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Potomac Crossings --By George Mason
Targets and Tax Cuts
An election usually comes down, not to facts, but to vision and trust. Does the candidate trust the people? Do the people trust the candidate? A primary theme this year is the competing proposals on taxes. Both sides assume a surplus in the trillions lasting for as far as the eye can see. What do they want to do with it? Their proposals reveal their vision.
Any discussion of tax reform begins with where we are currently. Over the past decade, the nation’s income has risen 6.2 percent and tax collections have grown 7.9 percent. The tax rise is due to people prospering while being taxed under a progressive code. (In a progressive system, when people earn more, they pay taxes at a higher rate. Without periodic tax cuts, a government with a progressive system and a healthy economy automatically collects and spends a larger fraction of the nation’s income.) The Joint Economic Committee (JEC) has just released new IRS data based on 1998 returns.
Percentile AGI Percent of Fed Income Tax PaidTop 1% $269,496 34.75%Top 5% $114,729 53.84%Top 10% $ 83,220 65.04%Top 25% $ 50,607 82.69%Top 50% $ 25,491 95.79%Bottom 50% ($25,491) 4.21%
The Gore Tax Plan
The essential Gore tax proposal is this: in a time of peace and prosperity, we should stick with what we have and invest any "surplus" in our future. Change is risky. No change, for example, is offered for how we pay for Social Security and Medicare. In all circumstances, Gore would not let tax revenues or decision-making slip away from Washington. He fights for the status quo, promising supporters that they will get no less from government and maybe something more under his regime. Part of the status quo is a prime interest rate that has risen from 6.0 to 9.5 percent over the past eight years and a Fed Discount Rate that has risen from 3.00% to 6.66% in the same time period. According to the Treasury Department, one-year T-bills have risen from 3.52% to 6.07% as well.
The tax overcharges, Gore says, are needed to reduce the public debt, create a reserve for changed circumstances in future surplus projections and to invest in some 28 new federal programs for certain favored constituent voting blocks. These needs supercede the personal desires of the taxpayers, who have enough already and who don’t make good decisions about spending their own money, anyway. Government should not offer general tax relief in a time of prosperity but reserve a tax cut for a time of economic decline when its stimulus effect is needed.
Gore’s proposal has been presented with a strong dose of populist rhetoric that incites class jealousy, fear, greed and envy. The base campaign theme seems to be "my opponent is an imbecile who threatens your government programs." The Gore tactics raise the question of being too cute by half. For example, is it a lie to correctly quote a false statement?
In his writings, Gore advocates a vision of America much like The Borg in Gene Roddenberry’s Star Trek series. Resources flow to Washington. Decisions are made there then mandates flow back to docile and obedient citizens. It is a curiously out-of-date message clearly at odds with free individuals working in the new digital economy where power devolves towards the individual. Though Gore courts Silicon Valley, his programs present a barrier, not a bridge, to the 21st century.
The Gore reputation for grasp of detail is often, though not always, built on "statistics" that are suspect and largely drawn from Mondale/Dukakis era activists, not reputable or current nonpartisan research sources. New programs, of course, create their own mandate and have to be funded even if the surplus disappears.
Gore’s tax reduction proposals are largely independent of a citizen’s tax liability. The discounts are conditioned on the behavior of the individual, not whether any taxes are due. If citizens behave in a correct, government-approved manner (and aren’t very wealthy) they qualify for a government payment administered by the IRS. The targeted tax cuts end up being limited to small sub-sets of people that total less than one-half of all taxpayers. The Gore tax proposals strongly favor households with income under $25,000, extend some benefits to incomes up to $50,000 and offer nothing after that. They total about 10 percent of the projected surplus. About one-third of the surplus is allocated to new government programs.
Tax Freedom Day is the first day Americans can keep a day’s pay for themselves because federal, state and local taxes have all been paid. Since 1992, 13 days have been added to the date. This year, it was May 3. Under the Gore plan, it will grow to May 7 by 2005 and May 8 by 2010.
