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Regent Digital News - Mar/April, 2001


How The Bush Tax Cut Plan Cuts Out Ordinary Americans
(I’m not an economist, but I play one on TV…)
by Russ Baker


If President Bush’s claims for his proposed tax cut are any indication, it promises to be a busy four years for those whose mission is to deflate the gassy pronouncements routinely emanating from Washington. In a weekly radio address about his 10-year, $1.6 trillion package, the president declared: "This would be good news for families struggling to pay off debt and to save for the future. And it would be good news for our broader economy, good news for economic growth and job creation and consumer confidence."

In this case, the “good news” is old news – a conservative standard-bearer taking care of his own. The Bush offering – some version of which is likely to be approved by Congress this spring – hands about 40 percent of the cut to the wealthiest one percent of the population, and a goodly chunk of the remainder to some mighty comfortable folks, through a combination of reduced income and eliminated estate taxes. What is left won’t do much to lighten the load on struggling families and, for structural reasons that include the many years over which it would be implemented, is unlikely to stimulate the shaky economy in the near future.  But there’s a deeper problem: while it is important to scrutinize the shifting particulars of the legislation as it makes its way through the senate and to a congressional conference committee, it is far more important to recognize the basic falseness of the underlying premise, and the disservice it does to honest dialogue about how much each American should pay to finance the services and infrastructure and benefits of life in this country that we all enjoy – some, it should be reminded, a lot more than others.

One simple fact gives the game away: originally, the rationale for a tax cut was the huge projected federal surplus. As Bush put it over and over again on the stump: all that money piling up in Washington belonged to the taxpayer, and all he was proposing was to give it back to the rightful owners. But a funny thing happened on the way to Washington. When the economy began to weaken and the stock market went south, Bush’s rationale morphed, with a smoothness that was almost Clintonian, into its polar opposite. Now, it seems, we need tax cuts because surpluses are no longer assured. And they are no longer assured because the economy has stopped booming.

The Claim 

Now the Bush administration says that an immediate tax cut –virtually the same one he proposed last year to tap into a booming economy-- is necessary to stimulate a faltering economy.

No one disputes that getting money into the hands of low- and moderate-income individuals and families helps them directly and pumps cash back into the economy. As virtually all well-designed studies show, people who have little or nothing tend to put the greatest multiplier effect on additional cash that comes into their hands. They either spend it on the kinds of goods and services that employ others of modest means, or they use it in ways that bolster overall financial health (both their own and the country’s) such as paying down debt or building up savings.

But to make much of a difference, you have to give people enough money to work with. The rich will certainly get that: a Center on Budget and Policy Priorities analysis estimates the top one percent of the population would get an average tax reduction of at least $39,000 a year. For the multitudes, the prize would range from hundreds of dollars a year to a thousand or so – most of which would appear in the form of reduced weekly payroll check withholding, putting very small additional amounts ($3, $5, $10, $20 a week), into most ordinary people’s hands on a regular basis. And what do folks do with that? Well, it’s not the sort of sum that makes people think, Aha! I can start seriously saving. And it’s not likely to be invested substantially into some job-generating investment. In truth, these amounts are so small that they’re most likely to go into the sorts of additional spending – buying lottery or movie tickets, having an extra burger meal – that, if it stimulates the economy at all, does so in barely measurable ways.

To make a difference for those of modest means, President Bush would have to commit to steps that would substantially change their overall economic situation. And that would necessarily involve huge cuts or rebates that would put many thousands – not hundreds – of dollars a year back in their pockets. Beyond that, he could direct the money into specific behavior that really does benefit the recipient in the long run – and the economy as a whole – such as helping consumers pay off unreasonably high-interest loans and credit card debts under which they’re trapped; buying conservative, long-term financial instruments like bonds or treasury bills, building up savings, buying a home or some other tangible property.

Instead, the Bush tax cut gives those of limited means limited, fairly useless “relief” – not enough, really, to even have an impact on basic needs, like the amount or quality of food a family can buy. And the rest goes exactly to the people who do not need it at all – the wealthy.

Paying Off the Already Comfortable

If the intent is to stimulate the economy, then giving money back to the affluent isn’t certain to – or even likely to – have that effect. The trickle-down economics of the Reagan era have been completely discredited over the past ten years; the problem for the economy has not been too little investment capital, but too much, carelessly proffered. But the Bush plan recycles the bad old news of the Reagan approach: give very rich people money, and everyone will benefit. Even the most cursory examination of anecdotal behavioral evidence suggests just how ridiculous that proposition is.

