Well, it's over. Tax season officially ended yesterday, as thousands of Americans dropped their 1040s in the mailbox and kissed significant portions of their income goodbye. This year though, citizens were comforted by talk of President Bush lowering taxes and were not as irate about forking over their cash as usual.
But be afraid. Be very afraid.
While Bush now is on the verge of getting a $1.6 trillion tax cut passed through Congress, the frightening truth is that it may be more harmful than beneficial.
Bush's promises of a $1.6 trillion reduction in taxes paid are by no means piddling in scope. His plan is the largest proposed in recent years, and in some ways, one could find merit in what he intends: namely, returning the public surpluses to the people.
Under President Clinton, the budget ran a huge surplus, as tax revenues exceeded the money spent by the government. The original idea behind incurring a surplus was that it would go toward paying down the excessive national debt that had been accumulating ever since President Reagan's era of tax cuts and huge deficit spending.
With the success of Clinton's plan, the national debt already has been reduced considerably, and it is projected to disappear completely by 2006. The drop in the national debt is evident in the near departure of 30-year U.S. Treasury bonds from the market.
These 30-year bonds were once the primary instrument through which the federal government borrowed money. However, as the public surplus was used to pay back existing debt obligations from the market, the 30-year treasuries bonds nearly disappeared.
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In general, Clinton's motivations for reducing the national debt were justified. Reducing the national debt cuts the premiums priced into many mortgages and loans because less money needs to be raised to pay back the debt. Such exceptional lending conditions contributed to the economic success of the United States over the last decade. However, once the surpluses reduce the national debt to zero, serious problems might arise.
The argument made by Alan Greenspan and other economists was that if these surpluses were allowed to continue they would not only reduce the national debt to zero, but they would then have to be used to purchase other debt obligations and financial assets such as corporate bonds.
Now it might not be a huge problem if the tax surpluses started chasing bonds issued by municipal or state governments. However, if the surplus is used to purchase corporate debt, stocks or other non-governmental interest bearing assets, the government will, in effect, intervene directly in the financial markets - an action as disturbing to most advocates of a free-market capitalism as Christopher Walken is to children. Cutting taxes prevents this, because it gives the unneeded public funds back to the people.
Yet, this argument assumes that the surpluses won't be needed for anything but reducing the national debt. When Social Security and Medicare start to collapse financially, the surplus will be needed desperately, and if Bush cuts taxes now, it won't be there.
The projected surplus figures put out by the Congressional Budget Office neglect to take these issues into account. CBO forecasts have a history of unreliability, and to base such a huge tax cut plan on their dependability is downright reckless.
Another problem with Bush's tax cuts is his attempts to justify them with the impending economic slowdown. On numerous occasions, Bush has stated that a tax cut will jump start the slowing economy. Though this argument might have some economic merit if you are economist John Maynard Keynes, trying to use fiscal policy to shape and control economic growth is, in reality, almost impossible.
The problems with fiscal policy are wrapped up in their delayed implementation. Though Bush's tax plan might be increasingly popular in Congress, debate over it will continue for quite some time. When and if the plan eventually is passed, it still may take years before it has significant effects at the individual or firm level.
So, let's say GDP slows down dramatically this year, maybe, to a positive average growth of 0.5 percent. If the tax cuts start taking effect next year, they might spur growth a bit and cause increases in GDP for the following year. But, what if the economy doesn't slow down as much as expected? Or what if it experiences a sharp rebound in the next few quarters?
The tax cuts, when they take effect a year later, won't be counter-cyclical anymore, but will add to the economic expansion. This might be nice, but if you care at all about price stability, the tax cuts could become increasingly inflationary, hurting everyone in the long run.
But, perhaps the worst part of Bush's tax plan is its failure to benefit anyone but the wealthiest of wealthy. A recent analysis by Citizens for Tax Justice, a non-partisan, non-profit research organization, is littered with atrocious statistics that support this claim.
According to the study, taxpayers in the lowest 60 percent of the income scale only would get an average annual reduction of $256. The bottom 20 percent of taxpayers would only see, on average, $47 per year. And, perhaps most striking of all, the wealthiest 1 percent of all taxpaying Americans would get 45 percent of the total tax cuts, or approximately $54,480 per year, in return.
Now, one could argue that because of our progressive tax system the wealthiest Americans are paying more into the system and should benefit more from a tax cut.
However, the bottom line is that, on a percentage basis, the wealthiest few will be the only group to benefit considerably from the proposed tax cuts.
In the end, it would not be surprising if Bush's tax plan does not make people better off. Though he might have the right idea in that the plan would return public surpluses to the people, the plan's scope is based on unreliable forecasts and faulty economic analysis. Worst of all, it could cause inflation, a demise to Social Security and Medicare, and its returns are littered with inequity.
And that's the real bottom line.
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