The Cartoon and the Reality Bruce Tinsley's
comic strip, "Mallard Fillmore," is, he says,
"for the average person out there: the forgotten
American taxpayer who's sick of the liberal
media." In June, that forgotten taxpayer made
an appearance in the strip, attacking his
TV set with a baseball bat and yelling: "I
can't afford to send my kids to college, or
even take 'em out of their substandard public
school, because the federal, state and local
governments take more than 50 percent of my
income in taxes. And then the guy on the news
asks with a straight face whether or not we
can 'afford' tax cuts."
that's just a cartoon. Meanwhile, Bob Riley
has to face the reality.
knows all about substandard public schools.
He's the governor of Alabama, which ranks
near the bottom of the nation in both spending
per pupil and educational achievement. The
state has also neglected other public services
-- for example, 28,000 inmates are held in
a prison system built for 12,000. And thanks
in part to a lack of health care, it has the
second-highest infant mortality in the nation.
he was a member of Congress, Riley, a Republican,
was a staunch supporter of tax cuts. Faced
with a fiscal crisis in his state, however,
he seems to have had an epiphany. He decided
that it was impossible to balance Alabama's
budget without a significant tax increase.
And that, apparently, led him to reconsider
everything. "The largest tax increase in state
history just to maintain the status quo?"
he asked. "I don't think so." Instead, Riley
proposed a wholesale restructuring of the
state's tax system: reducing taxes on the
poor and middle class while raising them on
corporations and the rich and increasing overall
tax receipts enough to pay for a big increase
in education spending. You might call it a
New Deal for Alabama.
likes paying taxes, and no doubt some Americans
are as angry about their taxes as Tinsley's
imaginary character. But most Americans also
care a lot about the things taxes pay for.
All politicians say they're for public education;
almost all of them also say they support a
strong national defense, maintaining Social
Security and, if anything, expanding the coverage
of Medicare. When the "guy on the news" asks
whether we can afford a tax cut, he's asking
whether, after yet another tax cut goes through,
there will be enough money to pay for those
things. And the answer is no.
it's very difficult to get that answer across
in modern American politics, which has been
dominated for 25 years by a crusade against
don't use the word "crusade" lightly. The
advocates of tax cuts are relentless, even
fanatical. An indication of the movement's
fervor -- and of its political power -- came
during the Iraq war. War is expensive and
is almost always accompanied by tax increases.
But not in 2003. "Nothing is more important
in the face of a war," declared Tom DeLay,
the House majority leader, "than cutting taxes."
And sure enough, taxes were cut, not just
in a time of war but also in the face of record
budget deficits. Nor will it be easy to reverse
those tax cuts: the tax-cut movement has convinced
many Americans -- like Tinsley -- that everybody
still pays far too much in taxes.
result of the tax-cut crusade is that there
is now a fundamental mismatch between the
benefits Americans expect to receive from
the government and the revenues government
collect. This mismatch is already having profound
effects at the state and local levels: teachers
and policemen are being laid off and children
are being denied health insurance. The federal
government can mask its problems for a while,
by running huge budget deficits, but it, too,
will eventually have to decide whether to
cut services or raise taxes. And we are not
talking about minor policy adjustments. If
taxes stay as low as they are now, government
as we know it cannot be maintained. In particular,
Social Security will have to become far less
generous; Medicare will no longer be able
to guarantee comprehensive medical care to
older Americans; Medicaid will no longer provide
basic medical care to the poor.
did we reach this point? What are the origins
of the antitax crusade? And where is it taking
us? To answer these questions, we will have
to look both at who the antitax crusaders
are and at the evidence on what tax cuts do
to the budget and the economy. But first,
let's set the stage by taking a look at the
current state of taxation in America.
How High Are Our Taxes? The reason Tinsley's
comic strip about the angry taxpayer caught
my eye was, of course, that the numbers were
all wrong. Very few Americans pay as much
as 50 percent of their income in taxes; on
average, families near the middle of the income
distribution pay only about half that percentage
in federal, state and local taxes combined.
fact, though most Americans feel that they
pay too much in taxes, they get off quite
lightly compared with the citizens of other
advanced countries. Furthermore, for most
Americans tax rates probably haven't risen
for a generation. And a few Americans -- namely
those with high incomes -- face much lower
taxes than they did a generation ago.
