Bush’s Tiny Tax Cut

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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 treatedit. 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 enoughyears, any number--tax cuts, tax hikes, spending on bananas--would seemimmense.

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 CongressionalBudget Office, the 10-year total revenue figure (including payroll taxes)for the federal government will equal $28.6 trillion. That is the largestamount of money collected by any government in history. The tax cut isabout 5.6 percent of the government’s projected revenue. That’s hardlyhuge. “Modest,” “small,” or even “tiny” would be the reaction of mosttaxpayers.

Indeed, the National Taxpayers Union points out that the proposed Bush taxcut is smaller than either President Kennedy’s 1963 tax cut proposal orPresident Reagan’s 1981 tax cut. Kennedy proposed a cut that amounted to12.6 percent of projected federal revenues, while Reagan cut 18.7 percent ofprojected revenues. Facing a gusher of tax revenue, Bush proposes a smallercut.

Over the next 10 years, the CBO projects that the federal government willamass a budget surplus of $5.6 trillion. The government will take in $5.6trillion more than it plans to spend. In other words, Bush’s tax cut willequal 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” oron whether the government can “afford” a tax cut. Politicians and punditsseem to have forgotten that money is earned by individuals, who are taxed topay for collective (i.e., government) goods. Any money not essential forauthentically collective purposes should stay with the people who earned it.We talk about spending money on housing, education, medical care and thelike--and that’s what the people who earn it will do. The argument is overwhether the money should be spent by individuals and their families or byelected 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 aconstant stream of appeals from individuals, interest groups and governmentagencies to spend more money on their favorite projects. It’s a racket.

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

The way for taxpayers to protect themselves is to put strict rules on thegovernment’s power to tax and spend. We should require the federalgovernment to balance its budget so we never again run up deficits likethose of the 1980s and 1990s. And we should reach that balance by slashingfederal spending and closing certain federal departments. Also, we shouldcut 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 25percent tax rate. So, one way to improve Bush’s plan and let Americans keepmore of their own money would be to drop the top rate to 25 percent. Forthe sake of simplicity there should be no more than two rates, perhaps 25percent and 15 percent.

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

David Boaz

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