Insomnia Log

This is what keeps me awake at night???

Who needs sleep? (well you’re never gonna get it)
Who needs sleep? (tell me what’s that for)
Who needs sleep? (be happy with what you’re getting,
There’s a guy who’s been awake since the second world war)

-- words and music by Steven Page & Ed Robertson

Location: Boulder, Colorado, United States

Everything you need to know about me can be found in my posts

Tuesday, March 07, 2006

Tax Cut, Tax Cut, Why Hast Thou Forsaken Me?

There is something in our political world today that makes the tax cut sacred. Politicians get elected by repeating the mantra "tax cuts" (or the equivalent, such as "read my lips -- no new taxes".) Politicians go into defensive mode when they are accused of voting for anything that is labeled as a tax increase or voting against anything that is labeled as a tax cut (no matter how accurate the label.)

I've been thinking about how we got here. What is it that makes any tax cut good and any tax increase bad? And what, exactly, is a tax cut?

For the conservative perspective, check out The Heritage Foundation. They have all the statistics you need to convince you that tax cuts are good for government and the economy, and that they pay for themselves.

For the liberal perspective, check out Paul Krugman's Article. He will show you why the current tax cut crusade is destroying this country.

Walk on the Supply Side

There are three major rationales cited for tax cut fever. The first, generally referred to as "supply side economics", states that cutting taxes will put more money in the hands of the people, the people will spend the money, and the economy will improve. According to this theory, the improved economy will bring about increased tax revenues, more than enough to make up for any revenue lost to the tax cuts.

On the kooky analogy side, this is kind of like asking your boss for a pay cut on the theory that the company will save money, be more efficient, sell more products, and give you additional paying work to build those additional products.

Is supply-side economics real? From a scientific point of view, there is no way to know. Both sides will point to data that makes their case. But the fact is, there is no such thing as a truly scientific experiment. We completely change all the rules at least once every two years when we elect a new congress. Plus, there are so many variables to what drives an economy, and tax policy is only one of these variables. There is no way to separately measure the effects of a tax cut.

As Paul Krugman points out, if you give credit for the economic boom of the 80s to Reagan's tax cuts, then you have to give credit for the boom of the 90s to Clinton's tax increases. And if you want to claim that Reagan's tax cuts somehow caused the Clinton boom, then you have to give credit to Lyndon Johnson for Reagan's boom.

Of course, there any many sophisticated economic models that will predict the economy's response to any number of variables. But if you are a conservative who doesn't buy global warming models you certainly can't believe these.

And then there are what I call the grad student experiments. You give one grad student a button that can generate an electric shock to another, watch when he does and doesn't do so, and somehow you generalize that to prove your particular economic theory.

On top of all this is the logical fallacy -- if you take tax cuts to their logical conclusion and eliminate all taxes, that should produce the most perfect economy and the best government. But that government would have no source of income and would not be able to accomplish a single thing.

Putting the Beast on a Low-Carb Diet

The second rationale for tax cuts is often referred to as "starving the beast". The idea is that reducing government revenue will eventually force a corresponding reduction in spending. This presumes that the only way to reign in politicians is by getting rid of their ability to actually do anything.

The kooky analogy for this is asking your boss for a pay cut, because you are spending way too much money on frivolous expenses.

Does starving the beast work? Well, so far, all it has accomplished is increases in deficit spending. Plus, I would point out that this theory is completely incompatible with supply-side economics, which claims that cutting taxes will improve government revenues.

It's My Money and I'll Spend It If I Want To

The emotional argument is, of course, that these taxes are your money and the government should give them back to you. After all, you best know how to spend your money.

Well, to the extent that our government is of the people, by the people, and for the people, the government's money certainly does belong to all of us.

Think about it this way. Everybody I know, right or left, agrees that there is some role for government. Although we don't all agree on what that role is, performing that function certainly requires some resources. At a minimum, according to the U.S. constitution, it is required to establish justice, insure domestic tranquility, provide for the common defense, promote the general welfare, and secure the blessings of liberty. Believe me, those tasks are not cheap. Not to mention hiring all those legislators, executives, and judges.

So, the government is required to spend money. It is required therefore to have some source of income (i.e., taxes). And, once received, those taxes are no longer the property of the taxpayer. Sad, but true. If we don't like it, we always have the option of moving to another country.

My kooky analogy for this one is when you go to the store to buy your groceries and then after you take your groceries out to your car you go back in and demand to get your money back because, after all, it is yours, you earned it, and you know better than the grocery company how to spend it.

What Is a Tax?

It seems like it should be obvious. According to various definitions, a tax is a charge on an entity, such as a person, property or company, paid for the support of a government. But, if you look at the various rationales for tax cuts, you begin to see that other definitions may make more sense.
  • If you are a supply sider, then what you are really about is putting more money in the hands of the people who can spend it. So, any government policy that causes people to have more money is good, and any that causes people to have less is bad.

  • If you are trying to starve the beast, then your real goal is reducing revenue to the government, by whatever means.

  • And, if you believe that the government's money belongs to the people, then it is really all about control. Anything that gives people more control over how the money is spent is good.
Unfortunately, none of these three goals is actually in line with what the tax cutters in our government are actually doing or trying to do.

Bush's Style of Tax Cuts

I said a few days ago that I wanted to write some more about Bush's 2007 budget proposal. Our President has certainly argued long and hard during his entire political career for tax cuts. I wanted to see how his own proposal measures up to that goal.

First, you have the classic definition: a tax is revenue assessed on the people for support of the government. Well, the bad news is that Bush is proposing billions of dollars of tax increases. The only thing is that he's not calling them tax increases, he's calling them fee increases. For example, in just the first year, Bush is calling for $105,000,000 in new "fees" on meat inspectors, $1,300,000,000 increased fees on airline passengers, and numerous other tax increases by another name.

Look at it from the supply side argument. Do Bush's proposals actually put more money in people's hands? In addition to the tax increases, there are many policy recommendations that do just the opposite. For example, axing the Commodity Supplemental Food Program will clearly remove spending power from the women, infants, children and elderly who currently rely on this monthly supplemental food package. The President is proposing the canceling of funding for hundreds of research grant earmarks, again money that will no longer be available to kick-start the economy. There are far too many examples in the proposal for me to itemize them all here, but clearly the President's goal is not to use his budget to pump up the economy.

If you are a beast starver, then clearly Bush's tax/fee increases are counter to your core philosophy. Instead of bringing in new money to fund these programs, we should be looking for ways to make the programs fail. Similarly, if the President really believed this money belonged to all of us, he wouldn't be arguing so hard to take it from one person's pocket (e.g., airline passengers and hungry, low-income women and children) and put it into somebody else's pocket (e.g., heirs of dead people and investors).

Bush Needs to Be Straight With Us

So, we've determined that the President is not being true to any reasonable argument for tax cuts. Therefore, the logical conclusion is that he is pushing for specific tax cuts over others for some reason. So, President Bush, please answer this question:
Why are you willing to raise taxes on airline passengers by $1.3 billion dollars per year, but unwilling to continue an existing tax on dead people that brings in $50 billion per year?

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