The Phantom Tax Cut

By George P. Brockway, originally published January 17, 1995
1995-1-30 The Phantom Tax Cut title

TWO YEARS AGO, reporting on the Little Rock “economic summit” (remember that?), I wrote sadly: “It was a dismal performance. For it was the supply side all over again. To be sure, the words ‘supply side’ could be read on no one’s lips; no one traced a laughable curve on a cocktail napkin; and the ideas were restated less breathlessly than Jack Kemp does it, and with a profundity beyond the capabilities of the Great Communicator. But if you had your eyes closed, there were times you could easily have imagined you were listening in on a planning session of Ronald Reagan’s early advisers.”

I was nevertheless confident that common sense and common decency would prevail more often in the Clinton White House than during the Reagan and Bush years, and that this would “make the Clinton Presidency worthy of being remembered.” Cheering the reiterated plea for full funding of Head Start, I concluded that the low-tech (and hence demand stimulating) operation would quickly get significant amounts of money circulating, and therefore would “do more to stimulate the economy this year, and every year of the program’s existence, than the schemes to restore the investment tax credit, to rehabilitate IRAs, and to cut taxes for the middle class-all of which are bum Reaganesque ideas we have already tried and found wanting.”

Well, the Reaganesque ideas are back again and are likely to be re-enacted by supply-side Republicans and “New” Democrats – none of whom is as stylish as the Bourbons, but all of whom, as Talleyrand said of the Bourbons, “have learned nothing and forgotten nothing.” In the process, what is represented as a version of the GI Bill of Rights for retraining downsized workers will be corrupted by a doctrinaire eagerness to support proprietary education mills.

Since anyone who is curious can look up the sorry record of previous investment tax credits and IRAs, let’s talk a bit about the tax cut for the middle class, arguably a demand-side action. The media have already noticed it will not amount to much – the equivalent of another couple of pizzas a month for every family. Still, the sheer number of pizzas is mindboggling and may result in supply-side expansion in the bakery industry as well as demand-side pressure for more laxatives and anti-gas pharmaceuticals, which will, in turn, inspire the creation of more sick-making television commercials. Although I am not now and never have been a pizza man, I have no great objection to any of that.

Nor do I have a strong objection to the elastic, not to say formless, definitions we are being given of the middle class. After all, speaking sociologically, as I occasionally do (“The Golden Mean,” NL, November 2, 1987), in any stable society the middle class is the society, the ultra-rich being exclusive and the infra-poor excluded.

Speaking economically, though, I find it hard to believe the Republicans believe anyone earning $200,000 a year (that is, snugly in the top 1 per cent of the population) needs a handout for an extra pizza. And I am sure everyone making $8,850 a year (the full-time minimum wage) should have a handout for more than that.

The President’s tax cut proposal presumes $75,000 a year is the top of the middle class (still almost 95 per cent of the population) and is estimated to cost $60 billion over five years – or something less than two-tenths of 1 per cent of the gross domestic product. That’s not even pizzas; that’s peanuts. It is barely a third of the woefully inadequate Clinton “stimulus package” the Republicans filibustered to death a year and a half ago.

So what’s all the fuss about? The fuss is about the votes of the small percentage of the American electorate that is not too lazy to go to the polls. Specifically, about its fear and loathing of the way things are going in the country; its stouthearted determination not to try to understand why the prospects aren’t brighter; its puerile anger against imagined tormentors; and its desperation for a quick fix, especially one that is mean to somebody else. An electorate with such qualifications can be bought and sold and made dizzy by spin doctors – who are undoubtedly a growth industry, but beyond the normal purview of this column.

For this column, the question is, What difference does all the fuss make to the economy? And the answer is, Precious little, and most of that counterproductive.

The tax break for the middle class (whether Clinton’s, Minority Leader Gephardt‘s, or the Republican Contract‘s) will of course be paid for by the middle class. Who else is there? Indeed, the paying will undoubtedly come to more than the cutting, particularly for those in the bottom half of that protean middle class. There are two principal reasons for this.

