In light of the Sept. 11 attack, this country must reconsider many of its priorities: the threat of terrorism is crowding out many election issues. One such issue, our future tax policy, definitely merits re-evaluation.
President Bush has already passed cuts which considerably reduce upper income rates over the next ten years. Such a reduction clearly raises questions of equity and fairness, but I am not interested in these arguments at the moment. American economics, particularly when the country faces an uncertain future, should be about what works: giving one, unelected official control over the money supply is not democratic or fair, but Greenspan has kept our economy out of serious trouble since ’87.
Of course, by saying “works” I am already assuming that the tax cut must serve some purpose other than simply returning people’s money. I make this assumption because, between the recession and the “war on terrorism,” the government has plenty of important uses for its revenue; it would be reckless to give money back purely for the sake of giving money back.
The Bush tax cut, then, could “work” in two ways: it could either help fight the recession now or it could stimulate the economy in the future. To stimulate the economy now, the tax cut, first of all, has to take affect now: at present, Bush’s plan does not return enough money in the next year to have any significant effect on the recession (which will, with any luck, be over by the time Bush’s tax cut really starts working).
The fact that those receiving these cuts are quite wealthy is also problematic: in order to fix recessions, you have to attempt to return money into the hands of a large group of people who are likely to spend it. Such temporary, immediate cuts have worked in the past: the affect of the vast majority of the country spending several hundred dollars each on the economy can be significant; the rise in demand spurs a rise in production which helps reduce unemployment and speed recovery. Unfortunately, Bush’s cut works nothing like this.
So then what about the cut helping the entire economy in the future? The idea is that by giving firms, corporations and employers money, we encourage them to invest it in new factories, research, training and machines. By providing working people with jobs and increasing their productivity, the tax cuts eventually “trickle-down” and promote increased employment, higher wages and economic growth.
Although certainly not the ridiculous idea liberals have made it out to be, “trickle-down” economics has yet to actually work. Reagan’s cuts in ’81 had no effect on productivity: they may have led us into the greatest recession this country had seen since the Great Depression, but they did not increase productivity. Our economy’s “boom” after the recession probably had little to do with Reagan’s cut also: it was a demand-side recovery, or the gradual, natural returning of the economy to its original capacity. Indeed, the only time we saw an increase in productivity was in the ’90s, after President Clinton raised taxes on the upper income brackets. The connection between cutting taxes on the rich and long-term growth is weak and largely indefensible.
One reason why this policy doesn’t work is that not enough recipients actually invest their tax returns. Some might save it or others might invest it abroad; there is little in the tax plan which forces or even encourages people to invest the money, so there is little reason to assume they will. A good current example is the airlines: after receiving $15 billion in government relief, 85,000 workers were laid-off. I am not really sure what they did with the relief money, but the idea that increasing security would require fewer workers strikes me as fanciful.
At any rate, it seems that tax policies that are “fair” and “equitable” could be effective and practical, too. If you are trying to increase demand, why not go straight to the people, its source? Similarly, if you are trying to increase productivity, why not give more money to expanding educational opportunities? Why make a middle man out of employers and corporations?
Finally, if the point of Bush’s cut is, as stated, just to give the American people back some of their money, why not really give it to them? My mother’s rebate this spring was so small she barely remembers it and I am sure a lot of families in this country can say the same. It is time to face up to a new and surprising possibility: progressive taxation is fair, equitable, sensible, and constructive. But, for now, tell your parents not to spend their $20 all in one place and to try to think happy thoughts when we start running deficits again.