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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

There’s been a lot of talk about “tax cuts” lately — well, actually, forever. It was supposedly one of the big campaign issues last year. In fact, Barack Obama ran on the claim that he was going to “cut the taxes of 95% of the American people.” Which, come to think of it, seems a little at odds with his recent decision to not emphasize tax cuts in the latest porkathon “stimulus package” because “I won.”

Anyway, when is a “tax cut” not a tax cut? Apparently, whenever it is discussed by a politician.

Both sides of the aisle continually make the mistake — though it’s no mistake on the part of the Democrats — of confusing a tax rate cut with an actual tax cut. Here is a commonsense, as opposed to the Alice-in-wonderland, definition of a real tax cut. It is a reduction in the amount of taxes paid. Conversely, a tax increase is an increase in the amount of taxes paid to — and revenue received by — the government.

That’s it. Almost too simple, isn’t it?

When a politician says that he’s going to either cut or increase your taxes, he is engaging, wittingly or not, in a conceit and a deceit. He says it as though he has the power to do any such thing, when in fact he does not. He has no power except to reduce or increase the rate at which you pay taxes, whether on property, income, or whatever.

Think of it as the difference between a joystick and a mouse. With a computer mouse, you can point directly to the place that you want to be on a screen. With a joystick, you can only control the rate at which you move toward it, and in so doing, the target may move, and it may move faster or in a different direction than you can keep up with using your rate control. Politicians talk about tax cuts as though they have a computer mouse that allows them to pass a law and a specified amount of revenue will roll in, but the reality is that they have a slow joystick, with a nebulous relationship to the eventual goal.

For instance, he can raise your top income tax rate from, say, thirty to ninety percent. Did he increase your taxes by that amount? Only if you’re as stupid as he is. More likely, you’ll just cut back on how much you work, settle for the lower bracket, or do more work off the books, and he’ll end up getting less in taxes from you than before. So did he increase your taxes? Nope.

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?

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.
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