Bad Math Makes Bad Economics
Most attackers of Bob Dole’s new economic program claim that it would increase the deficit. It almost certainly would. By 1999, if fully phased in by then, the reduction in tax revenues from the 15% cut alone would come to about $120 billion per year. The losses from the $500 child credits, cuts in capital gains taxes, expanded IRAs and reduction of taxes on moderately upper-income Social Security recipients would cost another $50 billion or more.
Dole claims that at least a quarter of the lost tax revenues will be made up out of a more prosperous economy. But Dole has also promised to make up for revenue losses by dramatically reducing government expenditures, thus reducing total spending and attenuating any demand-side impact that might come from greater purchasing power.
This would leave only the dubious supply effects of inducing people to work harder and hence earn more that can be taxed. Dole himself, however, indicated that higher taxes were forcing people to work more to make ends meet. This would imply that lowering taxes would reduce the supply of labor. At best, the Dole program would have little or no chance of increasing tax revenues.
With defense, Social Security and further reductions in Medicare said to be off the table, only an illusionist can see how $150 billion or more can be cut from remaining government expenditures. What would it be? The Federal Aviation Agency? Money for research on cancer, heart disease and AIDS? Still more cuts in the safety net for the poor? Reduced outlays to protect our environment, improve our airports and keep our roads and bridges from falling into decay? Dole would eliminate the “IRS as we know it” and presumably cut funds for the agency along the way. That would invite more tax-cheating and even greater losses in tax revenues.
But despite all the loud noise about deficits, that is not really the problem. The deficit this year is forecast at $117 billion, far down from its 1992 total of $290 billion and less than 1.6% of GDP now as against 4.7% then. We already have the lowest relative deficit of any major industrial nation, and the plan to balance the budget by 2002 would reduce the deficit further. As those reductions cut further into the meat and the essential lifeblood of the economy, we may well find that deficit reduction has gone too far.
What is wrong with the Dole program is that it would deprive the government of the tax revenues to finance all of the things necessary to really spur growth: expansion of the earned-income tax credit to get more people off welfare and out of idleness into jobs; more, not less investment in research, training, education and health; investment in our public infrastructure, without which private business is hamstrung; investment in crime prevention and internal security, not just prisons, and protection of the air and water and land on which all of us depend.
The major tax cuts proposed by Dole outrageously favor the rich while offering crumbs to the middle class and virtually nothing to the poor. A 15% cut in income taxes would reduce tax rates by 2.25% for those in the 15% tax bracket with taxable incomes up to $31,250, according to the 1995 tax schedule. Those with taxable incomes of more than $256,000 in the 39.6% bracket would find their marginal tax rates reduced by 5.94% points.
The halving of the maximum capital gains tax rate would be of little benefit to the $35,000 family of four cited by Dole, since if that family is typical it earns less than 11% of its income from capital gains. Those earning more than $1 million receive about a quarter of their income from capital gains.
What this adds up to is that Dole’s $35,000, middle-income family of four, even if it finds its taxes of about $3,000 cut by 56% or $1,680, as he claims, might observe that the family earning a million dollars will typically find its taxes reduced by around $80,000. The 5.94 percentage point cut would save $44,000 on the family’s $750,000 of ordinary income, and the 14 percentage point cut would save another $35,000 on the millionaire family’s average $250,000 of capital gains. The millionaire family hardly needs the $500 per child additional tax break, or any of the other boons in the Dole package. That family of four would still find the Treasury taking more than $4,000 in payroll taxes from wages and as matching contributions by employers.
And millions of Americans too poor to pay income taxes would get no benefit whatsoever from the Dole cuts. Unless its income is more than $16,000, a family of four is not likely to have any income taxes to pay--but it would still suffer those payroll taxes that Dole would not relieve. The reductions in income tax rates and nonrefundable credits would not help, either; nor would they help those struggling at even the new minimum wage of $5.15 an hour, which would offer an annual income of $10,700 to someone working 40 hours a week for 52 weeks of the year. And the Dole cuts would certainly do nothing to help the mother with three children whom we are trying to get off welfare.
The Dole program may re-invigorate the Republican faithful, who seem most interested in tax cuts, and perhaps especially tax cuts for the rich. It is very hard to see how his plan would not do more harm than good for the average American or the economy as a whole.
