When Do We Cut Taxes?

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Will Belke: “You recently suggested we should not cut taxes now because we will over-stimulate the economy. So if we don’t cut taxes in good times, and we will never cut taxes in bad times because the government needs the money to support the less fortunate during those periods, when do we cut taxes?”

Actually, bad times are a good time to cut taxes. It stimulates the economy and gets people spending and working again, tipping the national mood from fear to . . . well, if not greed, let’s say “better spirits.” Yes, government expenditures rise in recession and revenues fall. Combined with a tax cut, that can mean a year or two of sharp deficits. But that’s not imprudent, any more than it’s imprudent for a family to dip into savings when one of the breadwinners is in between jobs. The trick is to accumulate the savings in the first place — or, in the case of the national debt, to pay it down enough in good years so there’s room to run it back up some, if need be, in bad years.

Will continues: “It seems if we are going to cut taxes and reduce the pressure on the middle class, now is the only time. And I know the rich are going to get to come along too, but it is not a crime to be rich. As a matter of fact some of the greatest Americans ever have also been wealthy. Rich people are not by definition evil.”

No, we’re not. But we sure do have a pretty good deal, much as we complain. Yes, it costs an arm and a leg to run a yacht these days — look what you have to pay the oarsmen! And look how much more tax you pay than the oarsmen, even though you have no kids in public school and they all have three. Heck, they should be paying more tax than you!

But somehow I’d still rather be sipping my gin and tonic on deck than rowing.

So although I entirely buy Will’s notion that it’s no a crime to be rich, I don’t accept his premise that cutting taxes on the middle class necessarily means that “the rich are going to get to come along too” — that in order for each middle-class family to pay a couple of thousand dollars less, my friend Steve Forbes must pay a couple of million less. You could actually leave his tax bracket where it is.

One thus gets into this endless — but worthy — debate over two things.

First, how much of our spending should be public versus private. Do we need a public police force, public roads, public schools, social safety nets for the indigent? Where do you draw the line? And once we do draw the line, how do we manage the public part most efficiently, to waste as few dollars as possible? (I don’t buy the notion that public efforts are always less efficient than those of, say, a private nonprofit. Before it even starts to do any good work, the private nonprofit needs to hire a development staff to raise the money to pay for the fundraising required to pay the development staff and arrange for the black-tie dinner or the direct mail campaign — costs that a taxpayer-funded service can avoid.)

Second, once we decide what we do want to fund collectively, through taxes, how do we spread the burden? If you do it partly with an income tax, should everyone pay an equal sum? An equal percentage of income? The answer is part economic (some arrangements may produce a healthier economy than others) and part philosophical (people have differing notions of what’s fair).

To the government in Eisenhower’s day, a top federal income tax bracket of 90% apparently seemed fair (not that many of the few to whom it applied failed to find ways to avoid it). It was in that environment that Steve Forbes’ dad Malcolm built a terrific business. Kennedy lowered it to 70%. It was in that environment that we had a long economic boom. Reagan lowered it first to 50% and ultimately to 28%. The gap between rich and poor widened. The National Debt soared. Bush bumped the top federal bracket back up a little to 31% and the debt continued to soar but the economy was weak. Clinton hiked it to today’s 39.6%. (The marginal rate, because of the way certain tax benefits phase out as income rises, is even a bit higher.) But the economy has been great, and home and car loans — as much a “tax” to the middle class as any other — fell sharply.

It’s always tempting to cut taxes. And both the President and Democrats in Congress did favor a tax cut about half the size of the one the President vetoed. But here was my question last week that provoked Will’s comment (and many more acid ones): If Geo W’s stated goal is to help low-income folks break into the middle class, and to give the middle class a break, why also give a massive tax break to the rich? We’re actually not suffering as badly as you might imagine.

Tomorrow: An E-mail Edict