Get PJ Media on your Apple

Lies, Damned Lies, and ‘Tax Cuts’

Confusing "tax cuts" with "rate cuts" often keeps us from setting the proper economic course.

by
Rand Simberg

Bio

January 31, 2009 - 12:00 am
<- Prev  Page 2 of 2   View as Single Page

Similarly, he could cut your rate, and you might be motivated to go out and earn even more, perhaps enough more that you pay more taxes, even at the lower rate. So did he cut your taxes? No. But the wealth of the nation — including your own — was increased.

When the “cost” of a tax rate reduction is “scored” by the Congressional Budget Office, they do a “static” analysis, which means that they assume that the change in rates will have no influence on the behavior of the taxed, which is arrant nonsense. When a politician tells you that he knows how much revenue a tax change will result in, he is either lying or deluded.

Which brings us to the other myth of tax cuts. Leftists (I refuse to call them liberals) view “tax cuts” very differently than do I — and, I hope, you.

I view a reduction in my income tax as more of my own money, which I earned, that I am allowed to keep. Leftists start with the implicit assumption that all wealth, regardless of who actually earned it, is the property of the state, and any amount that we have after taxes is viewed as a gift from the state.

This bizarre worldview results in equating, in their minds, actual tax cuts and government expenditures. It’s all the same to them — it is a “cost” to the government to let you keep your own money. Well, actually, it is not all the same. They vastly prefer an expenditure by the government that funds something that they stipulate — generally to favor some political constituency — to an “expenditure” by the government that allows you to decide what to do with it, and over which they have (so far) no control. This explains why they don’t have any cognitive dissonance with the nonsense that you can give a tax cut to someone who pays no income tax, which seems to be one of the “features” of the so-called stimulus plan. Since they view all “tax cuts” as gifts of the beneficent state, there is no difference in their mind between letting you keep your own money and handing you a check.

But there is a difference, and it is a crucial one: the way in which individual behavior is influenced. As noted above, if I get a reduction in my tax rate — which, remember, is not a “tax cut,” even though almost everyone mistakenly calls it one — I am motivated to go earn more money, because I’ll get to keep more of it on the margin. If, on the other hand, I am simply handed a check, which has no relationship with either past or future effort, there is no reason that it will change my behavior or productivity. That is why the former (a tax rate cut) actually stimulates, while the latter (a no-strings handout) does not. He might go out and spend it, or he might pay off debt, or he might save it. But there’s no particular reason to think that it stimulates the economy, though it may stimulate the recipient into voting for those who granted him the unwilling largess of those actually paying taxes.

Which, of course, is the whole point of this charade, isn’t it?

<- Prev  Page 2 of 2   View as Single Page
Rand Simberg is a recovering aerospace engineer and a consultant in space commercialization, space tourism and Internet security. He offers occasionally biting commentary about infinity and beyond at his weblog, Transterrestrial Musings.
Click here to view the 20 legacy comments

Comments are closed.