assess trends in the overall level of taxes
and to compare taxation across countries,
economists usually look first at the ratio
of taxes to gross domestic product, the total
value of output produced in the country. In
the United States, all taxes -- federal, state
and local -- reached a peak of 29.6 percent
of G.D.P. in 2000. That number was, however,
swollen by taxes on capital gains during the
2002, the tax take was down to 26.3 percent
of G.D.P., and all indications are that it
will be lower still this year and next.
is a low number compared with almost every
other advanced country. In 1999, Canada collected
38.2 percent of G.D.P. in taxes, France collected
45.8 percent and Sweden, 52.2 percent.
aren't taxes much higher than they used to
be? Not if we're looking back over the past
30 years. As a share of G.D.P., federal taxes
are currently at their lowest point since
the Eisenhower administration. State and local
taxes rose substantially between 1960 and
the early 1970's, but have been roughly stable
since then. Aside from the capital gains taxes
paid during the bubble years, the share of
income Americans pay in taxes has been flat
since Richard Nixon was president.
course, overall levels of taxation don't necessarily
tell you how heavily particular individuals
and families are taxed. As it turns out, however,
middle-income Americans, like the country
as a whole, haven't seen much change in their
overall taxes over the past 30 years. On average,
families in the middle of the income distribution
find themselves paying about 26 percent of
their income in taxes today. This number hasn't
changed significantly since 1989, and though
hard data are lacking, it probably hasn't
changed much since 1970.
wealthy Americans have seen a sharp drop in
their tax burden. The top tax rate -- the
income-tax rate on the highest bracket --
is now 35 percent, half what it was in the
1970's. With the exception of a brief period
between 1988 and 1993, that's the lowest rate
since 1932. Other taxes that, directly or
indirectly, bear mainly on the very affluent
have also been cut sharply. The effective
tax rate on corporate profits has been cut
in half since the 1960's. The 2001 tax cut
phases out the inheritance tax, which is overwhelmingly
a tax on the very wealthy: in 1999, only 2
percent of estates paid any tax, and half
the tax was paid by only 3,300 estates worth
more than $5 million. The 2003 tax act sharply
cuts taxes on dividend income, another boon
to the very well off. By the time the Bush
tax cuts have taken full effect, people with
really high incomes will face their lowest
average tax rate since the Hoover administration.
here's the picture: Americans pay low taxes
by international standards. Most people's
taxes haven't gone up in the past generation;
the wealthy have had their taxes cut to levels
not seen since before the New Deal. Even before
the latest round of tax cuts, when compared
with citizens of other advanced nations or
compared with Americans a generation ago,
we had nothing to complain about -- and those
with high incomes now have a lot to celebrate.
Yet a significant number of Americans rage
against taxes, and the party that controls
all three branches of the federal government
has made tax cuts its supreme priority. Why?
Supply-Siders, Starve-the-Beasters and Lucky
Duckies It is often hard to pin down what
antitax crusaders are trying to achieve. The
reason is not, or not only, that they are
disingenuous about their motives -- though
as we will see, disingenuity has become a
hallmark of the movement in recent years.
Rather, the fuzziness comes from the fact
that today's antitax movement moves back and
forth between two doctrines. Both doctrines
favor the same thing: big tax cuts for people
with high incomes. But they favor it for different
of those doctrines has become famous under
the name "supply-side economics." It's the
view that the government can cut taxes without
severe cuts in public spending. The other
doctrine is often referred to as "starving
the beast," a phrase coined by David Stockman,
Ronald Reagan's budget director. It's the
view that taxes should be cut precisely in
order to force severe cuts in public spending.
Supply-side economics is the friendly, attractive
face of the tax-cut movement. But starve-the-beast
is where the power lies.
starting point of supply-side economics is
an assertion that no economist would dispute:
taxes reduce the incentive to work, save and
invest. A businessman who knows that 70 cents
of every extra dollar he makes will go to
the I.R.S. is less willing to make the effort
to earn that extra dollar than if he knows
that the I.R.S. will take only 35 cents. So
reducing tax rates will, other things being
the same, spur the economy.
much isn't controversial. But the government
must pay its bills. So the standard view of
economists is that if you want to reduce the
burden of taxes, you must explain what government
programs you want to cut as part of the deal.
