The Dishonest 'Tax Cut' Debate

The ongoing debate about whether or not to cripple the economy on January 1st through congressional inaction has been surreal.

Type the phrase “tax cuts” into the best-known search engine, and you’ll get over eleven million results (at least at the time of this writing). “Bush tax cuts” yields over seven million, even though what we’re really talking about is "Obama/Democratic tax rate increases.”

But most importantly, note the missing word in most of the discussion. Type a slightly altered version, “tax rate cuts,” and you’ll get an order of magnitude fewer hits. That is, for every time someone says that rates were cut, and will be going up in January absent congressional and White House action, (the factually correct description), ten people claim that taxes themselves will go up.

What’s the difference, you might ask? Well, that’s the problem. There’s a huge difference, but most people either don’t understand it, or ignore it. As I wrote a couple years ago:

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 (CBO), 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.

So all this talk about a “stimulus” of $800M (or whatever fantasy number they come up with) via a maintenance of existing tax rates is just that -- talk. Even if that were the correct number, it’s nonsensical to describe avoiding further damage to the economy as a “stimulus.” But the oldest man in the world doesn’t know the degree to which revenue will be reduced, or if in fact it will be reduced by preventing such an economy-bashing rate increase.