First and most important (constant readers may be certain) is the Federal Reserve Board, which considers itself entitled to frustrate every program, especially every promising program, of the constitutionally elected Executive and Legislature. In the notorious black wit of former Chairman W M. Martin, the Reserve’s aim in life is “to take away the punch bowl just when the party gets going.” It is sure as shooting going to raise the rate again if the talk about a tax cut continues. A tax cut at least pretends to give people money to spend, and people with money to spend give the Federal Reserve Board goose bumps.

When the Board gets goose bumps, it raises the interest rate. It can’t be bothered with the fact that this increases both the cost of producing and the cost of consuming, and consequently is doubly inflationary. It’s all the Reserve can think to do, even though inducing inflation while pretending to fight it makes the Reserve look silly.

Something more than silliness is involved. If the prices of consumer loans are raised, borrowers have less money to buy things with. ‘But where does their money go? It goes to the banks, of course. For example, I have a little adjustable rate mortgage. As a result of the Board’s recent maneuvers, my interest charges this year will be about $700 greater than they were last year. That won’t break me; but if the Board keeps it up (and you can bet it will), my pizza-size tax cut will disappear – roughly 10 times over – into the shining coffers of my friendly banker.

As Deep Throat said, follow the money. The famous middle-class tax cut, assuming there is one, will mean the United States of America will have less money to spend (and I’ll get to that in a moment). Congress will dangle that money before our eyes; but when we try to get our hands on it, the Federal Reserve Board will whisk it away and give it to our bankers, along with some money we thought was safely ours.

Every time the Reserve raises the interest rate to “head off inflation,” it effects a massive transfer of wealth and income from mostly middle-class borrowers to mostly rich lenders. Never mind what Polonius advised about borrowing; he was a Renaissance courtier, and not an over wise one. Borrowing is what modern capitalism is all about. Today’s borrowers have done nothing to deserve having their money taken away from them, and today’s lenders have done nothing to deserve being given it. You can forget about your pizza; your banker will be eating cake.

So much for the first reason why the middle-class tax cut will cost the middle class money.

THE SECOND REASON is that most of the “savings” proposed to pay for the cuts are fake, illusory, smoke-and-mirrors. I suppose it is true that, as Vice President Gore said the other day, there is an Agricultural Department field office within a day’s horseback ride from every farm. That sounds worse than it is; it doesn’t take many 50-mile radius circles to cover most farm country.

Schemes like turning air traffic controllers over to a government or private corporation (and there are a lot of such schemes) amount to nothing more than getting the costs off the Federal budget. The costs won’t vanish; they will reappear in the form of local taxes or user fees to be paid directly or indirectly by the middle class. Either that, or the airlines’ insurance premiums will take off into the wild blue yonder, and will have to be covered by higher fares.

Then there are all the truly vicious notions to eliminate or underfund programs that are already underfunded, like housing (as though there weren’t a million or more homeless fellow citizens in the streets), and school lunches and food stamps (as though ill nourishment were not a fact of life in the United States), and Medicaid (as though we have solved our health problems by yakking them to death). Not to mention Head Start, which was so promising two years ago. Or ending welfare as we know it by sending kids to orphanages and putting their mothers to work at jobs that won’t get them out of poverty, but will violate mainstream economists’ theory of a natural rate of unemployment and so give the Federal Reserve Board another excuse to raise the interest rate to head off inflation.

“Saving” by dumping on welfare and relief programs is what will cost the middle class – and the rich, too-many times more than their tax cuts will be worth. Supply-side Republicans and New Democrats are sensible enough not to like our decayed inner cities and rural slums, and they are reasonable enough to be afraid of the sullen, desperate people who live there. They seem to think there is an underclass, and that it can be cowed with long mandatory prison sentences and the death penalty. They shouldn’t count on it.

But they should count on having their household expenses and local taxes increase to pay for more guns and locks and burglar alarms and insurance and police and judges and prisons, some of which will have to be in their backyard for lack of anyplace else to put them. This being the case, they would be wise to take a long, straight look in the mirror and ask themselves if they really are or want to be as self-righteous, callous and mean-minded as they are in danger of becoming.

 The New Leader

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