There's no free lunch.
the supply-siders argued, however, was that
there was a free lunch. Cutting marginal rates,
they insisted, would lead to such a large
increase in gross domestic product that it
wouldn't be necessary to come up with offsetting
spending cuts. What supply-side economists
say, in other words, is, "Don't worry, be
happy and cut taxes." And when they say cut
taxes, they mean taxes on the affluent: reducing
the top marginal rate means that the biggest
tax cuts go to people in the highest tax brackets.
other camp in the tax-cut crusade actually
welcomes the revenue losses from tax cuts.
Its most visible spokesman today is Grover
Norquist, president of Americans for Tax Reform,
who once told National Public Radio: "I don't
want to abolish government. I simply want
to reduce it to the size where I can drag
it into the bathroom and drown it in the bathtub."
And the way to get it down to that size is
to starve it of revenue. "The goal is reducing
the size and scope of government by draining
its lifeblood," Norquist told U.S. News &
does "reducing the size and scope of government"
mean? Tax-cut proponents are usually vague
about the details. But the Heritage Foundation,
ideological headquarters for the movement,
has made it pretty clear. Edwin Feulner, the
foundation's president, uses "New Deal" and
"Great Society" as terms of abuse, implying
that he and his organization want to do away
with the institutions Franklin Roosevelt and
Lyndon Johnson created. That means Social
Security, Medicare, Medicaid -- most of what
gives citizens of the United States a safety
net against economic misfortune.
starve-the-beast doctrine is now firmly within
the conservative mainstream. George W. Bush
himself seemed to endorse the doctrine as
the budget surplus evaporated: in August 2001
he called the disappearing surplus "incredibly
positive news" because it would put Congress
in a "fiscal straitjacket."
supply-siders, starve-the-beasters favor tax
cuts mainly for people with high incomes.
That is partly because, like supply-siders,
they emphasize the incentive effects of cutting
the top marginal rate; they just don't believe
that those incentive effects are big enough
that tax cuts pay for themselves. But they
have another reason for cutting taxes mainly
on the rich, which has become known as the
"lucky ducky" argument.
how the argument runs: to starve the beast,
you must not only deny funds to the government;
you must make voters hate the government.
There's a danger that working-class families
might see government as their friend: because
their incomes are low, they don't pay much
in taxes, while they benefit from public spending.
So in starving the beast, you must take care
not to cut taxes on these "lucky duckies."
(Yes, that's what The Wall Street Journal
called them in a famous editorial.) In fact,
if possible, you must raise taxes on working-class
Americans in order, as The Journal said, to
get their "blood boiling with tax rage."
the tax-cut crusade has two faces. Smiling
supply-siders say that tax cuts are all gain,
no pain; scowling starve-the-beasters believe
that inflicting pain is not just necessary
but also desirable. Is the alliance between
these two groups a marriage of convenience?
Not exactly. It would be more accurate to
say that the starve-the-beasters hired the
supply-siders -- indeed, created them -- because
they found their naive optimism useful.
look at who the supply-siders are and how
they came to prominence tells the story.
supply-side movement likes to present itself
as a school of economic thought like Keynesianism
or monetarism -- that is, as a set of scholarly
ideas that made their way, as such ideas do,
into political discussion. But the reality
is quite different. Supply-side economics
was a political doctrine from Day 1; it emerged
in the pages of political magazines, not professional
is not to deny that many professional economists
favor tax cuts. But they almost always turn
out to be starve-the-beasters, not supply-siders.
And they often secretly -- or sometimes not
so secretly -- hold supply-siders in contempt.
N. Gregory Mankiw, now chairman of George
W. Bush's Council of Economic Advisers, is
definitely a friend to tax cuts; but in the
first edition of his economic-principles textbook,
he described Ronald Reagan's supply-side advisers
as "charlatans and cranks."
is not that the professionals refuse to consider
supply-side ideas; rather, they have looked
at them and found them wanting. A conspicuous
example came earlier this year when the Congressional
Budget Office tried to evaluate the growth
effects of the Bush administration's proposed
tax cuts. The budget office's new head, Douglas
Holtz-Eakin, is a conservative economist who
was handpicked for his job by the administration.