People who are already extremely comfortable tend to do a couple of things with unexpected windfalls: they buy stock, and they buy luxury goods and services, two actions with questionable benefit to the overall economy, and certainly to a quick stabilization of it. As we’ve seen from the recent dot-com debacle, a booming stock market is not necessarily a creator of lasting jobs. Wall Street remains a speculative vehicle, with at least as many losers as winners. For every job that stock speculation creates, it can take that same job away with lightning speed, causing serious economic dislocation for whole segments of the economy, and instability for all.

Spending on the kinds of things that highly affluent people desire  has little  correlation to benefits spread throughout society. When it comes to rare art, fine-bred racehorses, imported specialty watches and such, in general, a smaller percentage of the purchase price goes into the hands of ordinary Americans than with other goods and services. To be sure, banking $39,000 –  which then is loaned to someone starting a small local manufacturing business – has an obvious and broad economic benefit, just as hiring local workers to fix up a dilapidated house is salutary in many respects. The same cannot be said for $39,000 dropped on  a seemingly hot Initial Public Offering, or $39,000 spent on flying a group of friends to the Caribbean for a lavish birthday party.

The bottom line is that very wealthy people don’t need tax relief. Most of them, with the help of high-priced tax consultants, pay nowhere near the amounts stipulated in the tax laws. Of course, few people would turn down a government-sponsored windfall,  (although a group of particularly civic-minded superrich have taken it upon themselves to announce, publicly, that they don’t need or want ”relief” from the estate tax – despite the fact that its elimination would clearly benefit them and their heirs.) Sometimes, making it possible for the wealthy to increase consumption spending can directly hurt ordinary people. For example, in San Francisco, an explosion of second-home pieds a terre acquisitions is forcing low and moderate income people out of town, and enormous energy consumption on optional luxury devices is putting extra pressure on  the state’s overloaded energy grid, creating crisis and costs for everyone else.

Who Needs It?

Bush’s tax plan is largely dedicated to dramatically reducing the tax rates for the richest Americans. But a certain amount of intellectual honesty would remind us that people who make more from living and working in America benefit more and hence ought to pay more – percentage-wise. The Bush approach seems especially inappropriate in light of how well the wealthy have done, overall, during the 10-year boom now ending. Even with the economic difficulties that may lie ahead, the most affluent have more money, as a percentage of the total pie, than ever before, and are already better positioned to navigate a little rough weather.  Besides, the “economic stimulus” argument isn’t even authentically conservative. Conservatives once argued that an economic downturn should be permitted to run its course. Now, their standard-bearer holds aloft an updated, twisted version of the Keynesian economics long promoted by liberal Democrats. The idea used to be to short-circuit economic downturns with increased government spending or tax cuts designed to help ordinary Janes and Joes.  Bushonomics sounds suspiciously like Keynes for the rich and the superrich.

What to Do?

If the administration is serious about stimulating the economy through (1) savings and (2) job creation, it could offer credits for financially responsible behavior, such as paying down high interest loans and credit cards. It would think long and hard about how to create meaningful, productive, socially beneficial employment.  And if Bush could take time from his efforts to open up the Arctic National Wildlife Refuge (as payback to the oilmen who gave so generously to his campaign), he might develop a program of tax credits for rich and poor alike who install energy saving devices.

Instead, the President offers disingenuous platitudes, like the statement he made recently on a trip to Florida: "Be wary of those who talk about targeted tax cuts in Washington --those who want to pick winners and losers. That is not my vision for government."  Unlike his father, who famously did not understand “the vision thing,” W.’s vision is all too clear. . This heir to a political dynasty who has had just about everything in life handed to him, who has been rewarded beyond measure for who he is and whom he knows, has no qualms about seeking to convince struggling Americans that the modest blandishments offered to them are inextricably tied to huge giveaways to those who don’t need them at all.  

Sadly, it all comes down to politics’ near total dependency on proto-bribery. To get elected, Bush promised a huge tax cut, which is the most vulgar and least honorable way to engage the public, a straight quid pro quo devoid of any hint of community spirit, of any call for putting aside personal gain in the name of a greater good. Only his affluent backers will get what they paid for if the Bush tax cut goes through—a many-fold return on their campaign contributions. For the other Americans who voted for him, the payoff will be more like chump change.

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