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Bush's Tax Logic: If A, Then B, Even When C

March 18, 2001|David Mermelstein | David Mermelstein, professor of economics at Polytechnic University in Brooklyn, is the editor of "The Economic Crisis Reader."

NEW YORK — There is an old economics story in which a professor is confronted with the fact that he continues to give the same economics test year after year. "No problem," he responds. "The questions are the same, but the answers are different."

So they are. When John F. Kennedy wanted to get the economy "moving again" in the early 1960s, he favored lower taxes and increased military spending. By contrast, when Bill Clinton favored "growing the economy," he reined in spending and increased taxes.

Not only do economic prescriptions change, so do the stances of political parties. Dwight D. Eisenhower devoutly believed in balancing the budget and reducing the national debt, goals breached in practice, but goals nevertheless striven for. Decades later, fellow Republican Ronald Reagan abandoned Eisenhower's faith, cutting taxes to such a degree that the national debt quadrupled during 12 years of GOP rule.

In the '90s, Democrats not only ended the budget deficit but also created a surplus beyond anyone's dreams or expectations. Bush's mammoth tax cut, now estimated at $1.6 trillion over 10 years, is primarily a response to this unprecedented surplus and fears that it will encourage greater federal spending. He wants to give the surplus back to those to whom he claims it really belongs, the taxpayers. Yet, with the "soft" landing the Federal Reserve sought to create now threatening to harden into a recession, Bush has opportunistically argued that his tax cut would also serve as a fiscal stimulus to prevent (or reverse) a downturn.

The Democrats, on the other hand, have argued that the surplus should be used to finance increased spending, especially in health and contributions to Social Security; judicious tax cuts oriented to the poor and middle class; and paying off the national debt. Such is the topsy-turvy nature of economics and politics that in arguing for paying off the national debt, the Democrats are closer to Eisenhower and his values than is Bush or, for that matter, the conservative head of the Federal Reserve Board, Alan Greenspan, who, for technical reasons, feels it's good to keep around the previously despised national debt.

Budgetary issues, those concerning taxes and spending, involve two intertwined questions: the effects on the macro-economy--that is, on unemployment, inflation and growth--and the effects on the distribution of income and wealth--who gets what.

The distributional effects of Bush's tax cuts are clear. He claims that a typical family--one with two children under age 17--would receive a cut of $1,600. But 88% of families would receive less, in most cases considerably less. A widower, for example, would only receive $300. In contrast, the rich, especially the top 1% of them, would garner the biggest portion of the reduction. By one account (Citizens for Tax Justice), they would get 45% of the total. The working poor, by contrast, get nothing. One way to benefit them is to include an increase in the earned-income tax credit in the tax-cut legislation.

The distribution of income and wealth raises the fundamental question of what kind of society one wants to live in. Currently, economic inequality in the United States is the greatest among advanced capitalist countries. The Bush tax cut would widen the gap between rich and poor, one that has grown enormously since the early '70s. Moreover, huge cuts for CEOs, dot-com millionaires and others of their class would, by cutting into the surplus, strain government's ability to redress continuing inequities, especially in education, and make it next to impossible to find the wherewithal to offset funding shortages in Medicare and Social Security.

Vice President Dick Cheney has attributed his vote against more money for Head Start in the 1980s to the then deficit. Will we have Cheney redux? "I'd love to help seniors with the prescription drugs, but, alas, we simply don't have the money."

The effects of a tax cut on the economy as a whole would depend, in part, on whether one believes we are in or about to go into a recession and how long and deep this recession will be. The standard argument of economists is that we should leave stabilization policy to the Federal Reserve. The stimulus created by a tax cut would kick in too late. This argument has two potential flaws. First, the recession may be deeper, or last longer, than many expect. By the exotic new lettering system, we may have a U (a decline in the economy that finds a bottom slowly before resuming its upward path), not a V (a decline that quickly reverses itself). If so, a tax cut could appropriately stimulate an economy that continues to flounder.

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