The Father, The Son, And The Holy Tax Cut

The archetypal American politician works the rope lines at small town parades, shaking hands and kissing babies. Politicians also like to give out tokens of their appreciation to the constituency, party favors and earmarks usually go over well. This is a time-honored ritual that is not without redeeming qualities. Representatives serve at the pleasure, and for the benefit, of the citizens in their districts. Good constituent service, and the ability to remember someone’s name, go along way with the average voter.

Other redeeming qualities long appreciated, have fallen under scrutiny in these volatile times. Earmarks, as an example, used to be a measuring stick for the effectiveness of a member of Congress. The items now derisively referred to as pork-barrel spending are nothing more or less than targeted line items; projects in the district that allow federal taxes harvested from the area to return to the area. Having spent some time looking at earmarks myself, I have seen some crazy ones. But most voters would be surprised at the rather mundane and mostly reasonable list of projects completed with federal tax dollars. Far from the vagaries of the main body of the federal budget, earmarks represent transparent spending that is easy to track and evaluate.

In our declining wisdom as a democracy, we have chosen to vilify spending, and elevate the vague notion of fiscal responsibility to the throne of governance. It is one of the defining contradictions of our times that so-called pro-business interests have spent so much effort discouraging national spending in both physical and human infrastructure; spending that leverages the economies of scale that all real pro-business folks understand and target in their own enterprise. Instead of responsible, targeted spending, supported by a reasonable and honest tax code, we have taken to accepting the 21st century version of the politicians’ handshake and baby kissing: the promise of lower taxes.

Now I am quite sure that no one reading this essay would mind lower taxes; for myself, I would love to omit them altogether. That kind of hope, however, is a childish hope. It is the hope of teenagers everywhere; all of the infrastructure Mom and Dad can provide, with none of the responsibility.We adults, however, are lapping it up; promise a tax cut, and you can have our vote. Tell us the other bum in the election will raise our taxes, and we will burn the fool in effigy.

Throughout this nation, at a time when the federal tax burden is at its lowest point, forces in this country are hard at work fomenting a tax rebellion. The U.S. Chamber of Commerce in particular has made a mission out of whining about business taxes, despite the fact that the effective tax rates on corporations are minuscule. On a second glance though, we may need a tax rebellion, because there is a segment of the United States that is not pulling their weight. Businesses and the wealthiest Americans benefit from the labor and consumption of the American working class. The myth of businesses as the sole creator of wealth has driven a culture of loopholes and outright cuts that ensure those corporations and individuals who have gained the most benefit from the American marketplace get the biggest breaks when the bill comes due.

And the bill is due now. America’s physical infrastructure is beginning to fail, and the human capitol, once the world’s strongest, has been overtaken by other nations with more vigorous and well-funded educational systems. Our thirty year push towards supply-side economics, the concept where cuts at the top spur powerful economic progress, has yielded little in the way of results. We don’t need to return to the punitive top marginal rates that existed from WWII through the 1970’s, but we do need to address the disparity in the chart above.

A valid question becomes, should we address this disparity and the resulting shortfall in investment now, at a time of tenuous economic recovery. In general, the answer to that question is no. With regard to the much ballyhooed Bush tax cuts, the answer is yes. The expiration of those cuts would add 3% to the bills of those making more than $209,000 in taxable income. Almost 5% would be added to the bills of those above $373,000 in taxable income.

I add the emphasis to taxable income, because for those politicians and pundits that believe tax cuts are akin to the Lord’s Prayer, a very unlikely view of the American landscape exists. Precious few small businesses, of the type most of us would identify with that label, generate taxable income in excess of $200,000. Corner markets, pizza parlors, hair salons, craft stores, boutiques, Avon ladies, independent contractors…none of these are likely to reach that plateau. Even as a sole proprietor, and cutting no corners on the filing and writing off no expenses or material, Joe the Plumber might be expected to reach $120,000 in gross income for a year.

But no amount of patient explanation will do for some addicted to the twin notions that tax cuts are God’s promise, and the government is some distant set of aliens in a cave. After more than a year, I have yet to hear from anyone who could explain how tax cuts could help individuals with no jobs, and businesses with no customers. If you have no income, income tax cuts aren’t worth the paper they are printed on. But they do sound nice, and some are earning money…

Tax cuts do have one absolutely unassailable effect on the U.S. economic picture; they are massive drivers of the deficit and debt. The graph at left is particularly telling (especially to those sold on the notion that President Obama is the force driving the deficit. There are, right now, Republicans (and some Democrats) trying to tell the voters that tax cuts don’t add to the debt. Folks, we all know that when we make less money, our debt goes up unless when spend less to compensate. None of those politicians trying to purchase your good will by extending tax cuts is willing to say what spending they will cut to support them.

For the next three months, the conventional media, pundits, and know-it-all bloggers like me will bombard you with thoughts and suggestions about the mid-term elections. My one great plea, is that we Americans, all of us, keep our ears open and our calculators close at hand. If you like the idea of tax cuts that a politician is floating, just make sure that you know what will be cut to pay for them. If, like me, you are a proponent of deficit spending in a recession, understand that the debt accrued will, at some point, begin to introduce inflation into the economy. In other words, go deeper than the slogans, and don’t be taken in by the smiling politician kissing your baby; get your kid back and do the math yourself.

The Rational Middle is listening…

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