But his conclusion was that unless the revenue
losses from the proposed tax cuts were offset
by spending cuts, the resulting deficits would
be a drag on growth, quite likely to outweigh
any supply-side effects.
if the professionals regard the supply-siders
with disdain, who employs these people? The
answer is that since the 1970's almost all
of the prominent supply-siders have been aides
to conservative politicians, writers at conservative
publications like National Review, fellows
at conservative policy centers like Heritage
or economists at private companies with strong
Republican connections. Loosely speaking,
that is, supply-siders work for the vast right-wing
conspiracy. What gives supply-side economics
influence is its connection with a powerful
network of institutions that want to shrink
the government and see tax cuts as a way to
achieve that goal. Supply-side economics is
a feel-good cover story for a political movement
with a much harder-nosed agenda.
isn't just speculation. Irving Kristol, in
his role as co-editor of The Public Interest,
was arguably the single most important proponent
of supply-side economics. But years later,
he suggested that he himself wasn't all that
persuaded by the doctrine: "I was not certain
of its economic merits but quickly saw its
political possibilities." Writing in 1995,
he explained that his real aim was to shrink
the government and that tax cuts were a means
to that end: "The task, as I saw it, was to
create a new majority, which evidently would
mean a conservative majority, which came to
mean, in turn, a Republican majority -- so
political effectiveness was the priority,
not the accounting deficiencies of government."
effect, what Kristol said in 1995 was that
he and his associates set out to deceive the
American public. They sold tax cuts on the
pretense that they would be painless, when
they themselves believed that it would be
necessary to slash public spending in order
to make room for those cuts.
one supposes that the response would be that
the end justified the means -- that the tax
cuts did benefit all Americans because they
led to faster economic growth. Did they?
From Reaganomics to Clintonomics Ronald Reagan
put supply-side theory into practice with
his 1981 tax cut. The tax cuts were modest
for middle-class families but very large for
the well-off. Between 1979 and 1983, according
to Congressional Budget Office estimates,
the average federal tax rate on the top 1
percent of families fell from 37 to 27.7 percent.
did the tax cuts promote economic growth?
You might think that all we have to do is
look at how the economy performed. But it's
not that simple, because different observers
read different things from Reagan's economic
how tax-cut advocates look at it: after a
deep slump between 1979 and 1982, the U.S.
economy began growing rapidly. Between 1982
and 1989 (the first year of the first George
Bush's presidency), the economy grew at an
average annual rate of 4.2 percent. That's
a lot better than the growth rate of the economy
in the late 1970's, and supply-siders claim
that these "Seven Fat Years" (the title of
a book by Robert L. Bartley, the longtime
editor of The Wall Street Journal's editorial
page) prove the success of Reagan's 1981 tax
skeptics say that rapid growth after 1982
proves nothing: a severe recession is usually
followed by a period of fast growth, as unemployed
workers and factories are brought back on
line. The test of tax cuts as a spur to economic
growth is whether they produced more than
an ordinary business cycle recovery. Once
the economy was back to full employment, was
it bigger than you would otherwise have expected?
And there Reagan fails the test: between 1979,
when the big slump began, and 1989, when the
economy finally achieved more or less full
employment again, the growth rate was 3 percent,
the same as the growth rate between the two
previous business cycle peaks in 1973 and
1979. Or to put it another way, by the late
1980's the U.S. economy was about where you
would have expected it to be, given the trend
in the 1970's. Nothing in the data suggests
a supply-side revolution.
this mean that the Reagan tax cuts had no
effect? Of course not. Those tax cuts, combined
with increased military spending, provided
a good old-fashioned Keynesian boost to demand.
And this boost was one factor in the rapid
recovery from recession that developed at
the end of 1982, though probably not as important
as the rapid expansion of the money supply
that began in the summer of that year. But
the supposed supply-side effects are invisible
in the data.
the Reagan tax cuts didn't produce any visible
supply-side gains, they did lead to large
budget deficits. From the point of view of
most economists, this was a bad thing. But
for starve-the-beast tax-cutters, deficits
are potentially a good thing, because they
force the government to shrink. So did Reagan's
deficits shrink the beast?
casual glance at the data might suggest not:
federal spending as a share of gross domestic
product was actually slightly higher at the
end of the 1980's than it was at the end of
the 1970's. But that number includes both
defense spending and "entitlements," mainly
Social Security and Medicare, whose growth
is automatic unless Congress votes to cut
benefits. What's left is a grab bag known
as domestic discretionary spending, including
everything from courts and national parks
to environmental cleanups and education. And
domestic discretionary spending fell from
4.5 percent of G.D.P. in 1981 to 3.2 percent
that's probably about as far as any president
can shrink domestic discretionary spending.
And because Reagan couldn't shrink the belly
of the beast, entitlements, he couldn't find
enough domestic spending cuts to offset his
military spending increases and tax cuts.
