Editorial
Tax Cuts and Budget Deficits
by Fred E. Foldvary, Senior EditorCongress is now debating tax cuts. The President seeks a larger tax cut than do most members of Congress. Since the federal budget is already in deficit, a bigger tax cut will create a larger deficit and a greater federal debt. That will result in higher interest payments in the future.
Income taxes are evil, and budget deficits for consumption spending are evil, so we have a choice between evils. Taxes on wages and capital are a current and clear evil, while government debt is a future evil that can be handled in several ways. Future taxes could rise, future spending could decline, the debt could be reduced by inflation, or the debt could just continue to get bigger. We know that eventually the federal debt of the U.S.A. will be down to zero, either due to some catastrophe that eliminates the country and its debt, or by repudiation or, by some miracle, paying it off with budget surpluses or the sale of assets.
My preference is to eliminate a clear current evil rather than some vague future evil. Taxes on wages are evil because they violate a person's natural right to one's self, and because they make production more costly, creating a burden that wastes resources and makes folks poorer. Another evil is that taxes are uneven, which is unjust and causes more waste. So rather than just cut tax rates, more evil can be eliminated by also eliminating unequal treatment.
That is why it would be beneficial to eliminate the double taxation of corporate profits. The profits belong to the shareholders. But when the corporation chiefs actually transfer the profits to the owners, the owners get tax punished. If the chiefs keep the profits, there is no extra tax punishment. This is nuts! If the chiefs keep the profits, they could squander them in huge executive bonus payments, in excessive stock options, and in lavish expense accounts. There should be a tax credit for dividends in proportion to taxes already paid by the corporation.
Secondly, end the marriage tax. Many married couples pay a higher income tax than they would if not married. If anybody knows a good reason for this, please tell me. The marriage tax can be eliminated simply by letting married taxpayers pay the tax as if they were not married.
When people decide whether to produce and invest, they look at the marginal tax rate, the taxes on extra income. That is why it is good to cut marginal tax rates, the highest tax rates. Yes, this cuts taxes for the rich. If they earned the money properly, then egalitarian greed and envy should play no role in tax policy. Cutting marginal taxes is not a tax break, it is a reduction of tax theft.
But the poor should also have tax relief. This can be done effectively by raising the personal exemption. There is then no tax at all up to the amount of the exemption. The business tax should also have an exemption; currently the exemption is zero. I say, divide the tax cut into two equal parts. Half the cut is done by raising the exemptions. The other half is done by eliminating the marriage penalty and the dividend penalty.
There are plenty of places to cut government spending to reduce the budget deficit. Subsidies to farmers and other corporate welfare could be eliminated. The war on drug users could be scrapped. The US military could be withdrawn from Europe, Japan, and Korea.
The fact that most Americans would rather spend tax money on a useless drug war than reduce the deficit shows they don't care so much about the deficit. So cut taxes now, and let the taxpayers have the deficit they prefer to cutting wasteful spending.
Copyright 2003 by Fred E. Foldvary. All rights reserved. No part of this material may be reproduced or transmitted in any form or by any means, electronic or mechanical, which includes but is not limited to facsimile transmission, photocopying, recording, rekeying, or using any information storage or retrieval system, without giving full credit to Fred Foldvary and The Progress Report.
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