A Tax Cut…

William G. Gale
William G. Gale The Arjay and Frances Fearing Miller Chair in Federal Economic Policy, Senior Fellow - Economic Studies, Co-Director - Urban-Brookings Tax Policy Center

July 20, 1999

Rep. Bill Archer (R-Tex.) has long been an eloquent and impassioned advocate of lower taxes and smaller government. But his most recent claims [“Don’t Let Washington Spend It,” op-ed, July 14] are based on faulty “facts,” Orwellian doublespeak and misleading logic. The case for a major tax cut of any kind is weak, but the case for the cuts he’s pushing is even weaker.

Mr. Archer correctly notes that aggregate federal tax revenues are the highest they have been since World War II. Then, however, he goes on to claim that the typical American family pays 38 percent of its income in taxes. This figure, based on a Tax Foundation calculation, actually refers to the typical two-earner family, which has substantially more income and therefore a higher average tax burden, than the typical family.

More important, that estimate, which uses earlier years’ data, is based on a study that significantly understates income and overstates taxes—for example, as things now stand the family would receive child credits that reduce their taxes by $1,000, but these are not included in the study. The estimate also includes state and local taxes, but if taxpayers choose to support state and local programs via taxes, that hardly seems an argument for cutting federal taxes.

Data from the Congressional Budget Office and the Treasury Department consistently show that Americans at most points in the income distribution are paying less in federal taxes in 1999 than they would have with similar income over the past 20 to 30 years, and that the typical family will pay less than 19 percent of its income in federal taxes. Estimates from the Joint Committee on Taxation (JCT) show even smaller tax burdens. Aggregate tax revenues have increased largely because higher-income households, which face higher tax rates, have experienced large increases in income in recent years.

Archer claims that “broad-based tax relief is the answer.” George Orwell would be proud. The tax cuts Archer is advocating would do next to nothing for typical households and would instead lavish tax cuts on the wealthy.

According to the JCT, the proposed 10 percent across-the-board cut in income tax rates would reduce taxes by more than $9,200 per year for taxpayers who make more than $200,000—the top 1.8 percent of the income distribution. For taxpayers in the bottom 50 percent, the average tax cut would be a whopping $1 per week. Similarly, the proposed estate tax cuts would affect only the very wealthiest 1.5 percent of decedents. Archer’s capital gains cuts would provide about three-quarters or more of their benefits to taxpayers with incomes above $100,000.

Truly broad-based tax relief would focus on the three-quarters of taxpayers who pay more in payroll taxes than income taxes. Significant relief could be provided via a refundable income tax credit for payroll taxes, but Archer has vociferously opposed such ideas in the recent past and has even sought to cut back on the earned-income credit.

Archer then invokes the hallowed name of Alan Greenspan, who has noted that tax cuts are less bad than spending increases. But Archer fails to note that Greenspan, like most responsible observers, believes that paying down the public debt is the best use of the surplus. Greenspan also just engineered an interest rate increase to slow down a booming economy. The stimulative effects of a tax cut on consumer spending could well be offset by further Fed action.

Archer argues that the real debate is between advocates of big government and small government. Maybe, but cutting taxes won’t reduce the size of government: We learned that in 1981. And even if it did, why should we think that tax cuts for the wealthy restrict the size of government more effectively than cuts for middle- and low-income households?

There are other, effective ways to cut government or preserve the surplus if that is what Archer really wants to do. For example, if he believes the “lock-box” preserves the trust fund for Social Security, why not have an equivalent lock-box that preserves the rest of the budget surplus for debt repayment?

Archer overlooks an equally important debate: that between fiscally responsible and irresponsible government. Our future Social Security and Medicare obligations did not rain down like manna from heaven; they were legislated by Congresses and signed into law by presidents. The real concern should be focused on those politicians of short foresight who are willing to promise massive future benefits to voters but are unwilling to live with the taxes needed to pay for them.

Archer is surely correct about two things, but draws the wrong conclusions. First, the nation is enjoying a rare combination of good fortune: a strong economy, a short-term budget surplus and the lowest tax burdens on most households in at least two decades. But if we cannot address our long-term imbalance in Social Security and Medicare under these conditions of strength, and before the baby boomers retire, it is difficult to see how these problems will ever be addressed.

Rather than squandering our good fortune on unnecessary tax cuts that would be unproductive and would make it harder to solve the long-term problems, we should use this historic opportunity to provide durable repairs to our nation’s most cherished programs while we can still afford to do so.

And the second thing the chairman of the House Committee on Ways and Means has right? Pulling for tax cuts is like rooting for the Cowboys: irresponsible and overrated.