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Tax Cut, Small Man?

Dan Tortorice

The Senate’s vote for tax cuts estimated at $1.2 trillion over the next decade has sealed this country’s fate. With the House having already voted for a $1.6 trillion tax cut, the United States will see a tax cut of roughly $1.4 trillion over the next decade. This was truly a victory for George W. Bush, for not only did he convince 15 democratic senators to transfer 14 percent of the yearly production of the whole United States to, for the most part, the country’s wealthiest citizens, but he did so with incredibly simplistic arguments that, not surprisingly, are false.

That the economy is slowing down, but a tax cut will put money back into the hands of consumers, reviving the economy, was a familiar antiphon as Bush attempted to garner support for his tax plan. While the statement it true enough, it is far from a conclusive reason to endorse tax cuts. For while tax cuts can spur forth the economy, so too can government spending, and government spending is, perhaps, a preferable plan.

If Bush’s real desire is to pump money into the economy and increase consumption, it is better to have the government spend money directly. In that case, the money is ensured of going into the economy in its entirety. If money is returned through tax cuts, directly to consumers, part of it is saved, especially if given to the wealthy, and since banks need to keep a fixed percentage of savings in reserve, the whole tax cut does not enter into the economy.

But even if this point was not well understood by those Democrats who voted for the tax cut, it is more amazing they were not swayed by a second, perhaps more tangible argument. For if the government spent more of the tax cut, it probably would spend this money on education or social welfare programs like job training. Besides reviving the economy more effectively than a tax cut, government spending has the added benefit of actually helping needy people directly, a benefit that is not accrued with a tax cut that goes mostly to people with incomes over $50,000.

It is clear enough that tax cuts are not the sole legislative action the government could take to revive the economy. Yet there is one more obvious rebuttal to Bush’s argument that, to the Democrats’ discredit, was not given due consideration. If ones reason for a tax cut is to revive the economy now, why support a plan which cuts taxes not just now, but every year for the next ten years? Do people honestly believe that increasing an individual’s income nine or ten years from now will have a noticeable effect on their consumption today?

While it is of course possible, the Democrats could have easily argued that a five-year tax cut would have an almost identical effect on consumption today as a ten year cut. Yet, as is true in most times of hysteria, this logical observation got lost amid recession panic.

Supplementing the economic argument, Bush also argued that the government had taken too much from its citizens and now it was time for the United States to return what it has taken. The silliness of this argument is epic. Does this also imply when the government runs deficits, it is taking too little from its citizens and should start raising taxes? Of course not. The United States was running huge deficits before 1998, accumulating much debt. Governments cannot run deficits forever. Eventually, the money needs to be payed back, and this can only be done when there are budget surpluses. Thus, far from a budget surplus meaning the United States has taken too much from it citizens, a budget surplus is a necessity in light of past budget deficits.

Bush also clearly ignores that a large portion of the budget surplus is from payments into the Social Security system and into the Medicare system. These funds are not surpluses at all, for they entail future monetary obligations. If the economy weakens, and the surplus predictions fail, as predictions often do, the government will not be able to afford both the tax cut and its Medicare and Social Security obligations. The result will be either a repeal of the tax cut, which makes one wonder why it was passed in the first place, or a reduction in the services provided by programs designed to help the needy, the later being a transfer of wealth from the poor to the rich.

Let no one say that the passage of a $1.2 trillion tax cut through the Senate was not a political victory for George W. Bush. For with incredibly simplistic arguments, he managed to convince 15 Democrats to support a tax cut which disproportionately aids wealthy Americans. Either Bush is an incredibly simple man who believes in his own silly arguments, or a man with substantial political acumen who just scored a slam duck for his constituency.