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November 25, 2002
Permanent, marginal & immediate
The main topic on the economic front will now be tax reform and tax cuts. Get ready for "tax cuts for the rich" demagoguery from the left. Of course, with the top 10% of taxpayers flipping 55% of the bill and the top 50% flipping 96%, and tax reform/reduction will surely benefit those who currently pay taxes (duh.) But there are three issues to be determined, and none of them necessarily dictate the others. First, there is how we are taxed (income, consumption, flat, VAT, sales tax, etc.), second how much we are taxed (what the various rates are), and who is taxed relatively speaking (how progressive the tax system is.) The left is already suspicious that the first two automatically mean reducing progressivity--and they are probably true that those driving reform in the first two areas also want reform in the third. Although I think there are big problems with an overly progressive tax system, because when half of the population pays little or no taxes they tend to vote as free-riders, not as responsible citizens, I would take two out of three--and I hope Bush can use these levers to make real improvements in our tax code.
But enough from me, this article from Robert Bartley, as usual, is a must read. Even if you disagree, you should know what the arguments are. Here's an excerpt:
The president was clear on one important thing: "We have a deficit because tax revenues are down. Make no mistake about it, the tax relief package that we passed--that should be permanent by the way--has helped the economy. And that the deficit would have been bigger without the tax relief package." Again, "The deficit is caused by the fact that revenues have not come in. There are two things we can do about that: One, stimulate the economy to create more revenues, and two, hold down spending."So for openers, Mr. Bush would make his 2001 tax cuts permanent; under the current law they would expire in 2010. And the president rejects the deficit-mongering that gave rise to cockamamie provision, as well as a lot of other Washington nonsense. The whole debate changes when you announce, as he just did, that the way to deal with deficits is to stimulate the economy.
This explicitly rejects Rubinomics, the eccentric notion that reducing deficits and running surpluses boosts growth by reducing interest rates (see TTO, Feb. 25). It also casts perspective on the traditional Keynesian notion that deficits themselves stimulate (see TTO, Feb. 4). Since the government has to cover its spending by taxing or borrowing, deficits or surpluses merely move money from one pocket to another, a trivial stimulus at best.
Fiscal policy can stimulate the economy, however, by changing the incentives taxpayers face (see TTO, March 4). The principal measure of incentives is the marginal tax rate--the tax you will pay on your next dollar of income. A reduction in marginal rates increases the reward for working, saving and risk taking; and higher rewards produce more effort and more economic activity. So to get growth you cut marginal rates.
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