Economics vs. Politics
by Thomas Sowell
(January 14, 2003)
The familiar chorus of "tax cuts for the rich" has begun to ring out across the political landscape, in the wake of President Bush's proposals to boost the economy. The time is long overdue to expose some of the fallacies folded up inside that phrase.
The dirty little secret is that those defined as "the rich" by liberal politicians include most of the American people, in the course of their lifetimes. Even people who were in the bottom 20 percent in income in 1975 were also in the top 20 percent at some point over the next two decades.
There is nothing mysterious about the fact that most people start out making beginners' salaries and their incomes rise over the years until they reach a peak, usually in their 40s or 50s. Even then, they are not rich by anyone's standard, except that of politicians who want to tax them heavily.
Those who are crying "tax cuts for the rich" never define where "rich" begins. It takes a household income of just $83,500 to be in the top 20 percent. A couple of people making a little over 40 grand apiece are not rich. Even to make the top 5 percent requires a household income of just over $150,000. Seventy-five grand apiece is a nice income, but you are not going to buy a yacht or a Rolls Royce with that.
When politicians talk about "the rich" that they want to tax, send not to know for whom the bell tolls. It tolls for thee -- if not now, then at some other point in your life.
Talk about how tax cuts will "give" money to the rich is very misleading. Thinking about the economy solely in terms of money ignores the fact that income and wealth consist of real things -- food and shelter, automobiles and airplanes, factories and farms.
To boost the economy means increasing real production. Boosting the economy requires policies that change people's behavior, causing more people to be hired, more work to be done, and more production to result.
The point of cutting taxes on dividends is not -- repeat, not -- to get dividend recipients to spend more money, if and when they receive those dividends somewhere down the road. The point is to get them to invest right now, creating jobs right now, so that employment will go up and real output will rise.
Those who think solely in terms of money prefer to extend the period for receiving unemployment benefits. But paying people longer for not working makes no sense if you want more output.
Perhaps the most ridiculous of all the economic fallacies produced by politicians is that "tax cuts for the rich" are supposed to cause money to "trickle down" to those in lower income brackets. This is a pure straw man.
As someone who spent the first decade of his career researching, teaching, and writing about the history of economic ideas, let me assure you that there is no such thing as a "trickle-down" theory. No economist of any school of thought has ever proposed any such thing.
Cuts in tax rates are intended to do what past tax cuts have done before -- under both John F. Kennedy and Ronald Reagan -- namely, cause an increase in real economic activity. In both cases, the government received more tax revenues, as a result of rising economic activity, than it had received when tax rates were higher.
That is why it is so misleading to express a tax cut in terms of so many billions of dollars. The government can only change tax rates. How much revenue will increase or decrease is something they will find out later.
Tax cuts should be immediate, if you want results to be immediate. Stretching out the tax cuts, as was done initially in order to get political support, gives people incentives to wait before investing. Waiting is not what you want.
The only people whose taxes can be cut are people who are paying taxes. This simple and obvious fact gets overlooked by those who are busy crying "tax cuts for the rich." Tax rates are so skewed that a relatively small percentage of the population pays a huge proportion of the taxes at any given time.
That ensures that any serious tax cut will qualify as "tax cuts for the rich" -- as defined by liberals. How they get away with this phony stuff is one of the mysteries of our time.
Thomas Sowell has published a large volume of writing. His dozen books, as well as numerous articles and essays, cover a wide range of topics, from classic economic theory to judicial activism, from civil rights to choosing the right college.
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