The federal budget went into persistent, alarming,
deficit. In response to these deficits, George
Bush the elder went back on his "read my lips"
pledge and raised taxes. Bill Clinton raised
them further. And thereby hangs a tale.
Clinton did exactly the opposite of what supply-side
economics said you should do: he raised the
marginal rate on high-income taxpayers. In
1989, the top 1 percent of families paid,
on average, only 28.9 percent of their income
in federal taxes; by 1995, that share was
up to 36.1 percent.
confidently awaited a disaster -- but it failed
to materialize. In fact, the economy grew
at a reasonable pace through Clinton's first
term, while the deficit and the unemployment
rate went steadily down. And then the news
got even better: unemployment fell to its
lowest level in decades without causing inflation,
while productivity growth accelerated to rates
not seen since the 1960's. And the budget
deficit turned into an impressive surplus.
advocates had claimed the Reagan years as
proof of their doctrine's correctness; as
we have seen, those claims wilt under close
examination. But the Clinton years posed a
much greater challenge: here was a president
who sharply raised the marginal tax rate on
high-income taxpayers, the very rate that
the tax-cut movement cares most about. And
instead of presiding over an economic disaster,
he presided over an economic miracle.
be clear: very few economists think that Clinton's
policies were primarily responsible for that
miracle. For the most part, the Clinton-era
surge probably reflected the maturing of information
technology: businesses finally figured out
how to make effective use of computers, and
the resulting surge in productivity drove
the economy forward. But the fact that America's
best growth in a generation took place after
the government did exactly the opposite of
what tax-cutters advocate was a body blow
to their doctrine.
tried to make the best of the situation. The
good economy of the late 1990's, ardent tax-cutters
insisted, was caused by the 1981 tax cut.
Early in 2000, Lawrence Kudlow and Stephen
Moore, prominent supply-siders, published
an article titled "It's the Reagan Economy,
anyone who thought about the lags involved
found this implausible -- indeed, hilarious.
If the tax-cut movement attributed the booming
economy of 1999 to a tax cut Reagan pushed
through 18 years earlier, why didn't they
attribute the economic boom of 1983 and 1984
-- Reagan's "morning in America" -- to whatever
Lyndon Johnson was doing in 1965 and 1966?
the end of the 1990's, in other words, supply-side
economics had become something of a laughingstock,
and the whole case for tax cuts as a route
to economic growth was looking pretty shaky.
But the tax-cut crusade was nonetheless, it
turned out, poised for its biggest political
victories yet. How did that happen?
Second Wind: The Bush Tax Cuts As the economic
success of the United States under Bill Clinton
became impossible to deny, there was a gradual
shift in the sales strategy for tax cuts.
The supposed economic benefits of tax cuts
received less emphasis; the populist rationale
-- you, personally, pay too much in taxes
-- was played up.
began this article with an example of this
campaign's success: the creator of Mallard
Fillmore apparently believes that typical
families pay twice as much in taxes as they
in fact do. But the most striking example
of what skillful marketing can accomplish
is the campaign for repeal of the estate tax.
demonstrated, the estate tax is a tax on the
very, very well off. Yet advocates of repeal
began portraying it as a terrible burden on
the little guy. They renamed it the "death
tax" and put out reports decrying its impact
on struggling farmers and businessmen -- reports
that never provided real-world examples because
actual cases of family farms or small businesses
broken up to pay estate taxes are almost impossible
to find. This campaign succeeded in creating
a public perception that the estate tax falls
broadly on the population. Earlier this year,
a poll found that 49 percent of Americans
believed that most families had to pay the
estate tax, while only 33 percent gave the
right answer that only a few families had
while an insistent marketing campaign has
convinced many Americans that they are overtaxed,
it hasn't succeeded in making the issue a
top priority with the public. Polls consistently
show that voters regard safeguarding Social
Security and Medicare as much more important
than tax cuts.
