the tax-hike may be less than anticipated, or evaporate entirely.

This elemental and obvious truth of human economic nature was standard doctrine during the Reagan presidency, when top marginal personal income tax rates were slashed from 70% to 28%, igniting one of the greatest epochs of economic growth in American history, and setting the stage for the present era of modest federal deficits. But after 15 years of the media repeating the “big lie” that Reaganomics did nothing but lead to catastrophic debt — we are left with a monstrous confusion of cause and effect. Tax-cuts made economic growth possible, and economic growth made balanced budgets possible. Yet we are told (by the inheritors of the balanced budgets, who did nothing to cause them), that it’s the other way around: balanced budgets cause growth.

This wholesale rewriting of economic history has become so ingrained that even conservative Bruce Bartlett — seemingly a died-in-the-wool tax-cutter — has joined in the rewriting. In a recent column for National Review Online, Bartlett states emphatically that no one in the Reagan administration ever asserted that tax-cuts would lose no tax revenues. He is shocked — shocked! — that anyone would suggest such a thing. Treating tax-cuts as anything but a deadweight cost is so politically incorrect now that Bartlett even tries pinning it on his opponents: “…today it is Democrats who are more likely to say that tax cuts may raise revenue.”

It’s not just the media and the pundits. Talking about tax cuts as anything but a deadweight cost is barred from policy discourse in Washington. Current House of Representatives rules require that, for budget reconciliation purposes, tax cuts be treated dollar-for-dollar as hits to federal revenues. The official analyses of the Congressional Joint Committee on Taxation staff, the Treasury’s Office of Tax Analysis, and the Congressional Budget Office all look at tax cuts the same way.

Don Luskin is Chief Investment Officer for Trend Macrolytics, an economics research and consulting service providing exclusive market-focused, real-time analysis to the institutional investment community. You can visit the weblog of his forthcoming book ‘The Conspiracy to Keep You Poor and Stupid’ at www.poorandstupid.com. He is also a contributing writer to SmartMoney.com.

The views expressed above represent those of the author and do not necessarily represent the views of the editors and publishers of Capitalism Magazine. Capitalism Magazine sometimes publishes articles we disagree with because we think the article provides information, or a contrasting point of view, that may be of value to our readers.

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