Viewpoint: Taxed to Death

For some people, it never seems to be quite the right time to cut taxes. The Carter administration argued last year that tax cuts should be postponed until the economy was flat on its back. After obligingly shoving the economy into the pits, they now argue that tax cuts should not occur in election years, either. Those criteria leave only two appropriate moments in the past decade (1970 and 1975), so we missed our chance. It is apparently too late to cut taxes to avert the recession, too early to tell if it is needed in the recovery.

To be fair, there were major federal tax cuts enacted in 1975, 1976, 1977, and 1978. As a result, income and payroll taxes rose only 54 percent from the fall of 1974 to 1979 for middle-income budgets; for "higher" budgets (an obscenely lavish before-tax income of $30,317 for a family of four), the tax increase was merely 66 percent.

In Washington, a "tax cut" means that taxes will not rise quite as fast as otherwise, "tax reform" means taxes are going up, and "tax relief" means that taxes will be lowered only for those with the lowest incomes and lowest tax rates. A "targeted" tax cut means a break for existing large corporations that are not serving consumers well.

Now the Senate Finance Committee is generously offering to cut individual taxes by $22 billion next year, with most of the benefit again going to the very lowest and highest incomes. This at a time when inflation will raise tax rates by at least $14 billion, Social Security taxes go up by $17 billion, and the excise tax on domestic oil drains another $15 billion. With friends like this, taxpayers don't even need Jimmy Carter.

Recent leaks about Carter's latest policy switch emphasize the virtue of delay but hint at a "refundable investment tax credit" (that is, a cash subsidy) for companies without profits that invest in certain forms of physical capital. Consumers and the businesses they make profitable can thus pay higher taxes so that losers can expand.

Higher taxes are, we're told, the price we have to pay to reduce inflation. That is why past tax increases have done such a good job in preventing inflation. It also explains why Britain and Sweden have never had inflation problems, and why the annual tax cuts in Japan have obviously devastated that economy. Perhaps the best example is Jamaica, which decided to help the poor by hiking taxes on the rich—until they left.

A Puerto Rican official once asked writer-economist Jude Wanniski how to raise per capita income, and he said: "Import more rich people, or at least stop exporting so many of them." A viable economy needs managers, professionals, and successful entrepreneurs. Puerto Rico has been cutting income tax rates by 5 percent a year and is swimming in an unexpected windfall of tax revenues from a stronger economy.

This sort of thing bothers some libertarians, and conservatives too. Having suffered at the hands of heavy-handed government, as has everything noble or virtuous in human endeavor, they experience some agony in seeing government share in prosperity, even if the share is smaller. Just as the so-called liberals would rather see a stagnant economy than let anyone get rich by creating prosperity, their opponents sometimes seem to prefer to see the government in a fiscal squeeze even if the cause is a private economy taxed into chronic stagnation. That attitude can end up with government growing in relative size and power, as the private economy is emancipated by punitive tax and regulatory policies. The British government isn't really so huge; it's just that there isn't much else left over there.

The most dangerous opposition to meaningful tax cuts is not the Carter administration, which has a credibility problem, but a curious collection of corporate spokesmen and conservative economists whose advice proved so constructive in the Nixon-Ford years. Some, like Herbert Stein, argue that taxes will have to go still higher to finance more arms. Never mind that the already projected tax increases are demonstrably impossible—the economy could not possibly bear them and nonetheless grow at the 4.2 percent rate assumed for 1982-85. Others implicitly believe that the budget really could be balanced by taxing us all into the unemployment lines.

Then there are nitpicking debates about precisely which taxes to cut in which way. Many businessmen agree with President Carter that corporate taxes must come first. But all taxes are paid by people, as suppliers of labor and capital, and the corporate income tax (silly as it is) is relatively trivial. Individual income and payroll taxes are slated to rise from 15 percent of personal income before Carter took office to 20 percent next year and 23 percent by 1983. Corporate taxes are not now planned to take any larger share of corporate profits and are only one-seventh the size of direct personal taxes.

When the Carter folks complain that Kemp-Roth would cut revenues in 1985 by $220 billion, that is indeed alarming. All individual income taxes did not amount to that much last year. In fact, however, cutting tax rates by 30 percent wouldn't lower revenues by anything like $220 billion, because there is no way to hike taxes as much as planned without flattening the private economy and driving recession-related spending through the roof. Actually, if Kemp-Roth passed, the share of personal income going to federal income and payroll taxes would still be substantially higher in 1985 than it was in 1976-78. Kemp-Roth is not drastic tax cutting at all—just a smaller increase.

Now, the plan put forward by Libertarian Party candidate Ed Clark (see Trends, Oct.) really would cut taxes and provide a generally persuasive list of drastic spending cuts, too. But I could do without this part: "The Clark tax cut will have a much greater impact on lower-income taxpayers than higher-income." Has the Libertarian Party adopted an egalitarian ethic?

Alan Reynolds is vice-president of research at a major US bank.