The Bush Tax Plan
Tax fairness, not economic stimulus, is at the heart of the Bush plan. "Since taxes are extracted by force from people against their will, the government has no right to use forceful means to take more from any taxpayer than can be justified by its legitimate functions," says Bruce Bartlett, of the National Center for Policy Analysis. "When the government has collected more resources than it needs," he continues, " it is the essence of fairness to return unneeded resources to those from whom they were forcibly taken."
The income to be taxed is not created by government but by its citizens. "The money is generated in the private sector when individuals go to work and risk their own capital and wealth, " says Marty Reiser of Citizens for a Sound Economy, " Tax relief means more money stays in control of those who actually earned and created it."
Central to the Bush plan is the new economy, high-tech vision of dispersed intelligence, experience and local knowledge. This view holds that knowledge is scattered throughout society and it is impossible to collect all relevant information in a single place or a single person. Virginia Postrel, writing in Reason magazine, says that this insight of diffused and scattered talents is fundamental to understanding why central planning doesn’t work and why the authoritarian state is incompatible with individual freedom.
The Congressional Budget Office projects that under the Bush plan roughly 30 percent of the projected surplus would be returned to all taxpayers in about the same proportion to the taxes they pay. The current 15 percent bracket is reduced to 10 percent, the 28 and 31 percent brackets are combined at 25 percent and the 36 and 39.6 (the Clinton tax hike that came from Al Gore’s tie-breaking vote) brackets are reduced to 33 percent. For the typical family of four, if their income is under $35,000 their federal-income tax is reduced to zero under the Bush plan. If they make the median national income of $50,000, their taxes are reduced 50 percent. For those above $75,000, taxes are reduced 25 percent. The lowest incomes receive the highest percentage reductions.
To the populist charge that the rich (who pay the most in taxes) get the most dollars under the Bush plan, history has an interesting lesson to teach. The 1925 tax rate reduction caused real tax collections to almost double by 1928. The 1962 Kennedy tax cut caused income tax collections to rise by more than 50 percent by 1968. The 1981 Reagan tax cut doubled tax receipts from 1980 to 1990. In 1997, capital gains taxes were cut from 28% to 20%. Capital gains receipts grew from $62 billion in 1996 to $110 billion in 1999. Why? An increase in discretionary income stimulates new investment and that creates more and better jobs for all. Tax cuts nourish and replenish the economy.
There is another bonus as well. "In an era of instant capital mobility," says Arthur Laffer, "lower taxes assure a continued flow of foreign capital investment. This capital infusion translates directly into more jobs and higher productivity for all U.S. workers." Japan, Germany and France have all recently cut tax rates to become more competitive with the United States.
"In a high-tech, investor-class ownership, entrepreneurial new economy, old-style liberalism is a loser," says Larry Kudlow. Wage earners enter the investor class every day through work-based 401(k) plans. Just about one-half of all Americans own some form of equity such as mutual funds and one-quarter own shares of stock directly. Talk about people who vote, there are now nine million families that make over $100,000 per year. They are the prime movers and shakers of the sophisticated, high-tech, growth-oriented future. Government programs and policies that reduce the value of companies by increasing the threat of lawsuits, taxes or regulations directly affect their future retirement and their current livelihood.
Under the Bush plan, Tax Freedom Day will roll back to May 2 by 2005 and grow to May 4 by 2010. If the Bush Social Security plan is adopted as well, the date will recede to April 29 in 2005 and rise to May 1 in 2010.
It’s time to choose.
####
George Mason, 1725-92, was known as the Sage of Gunston Hall.
His Virginia declaration of rights, written in 1776, was the model for the first section of the Declaration of
Independence. A friend of Patrick Henry and Thomas Jefferson, Mason was an original drafter of the Constitution
and the first ten amendments to the Bill of Rights. He refused, however, to sign the final version of the Constitution
because he thought it did too little for individuals and, without the Bill of Rights, gave too much power to the
government.This column honors his memory.
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