George W. Bush has pushed through tax cuts
in each year of his presidency. Why did he
push for these tax cuts, and how did he get
might think that you could turn to the administration's
own pronouncements to learn why it has been
so determined to cut taxes. But even if you
try to take the administration at its word,
there's a problem: the public rationale for
tax cuts has shifted repeatedly over the past
the 2000 campaign and the initial selling
of the 2001 tax cut, the Bush team insisted
that the federal government was running an
excessive budget surplus, which should be
returned to taxpayers. By the summer of 2001,
as it became clear that the projected budget
surpluses would not materialize, the administration
shifted to touting the tax cuts as a form
of demand-side economic stimulus: by putting
more money in consumers' pockets, the tax
cuts would stimulate spending and help pull
the economy out of recession. By 2003, the
rationale had changed again: the administration
argued that reducing taxes on dividend income,
the core of its plan, would improve incentives
and hence long-run growth -- that is, it had
turned to a supply-side argument.
shifting rationales had one thing in common:
none of them were credible. It was obvious
to independent observers even in 2001 that
the budget projections used to justify that
year's tax cut exaggerated future revenues
and understated future costs. It was similarly
obvious that the 2001 tax cut was poorly designed
as a demand stimulus. And we have already
seen that the supply-side rationale for the
2003 tax cut was tested and found wanting
by the Congressional Budget Office.
what were the Bush tax cuts really about?
The best answer seems to be that they were
about securing a key part of the Republican
base. Wealthy campaign contributors have a
lot to gain from lower taxes, and since they
aren't very likely to depend on Medicare,
Social Security or Medicaid, they won't suffer
if the beast gets starved. Equally important
was the support of the party's intelligentsia,
nurtured by policy centers like Heritage and
professionally committed to the tax-cut crusade.
The original Bush tax-cut proposal was devised
in late 1999 not to win votes in the national
election but to fend off a primary challenge
from the supply-sider Steve Forbes, the presumptive
favorite of that part of the base.
brings us to the next question: how have these
cuts been sold?
this point, one must be blunt: the selling
of the tax cuts has depended heavily on chicanery.
The administration has used accounting trickery
to hide the true budget impact of its proposals,
and it has used misleading presentations to
conceal the extent to which its tax cuts are
tilted toward families with very high income.
most important tool of accounting trickery,
though not the only one, is the use of "sunset
clauses" to understate the long-term budget
impact of tax cuts. To keep the official 10-year
cost of the 2001 tax cut down, the administration's
Congressional allies wrote the law so that
tax rates revert to their 2000 levels in 2011.
But, of course, nobody expects the sunset
to occur: when 2011 rolls around, Congress
will be under immense pressure to extend the
same strategy was used to hide the cost of
the 2003 tax cut. Thanks to sunset clauses,
its headline cost over the next decade was
only $350 billion, but if the sunsets are
canceled -- as the president proposed in a
speech early this month -- the cost will be
at least $800 billion.
the administration has carried out a very
successful campaign to portray these tax cuts
as mainly aimed at middle-class families.
This campaign is similar in spirit to the
selling of estate-tax repeal as a populist
measure, but considerably more sophisticated.
reality is that the core measures of both
the 2001 and 2003 tax cuts mainly benefit
the very affluent. The centerpieces of the
2001 act were a reduction in the top income-tax
rate and elimination of the estate tax --
the first, by definition, benefiting only
people with high incomes; the second benefiting
only heirs to large estates. The core of the
2003 tax cut was a reduction in the tax rate
on dividend income. This benefit, too, is
concentrated on very high-income families.
to estimates by the Tax Policy Center -- a
liberal-oriented institution, but one with
a reputation for scrupulous accuracy -- the
2001 tax cut, once fully phased in, will deliver
42 percent of its benefits to the top 1 percent
of the income distribution. (Roughly speaking,
that means families earning more than $330,000
per year.) The 2003 tax cut delivers a somewhat
smaller share to the top 1 percent, 29.1 percent,
but within that concentrates its benefits
on the really, really rich. Families with
incomes over $1 million a year -- a mere 0.13
percent of the population -- will receive
17.3 percent of this year's tax cut, more
than the total received by the bottom 70 percent
of American families. Indeed, the 2003 tax
cut has already proved a major boon to some
of America's wealthiest people: corporations
in which executives or a single family hold
a large fraction of stocks are suddenly paying
much bigger dividends, which are now taxed
at only 15 percent no matter how high the
income of their recipient.
might seem impossible to put a populist gloss
on tax cuts this skewed toward the rich, but
the administration has been remarkably successful
in doing just that.
technique involves exploiting the public's
lack of statistical sophistication. In the
selling of the 2003 tax cut, the catch phrase
used by administration spokesmen was "92 million
Americans will receive an average tax cut
of $1,083." That sounded, and was intended
to sound, as if every American family would
get $1,083. Needless to say, that wasn't true.
the catch phrase wasn't technically a lie:
the Tax Policy Center estimates that 89 million
people will receive tax cuts this year and
that the total tax cut will be $99 billion,
or about $1,100 for each of those 89 million
people. But this calculation carefully leaves
out the 50 million taxpayers who received
no tax cut at all. And even among those who
did get a tax cut, most got a lot less than
$1,000, a number inflated by the very big
tax cuts received by a few wealthy people.
