Joy of Tax Cuts
poll in March reported that most people would prefer "deficit reduction"
to "tax cuts." Polls and the media lie all the time, but this one
refutes itself. If people really wanted to be taxed, they would
pay up without being threatened by audits, fines, special agents,
and jail terms.
need to speculate on the result of funding the feds voluntarily,
however. Americans would not send huge chunks of their income to
D.C. if the tax police didn't make them. Taxes rely on force by
definition because they coerce exchanges that otherwise would not
take place. And every year, the government increases the number
of prosperity-killing "exchanges" between the public and the distant
rulers who live off our taxes.
much have taxes increased? Let's set aside the brutal and wasteful
income tax and consider a relatively "minor" levy. This year the
government will loot $14 billion from the dead in the form of the
inheritance tax. That amount would have funded the entire pre-World
War II federal government of 1941. Today, the inheritance tax funds
a mere 0.8% of federal spending.
federal outlays in 1940 were $10 billion. Customs, duties, and fees
will collect twice that amount this year. The total revenue collected
by the New Deal federal government in 1935 was $3.7 billion. That's
what the federal telephone tax will collect this year.
corporate income tax this year will collect $140 billion, more than
total government spending in 1966. The tobacco tax brought in $5.6
billion last year. At the end of the Roaring Twenties, this amount
would have funded the whole federal government and put the budget
aside Federal Reserve dollar debasement, and total government spending
has doubled every ten years since 1953. Taxes have kept pace. Textbook
public finance theory says these taxes approximate the market because
we get services in exchange. Hah.
year, average Americans pay more and receive less. That's why voters
and taxpayers have good reason to be wary of any new tax reform.
Despite all the promises, the government always ends up with more
revenue and the public with less.
why every proposal for tax reform should be evaluated apart from
the typically exaggerated claims. How to think about any given tax
reform? Here are four rules:
If a bill reduces taxes through lower rates or increased deductions,
it should be supported;
If a bill increases taxes through raising rates or repealing deductions,
it should be opposed;
If a bill includes tax increases as well as tax reductions, it's
intellectually incoherent and therefore probably a trick;
If a bill promises to reduce taxes and increase revenue, it should
be rejected out of hand.
the light of these rules, let's consider some recent proposals.
The House Republicans were right to pass a $500 per child tax credit.
In conventional economic theory, tax credits for children are not
considered productive. It doesn't cause people to open new businesses
or invest in new stocks. It only makes children less costly and
therefore, on the margin, more numerous.
economists who say this should think more broadly. Every policy
change that allows people individuals or families to keep more
of their own money is a good one. Tax policy shouldn't be judged
solely by the incentives or disincentives it creates. We must also
evaluate whether the changes result in more resources in public
hands (meaning wasted) or private ones (meaning invested, saved,
or spent on useful goods and services).
spends a dollar better? HUD or the Jones clan next door? We know
the answer, which is why the House Republican tax cut is both good
for families and good for the economy. And money rescued from the
tax state is potentially saved and invested, which raises living
standards and lowers the cost of borrowing for everyone else.
money might be invested in a business or given away to charity.
Even if it is "blown," as Mr. Clinton warned it would be, it's far
better to have individuals waste their own money than to have government
use it to control and distort the economy.
are much more costly to rear these days. Both parents now typically
work. Child care costs must be figured in the family budget. Medical
care and clothing have gone way up. Schooling is more expensive,
and public schools are no longer up to the job, if they ever were.
Child labor laws prevent kids from adding to the family income.
not on welfare are forced to "purchase" children the way they buy
a new car or house. It's something they think about long and hard,
with an accountant nearby to run the numbers. That's why no one
is more deserving of tax cuts than American families.
don't family tax credits "subsidize" families at the expense of
single people? Not at all. It is not a subsidy to allow people to
keep their own money. A tax credit comes at no one's expense but
doesn't the House plan "discriminate" in favor of families with
children over everyone else? Sure, but we should celebrate whenever
anyone gets a tax break. It is in the public interest that the government
take less and spend less. The only legitimate response to the objection
that families are "getting" too much is for the Republicans to extend
tax credits to all, and make them much more generous.
problem is this: $500 is a tiny amount. It should be at least 20
times that, just to keep up with inflation and tax increases. That's
why the proposal didn't generate much excitement and no family felt
gratitude, nor should they. To restore economic and family well-being,
much more must be done.
