Commentary

Bush’s Tiny Tax Cut

Just how big is President Bush’s proposed tax cut? He wants to cut taxes by $1.6 trillion over 10 years, keeping a promise he made in his 2000 campaign. It sounds like a lot—$1.6 trillion— and that’s how journalists have treated it. So, is that a big cut or a small one?

First, it’s a total over 10 years. On average, it’s a tax reduction of $160 billion a year. Big, but not in the trillions. If you use enough years, any number—tax cuts, tax hikes, spending on bananas—would seem immense.

Another way to look at it is to say: Compared to what? From where will the $1.6 trillion be cut? According to revised numbers from the Congressional Budget Office, the 10-year total revenue figure (including payroll taxes) for the federal government will equal $28.6 trillion. That is the largest amount of money collected by any government in history. The tax cut is about 5.6 percent of the government’s projected revenue. That’s hardly huge. “Modest,” “small,” or even “tiny” would be the reaction of most taxpayers.

Indeed, the National Taxpayers Union points out that the proposed Bush tax cut is smaller than either President Kennedy’s 1963 tax cut proposal or President Reagan’s 1981 tax cut. Kennedy proposed a cut that amounted to 12.6 percent of projected federal revenues, while Reagan cut 18.7 percent of projected revenues. Facing a gusher of tax revenue, Bush proposes a smaller cut.

Over the next 10 years, the CBO projects that the federal government will amass a budget surplus of $5.6 trillion. The government will take in $5.6 trillion more than it plans to spend. In other words, Bush’s tax cut will equal only 29 percent of what taxpayers are overpaying—$1.6 trillion of $5.6 trillion.

Too much chatter in Washington focuses on what the tax cut will “cost” or on whether the government can “afford” a tax cut. Politicians and pundits seem to have forgotten that money is earned by individuals, who are taxed to pay for collective (i.e., government) goods. Any money not essential for authentically collective purposes should stay with the people who earned it. We talk about spending money on housing, education, medical care and the like—and that’s what the people who earn it will do. The argument is over whether the money should be spent by individuals and their families or by elected officials and federal employees.

We know what Congress will do with the “surplus” if it doesn’t cut taxes. It will spend the money. A day in the life of a member of Congress is a constant stream of appeals from individuals, interest groups and government agencies to spend more money on their favorite projects. It’s a racket.

Economists call it the problem of “concentrated benefits and diffuse costs”—members of Congress hear from the small number of people who will benefit from each new spending program, but they almost never hear from the large number of people who will pay the bill for each program. A new farm program or education program might mean $10,000 for each beneficiary—so they will take the trouble to make their voices heard. But any one program might cost each taxpayer a few dollars, so they won’t know about each new spending program.

The way for taxpayers to protect themselves is to put strict rules on the government’s power to tax and spend. We should require the federal government to balance its budget so we never again run up deficits like those of the 1980s and 1990s. And we should reach that balance by slashing federal spending and closing certain federal departments. Also, we should cut taxes now, by more than the Bush administration proposes.

President Bush proposes to bring the top tax rate down to 33 percent. Polls show that most Americans think no one should pay more than a 25 percent tax rate. So, one way to improve Bush’s plan and let Americans keep more of their own money would be to drop the top rate to 25 percent. For the sake of simplicity there should be no more than two rates, perhaps 25 percent and 15 percent.

The federal government is proposing to collect $28,600,000,000,000 from us over the next 10 years. That’s $5.6 trillion more than the biggest-spending Congress in history proposes to spend. We’re overtaxed. It’s the people’s money. Congress should give it back. President Bush’s tiny tax cut is a down payment on the tax cut we need.

David Boaz is executive vice president of the Cato Institute and co-editor of the Cato Handbook for Congress.