President Bush has shown a remarkable willingness to use almost any argument to push his tax cut. A booming economy or a lagging economy—no matter, the tax cut is the answer. The tax package was supposedly designed to help the single-mom waitress, even though she would get only a dollar or two per week, while the typical household in the top 1 percent of the income distribution would have taxes reduced by twice the entire annual income of the waitress. Cutting the top rate is supposed to target small businesses, even though only 1.4 percent of small businesses actually face that rate.
The president’s hawking of his tax cut evokes images of the proverbial realtor who always thinks it is a good time to buy a house, or a stockbroker who thinks it is always a good time to buy a stock. The diabolical genius of the president’s plan, of course, is that every cause and development—no, every conceivable cause and development—seems to justify not only a tax cut in general, but a cut of the exact size and structure of a particular plan designed in November 1999 to fend off Steve Forbes.
Now, however, we have reached a new plateau. Recently, the president stated that Congress needs to pass the tax relief package—and, as Dave Barry would say, I am not making this up—to help people pay the higher energy bills they are likely to face soon. Clearly, there is some logic to the view that giving funds to all households immediately would help them pay for higher energy costs or other things. But that isn’t what the president’s tax cut would do.
Only about $100 billion is proposed for an immediate stimulus—an idea developed in Congress, not the White House. The remaining $1.25 trillion—the tax cuts the president proposed—have absolutely nothing to do with making energy affordable now. The president’s proposals would not put much money in anyone’s pockets right now, because they are phased-in very slowly. And they would give no benefits at all to 27 percent of households, including 75 percent of those with incomes in the bottom quintile, even though the rise in energy prices hurts them the most. The old justification for the distorted distributional effects was that poor households didn’t pay any income tax and so should not participate in an income tax cut. But if the goal is now to defray rising energy costs, why should poor households be excluded? To the extent that the plan does focus on energy costs at all, it seems best designed to subsidize the energy bills of rich people in 2011.
And, of course, a central feature of the president’s plan is to abolish the estate tax. I thought long and hard about that, but I could not convince myself that abolishing the estate tax would help people pay their energy bills. The best argument I could muster was that maybe the president thought that cutting the estate tax would reduce the cost of dying and thereby increase the number of deaths. That would reduce the population and reduce energy demand and lead to lower energy prices. But I did not find that very convincing. After all, it goes beyond what even Art Laffer or Jack Kemp would claim is the likely supply-side impact of tax policy.
So, even normalizing for the rest of the administration’s arguments, I thought this claim was a new low. In search of a better answer, I appealed to a number of leading economists to explain it to me. (I did not think to ask any lawyers, but the legal perspective would be of interest, too.) The answers are in, and readers may judge for themselves:
- You dork, it’s obvious. When holding a wake or sitting shiva, one has lots of people over during the evening. One has to keep the lights on and cook food, and people drive around a lot to go visit each other. That all adds up. And the death tax makes it worse. Next thing, you’ll be asking why paying farmers not to grow food is called agricultural policy.
- W. is advised by experts who understand that energy policy is extremely complex and technical. With no estate tax, heirs will be much more apt to use highly energy-efficient crematoria for their loved ones. Some will even recover energy to produce steam heat for the mortuary and neighboring businesses. Others will convert the heat into electricity, which would lower electric bills in California and many other states. You probably also don’t understand how repealing the estate tax would reduce global warming.
- Oh, if I could clarify everything rattling around your feeble brain. . . . Abolishing the estate tax will raise saving and reduce consumption and thereby reduce the amount that rich people spend on energy.
- The rich guys will generate more wealth and that new wealth will enhance technology and that new technology will lead to energy-saving discoveries and those energy-saving discoveries will lower demand for energy. And, my friend, lower demand means lower prices. It’s an immediate causal chain.
- People who have enough wealth to be subject to the estate tax right now could borrow money to pay their energy bills and then pay back the loan with the funds they would otherwise have had to use to pay the estate tax.
- The wealthy will be so overcome with happiness they will have heart attacks and the heirs will then be able to pay their energy bills.
Maybe an alert Tax Notes reader has a better answer. Until then, the president’s tax cut remains an answer in search of a question. The supreme irony is that although the plan was originally packaged as "a tax cut with a purpose," the purpose keeps changing while the tax cut stays the same. The president’s continuing efforts, 18 months later, to find a coherent rationale for the plan reveal how vacuous the arguments for large-scale tax cuts really are.
The author thanks the economists who participated in his survey.