About half of American families received a
tax cut of less than $100; the great majority,
a tax cut of less than $500.
the most original, you might say brilliant,
aspect of the Bush administration's approach
to tax cuts has involved the way the tax cuts
themselves are structured.
Stockman famously admitted that Reagan's middle-class
tax cuts were a "Trojan horse" that allowed
him to smuggle in what he really wanted, a
cut in the top marginal rate. The Bush administration
similarly follows a Trojan horse strategy,
but an even cleverer one. The core measures
in Bush's tax cuts benefit only the wealthy,
but there are additional features that provide
significant benefits to some -- but only some
-- middle-class families. For example, the
2001 tax cut included a $400 child credit
and also created a new 10 percent tax bracket,
the so-called cutout. These measures had the
effect of creating a "sweet spot" that could
be exploited for political purposes. If a
couple had multiple children, if the children
were all still under 18 and if the couple's
income was just high enough to allow it to
take full advantage of the child credit, it
could get a tax cut of as much as 4 percent
of pretax income. Hence the couple with two
children and an income of $40,000, receiving
a tax cut of $1,600, who played such a large
role in the administration's rhetoric. But
while most couples have children, at any given
time only a small minority of families contains
two or more children under 18 -- and many
of these families have income too low to take
full advantage of the child tax credit. So
that "typical" family wasn't typical at all.
Last year, the actual tax break for families
in the middle of the income distribution averaged
$469, not $1,600.
that's the story of the tax-cut offensive
under the Bush administration: through a combination
of hardball politics, deceptive budget arithmetic
and systematic misrepresentation of who benefits,
Bush's team has achieved a major reduction
of taxes, especially for people with very
where does that leave the country?
A Planned Crisis Right now, much of the public
discussion of the Bush tax cuts focuses on
their short-run impact. Critics say that the
2.7 million jobs lost since March 2001 prove
that the administration's policies have failed,
while the administration says that things
would have been even worse without the tax
cuts and that a solid recovery is just around
this is the wrong debate. Even in the short
run, the right question to ask isn't whether
the tax cuts were better than nothing; they
probably were. The right question is whether
some other economic-stimulus plan could have
achieved better results at a lower budget
cost. And it is hard to deny that, on a jobs-per-dollar
basis, the Bush tax cuts have been extremely
ineffective. According to the Congressional
Budget Office, half of this year's $400 billion
budget deficit is due to Bush tax cuts. Now
$200 billion is a lot of money; it is equivalent
to the salaries of four million average workers.
Even the administration doesn't claim its
policies have created four million jobs. Surely
some other policy -- aid to state and local
governments, tax breaks for the poor and middle
class rather than the rich, maybe even W.P.A.-style
public works -- would have been more successful
at getting the country back to work.
the tax cuts are designed to remain in place
even after the economy has recovered. Where
will they leave us?
the basic fact: partly, though not entirely,
as a result of the tax cuts of the last three
years, the government of the United States
faces a fundamental fiscal shortfall. That
is, the revenue it collects falls well short
of the sums it needs to pay for existing programs.
Even the U.S. government must, eventually,
pay its bills, so something will have to give.
numbers tell the tale. This year and next,
the federal government will run budget deficits
of more than $400 billion. Deficits may fall
a bit, at least as a share of gross domestic
product, when the economy recovers. But the
relief will be modest and temporary. As Peter
Fisher, under secretary of the treasury for
domestic finance, puts it, the federal government
is "a gigantic insurance company with a sideline
business in defense and homeland security."
And about a decade from now, this insurance
company's policyholders will begin making
a lot of claims. As the baby boomers retire,
spending on Social Security benefits and Medicare
will steadily rise, as will spending on Medicaid
(because of rising medical costs). Eventually,
unless there are sharp cuts in benefits, these
three programs alone will consume a larger
share of G.D.P. than the federal government
currently collects in taxes.
