Sunday, July 31, 2005

Tax Cutting as Unadulterated Ideology

Although taxes are literally the price we pay to live in a civilized society, the aversion to taxes is extremely easy to comprehend– no one likes giving their money to the government (even if they receive many direct and indirect benefits from government services). Efforts to cut taxes are about as politically courageous as saying that we should combat terrorism; they will always be met with cheers and garner support just about everywhere. It is much more difficult to propose tax increases, or even suggest limiting tax cuts– this is Politics 101.

Sometimes cutting taxes makes sense, both from the standpoint of good economics and basic notions of fairness. For example, when marginal rates are so high that they discourage work and innovation it is good to reduce these rates. In times of great surplus, the notion of returning some of the public’s money to individuals is also intuitively appealing and fair. It may make sense to cut taxes on capital gains (up to a limit) in order to ensure that people are not discouraged from cashing them in, especially in times when economic stimulus is needed. As always, the specifics are important since the tax code is extremely complex.

Just as cutting taxes can be good policy, it can also be bad. This is especially true in times of large budget deficits, war, and growing income and opportunity inequality, which is exactly the situation we find ourselves in today. This is why President Bush and the GOP’s insistence that all of the major tax breaks from 2001 and 2003 be made permanent is so astounding (in addition, to the new ones that are continually proposed). The cost of the repeal of the Estate Tax alone is in the hundreds of billions of dollars over the next decade, and essentially all the benefit goes to the heirs of multi-millionaires.

The rationale for the massive rounds of tax cuts that began in 2001 (which have showered disproportionate benefits on the wealthy) was that we needed to return the surplus to the American people (although it could’ve been used to pay down the debt), then the rationale shifted to the need for economic stimulus when we found ourselves in a recession (although the best stimulus is targeted at the lower and middle class who spend the most of their new income), and now has simply morphed into doing it for the sake of doing it because tax cuts are right by default. Economic arguments are no longer heard (except by the lone supply-sider every now and then) and even the issue of fairness is rarely trotted out anymore. Republicans want to cut taxes just because. And if you disagree, even for entirely legitimate reasons, you’re a “tax and spend liberal.” Such a stance is the definition of unadulterated ideology driving policy.

Democrats have their ideological biases as well (e.g. that spending more money is usually the best solution to a problem) and these will be tested in the not-too-distant future when Medicare spending (and health care spending in general) goes through the roof. Unfortunately, the drive to cut taxes that the GOP is now engaged in no matter what the fiscal consequences is setting the country up for a collision course with reality that promises to be both ugly and painful.

J.S.

P.S. For a great article on more tax-cutting ideology with no basis in reality click here.

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