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Bad Tax Bill


We’ve been had. By a Bush. Again.

The tax cut is a joke. After all the blather about how the surplus belongs to us, not the government, the resulting tax-cut bill is minuscule, ultra-gradual, and now scheduled to expire in 10 years! Republican and Democrat members of Congress, most of whom never saw a dollar they didn’t think was theirs, took advantage of President Bush’s desperation to sign a tax-cut bill — any tax-cut bill — and handed us this fiasco.

The promise to cut the 15-percent bracket to 10 percent was abandoned. Instead, there is a new 10-percent bracket for married couples’ first $12,000. After that, the take is still 15 percent up to $45,000. The president pledged to cut the top 39.6-percent bracket to 33 percent — which would have failed to roll back his father’s 1990 promise-breaking tax cut — but that pledge was radically modified. The top rate will be reduced to 35 percent by 2006 and to 33 or 34 percent four years later. Meanwhile, the personal exemption and itemized deduction will be phased out for people in the top bracket.

There are many other provisions involving child credits, 401(k)s, and the like. This is surely not a tax-simplification bill. And it isn’t much of a tax-reduction bill either. Face it, $1.3 trillion over a decade isn’t much money. The government will rake in at least $25 trillion in that time. The big spenders in Washington complain that the “price tag” is really $1.9 trillion, or more if you count unpaid interest on the national debt. Big deal.

The whole matter is a big mass of fallacy. We should know by now that cutting tax rates does not cost the treasury money; it makes money. High tax rates discourage productive activity, leaving less for the government to tax. Slashing tax rates induces an investment boom, higher profits, and higher incomes — more for the government to tax.

Not that that is a good thing. Remember, taxation is the politicians’ way of stealing. If government revenues go up after a tax cut, it means taxes weren’t cut enough. This is the point that not enough people get: Money in the government’s hands is not something to rejoice over. Money in the government’s hands is nothing more than consumption directed by politicians. If the money is left in the hands of its producers, we get consumer-directed investment. Who should be making the money decisions: short-sighted, reelection-oriented career politicians who rarely suffer personally when they squander hundreds of billions, or the people who actually take risks and produce wealth by serving consumers? It’s a no-brainer.

Another point that needs to be driven home often is that tax cuts don’t cost the American people anything. If the government abstains from taking money from you, how can that be construed as costly? You’re being permitted to keep your own money! So when the big-taxers complain that a tax cut will “cost” some number of trillions of dollars, remember two things: the government’s take may actually rise and the only cost, if any, is to the government and its clients, who aren’t entitled to the money anyway.

And please, let’s not hear any more grousing about how most of the cuts go to higher-income people. That’s who pays most of the taxes! They also do most of the saving and investing, which raises the living standards of the rest of us. The bottom 50 percent of earners account for only 4 percent of the income-tax take.

There is one thing we know for sure. This is the end of the tax-cut discussion in Washington. A president gets one shot, if that much, at cutting taxes. Mr. Bush had his chance. He blew it.

I said it was the end of the tax-cut discussion. There is never an end to the tax-increase discussion. Don’t think for a moment that because this bill has passed, taxes can’t be raised during the next four years. They can and well might be. Keep an eye on Sen. John McCain.

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    Sheldon Richman is former vice president and editor at The Future of Freedom Foundation and editor of FFF's monthly journal, Future of Freedom. For 15 years he was editor of The Freeman, published by the Foundation for Economic Education in Irvington, New York. He is the author of FFF's award-winning book Separating School & State: How to Liberate America's Families; Your Money or Your Life: Why We Must Abolish the Income Tax; and Tethered Citizens: Time to Repeal the Welfare State. Calling for the abolition, not the reform, of public schooling. Separating School & State has become a landmark book in both libertarian and educational circles. In his column in the Financial Times, Michael Prowse wrote: "I recommend a subversive tract, Separating School & State by Sheldon Richman of the Cato Institute, a Washington think tank... . I also think that Mr. Richman is right to fear that state education undermines personal responsibility..." Sheldon's articles on economic policy, education, civil liberties, American history, foreign policy, and the Middle East have appeared in the Washington Post, Wall Street Journal, American Scholar, Chicago Tribune, USA Today, Washington Times, The American Conservative, Insight, Cato Policy Report, Journal of Economic Development, The Freeman, The World & I, Reason, Washington Report on Middle East Affairs, Middle East Policy, Liberty magazine, and other publications. He is a contributor to the The Concise Encyclopedia of Economics. A former newspaper reporter and senior editor at the Cato Institute and the Institute for Humane Studies, Sheldon is a graduate of Temple University in Philadelphia. He blogs at Free Association. Send him e-mail.