Auerbach, William Gale and Peter Orszag, fiscal
experts at the Brookings Institution, have
estimated the size of the "fiscal gap" --
the increase in revenues or reduction in spending
that would be needed to make the nation's
finances sustainable in the long run. If you
define the long run as 75 years, this gap
turns out to be 4.5 percent of G.D.P. Or to
put it another way, the gap is equal to 30
percent of what the federal government spends
on all domestic programs. Of that gap, about
60 percent is the result of the Bush tax cuts.
We would have faced a serious fiscal problem
even if those tax cuts had never happened.
But we face a much nastier problem now that
they are in place. And more broadly, the tax-cut
crusade will make it very hard for any future
politicians to raise taxes.
how will this gap be closed? The crucial point
is that it cannot be closed without either
fundamentally redefining the role of government
or sharply raising taxes.
will, of course, promise to eliminate wasteful
spending. But take out Social Security, Medicare,
defense, Medicaid, government pensions, homeland
security, interest on the public debt and
veterans' benefits -- none of them what people
who complain about waste usually have in mind
-- and you are left with spending equal to
about 3 percent of gross domestic product.
And most of that goes for courts, highways,
education and other useful things. Any savings
from elimination of waste and fraud will amount
to little more than a rounding-off error.
let's put a few things back on the table.
Let's assume that interest on the public debt
will be paid, that spending on defense and
homeland security will not be compromised
and that the regular operations of government
will continue to be financed. What we are
left with, then, are the New Deal and Great
Society programs: Social Security, Medicare,
Medicaid and unemployment insurance. And to
close the fiscal gap, spending on these programs
would have to be cut by around 40 percent.
impossible to know how such spending cuts
might unfold, but cuts of that magnitude would
require drastic changes in the system. It
goes almost without saying that the age at
which Americans become eligible for retirement
benefits would rise, that Social Security
payments would fall sharply compared with
average incomes, that Medicare patients would
be forced to pay much more of their expenses
out of pocket -- or do without. And that would
be only a start.
this sounds politically impossible. In fact,
politicians of both parties have been scrambling
to expand, not reduce, Medicare benefits by
adding prescription drug coverage. It's hard
to imagine a situation under which the entitlement
programs would be rolled back sufficiently
to close the fiscal gap.
closing the fiscal gap by raising taxes would
mean rolling back all of the Bush tax cuts,
and then some. And that also sounds politically
the time being, there is a third alternative:
borrow the difference between what we insist
on spending and what we're willing to collect
in taxes. That works as long as lenders believe
that someday, somehow, we're going to get
our fiscal act together. But this can't go
on indefinitely. Eventually -- I think within
a decade, though not everyone agrees -- the
bond market will tell us that we have to make
a choice. vIn short, everything is going according
the looming fiscal crisis doesn't represent
a defeat for the leaders of the tax-cut crusade
or a miscalculation on their part. Some supporters
of President Bush may have really believed
that his tax cuts were consistent with his
promises to protect Social Security and expand
Medicare; some people may still believe that
the wondrous supply-side effects of tax cuts
will make the budget deficit disappear. But
for starve-the-beast tax-cutters, the coming
crunch is exactly what they had in mind.
What Kind of Country? The astonishing political
success of the antitax crusade has, more or
less deliberately, set the United States up
for a fiscal crisis. How we respond to that
crisis will determine what kind of country
Grover Norquist is right -- and he has been
right about a lot -- the coming crisis will
allow conservatives to move the nation a long
way back toward the kind of limited government
we had before Franklin Roosevelt. Lack of
revenue, he says, will make it possible for
conservative politicians -- in the name of
fiscal necessity -- to dismantle immensely
popular government programs that would otherwise
have been untouchable.
Norquist's vision, America a couple of decades
from now will be a place in which elderly
people make up a disproportionate share of
the poor, as they did before Social Security.
It will also be a country in which even middle-class
elderly Americans are, in many cases, unable
to afford expensive medical procedures or
prescription drugs and in which poor Americans
generally go without even basic health care.
And it may well be a place in which only those
who can afford expensive private schools can
give their children a decent education.
as Governor Riley of Alabama reminds us, that's
a choice, not a necessity. The tax-cut crusade
has created a situation in which something
must give. But what gives -- whether we decide
that the New Deal and the Great Society must
go or that taxes aren't such a bad thing after
all -- is up to us. The American people must
decide what kind of a country we want to be.
Krugman is a Times columnist and a professor
at Princeton. His new book is "The Great Unraveling:
Losing Our Way in the New Century."
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