Republicans have ridiculed Bill Clinton's proposal to make the price
of college tuition deductible up to $10,000 per year. In fact using
the rules above it's a great idea. State funding, government student
loans, and affirmative action scholarships have driven up the price
of college tuition at a rate much faster than inflation (which is
bad enough!). At the very least, parents should be allowed to deduct
tuition from their taxable income.
will this increase the demand for education and drive the price
even higher? Not necessarily. We should remember that removing the
tax penalty does not "subsidize" education any more than charitable
deductions "subsidize" charity. Moreover, we should abolish all
subsidies to education, which will drastically lower the cost.
should love all tax deductions. If someone proposes that the cost
of a dozen roses on Valentine's Day be deductible, great! Pass it
forthwith. The same goes for deductions for penny loafers, cheeseburgers,
or home computers. Make them all deductible. The more deductions,
the freer the economy.
flat tax, a proposal again popular on Capitol Hill, actually takes
us in the opposite direction. Back again are the attacks on "loopholes"
and deductions. We went through this in 1986, with a reform that
eliminated many loopholes and promised lower taxes. But look what
happened. Commercial real estate was devastated, and taxes have
gone up. It's not surprising why. A small increase in rates yields
vast amounts of new revenue.
is there a "neutral tax" that affects all income the same way. A
flat 20% rate means the rich are forced to pay a higher dollar amount
than the middle class or the poor, which is hardly fair. And like
all income taxation, the flat tax punishes work relative to leisure
and breaks down the division of labor.
we need is lower overall taxes and ever more deductions. We especially
should not be repealing the mortgage-interest deduction, as Dick
Armey has suggested. And on a practical level, repealing this deduction
would do to the home real estate market what the 1986 deduction
destruction did to commercial real estate.
mortgage-interest deduction, moreover, has a solid constituency
in its favor, no doubt soon to be denounced as a "special interest
group." But far from being criticized, special interests for lower
taxes should be encouraged and rewarded. If the mortgage-interest
deduction is repealed, and then traded for deductions on earned
interest from savings, that new deduction could easily be repealed
far the best course is to scrap the income tax, which discourages
savings, induces consumption, punishes work, and discriminates against
the productive. It is costly to pay and costly to collect, and it
subverts our privacy. It shortens time horizons and makes everyone
a slave to the federal government. Worst of all, it has funded the
expansion of Leviathan.
first income tax was levied by Abe Lincoln to fund the invasion
of the South. When the tax was later found unconstitutional, Congress
eventually passed the 16th amendment. Most people didn't know where
it would lead. Now almost everyone works nearly five months out
of the year for the feds.
we abolished the income tax this year, an additional $600 billion
would be available for productive private investment. The standard
of living would zoom. Savings would increase and interest rates
would fall. The phony system of "withholding," a relic of wartime
statism, would also be abolished. The increase in overall prosperity
would be astounding.
would the government raise money? Already other taxes will raise
$753 billion this year, which is larger than the fiscal 1982 budget.
And the budget of 1982 was far larger than any free society should
tolerate. Add taxes and borrowing, and subtract the income tax take,
and we are left with a 1987-sized budget. Would recreating that
be so difficult?
about revenue neutrality? Fie on it. Those serious about cutting
the budget should welcome a huge tax cut. Where to cut? Eliminate
the welfare state and save $320 billion. Drop foreign aid, and subsidies
to energy, agriculture, mails, banking, and technology, and save
$110 billion. Another $170 billion can be divided between means-testing
Social Security and cutting Medicare and military spending (why
spend as much as the rest of the world combined?).
to some House Republicans, the idea of abolishing the income tax
is no longer considered loopy. But unfortunately, the same people
talk about replacing it with a national sales tax. Such a tax would
be terrible for small business. If we think the present system is
cruel, wait until the federal sales tax police demand the records
of every seller and consumer in the country. Enforcing this tax
would make the present system look compassionate.
point of all tax reform should be to keep more private property
private. No matter how it is collected, a tax is a tax, and therefore
economically destructive. Taxes should be cut anywhere and everywhere,
and never be "replaced."
ideal tax would be one just big enough to run a constitutional-sized
government. That way we could abolish the Social Security tax, the
income tax, every tariff, duty, and fee, the corporate tax, the
inheritance tax, and the capital-gains tax. The revenue from the
telephone tax is more than they deserve anyway.