Commentary | Budget, Taxes, and Public Investment

America Needs a Future, Not a Tax Cut

Opinion pieces and speeches by EPI staff and associates.


America Needs a Future, Not a Tax Cut

by Jeff Faux

Whoever defines the language of politics, controls the outcome. And for most of our history, the language of American politics has been largely a debate between competing visions of the future.

Liberals — in our American sense of the word — pursued an expansive vision of how society might be improved. Roosevelt, Truman, Kennedy, and Johnson believed they had been elected to make the future better for those in the bottom two-thirds of the income distribution. Conservatives — concerned with preserving the shape of the wealth pyramid — were the brakes on the liberal vision. So, as the electoral pendulum swung back and forth, we made steady incremental progress: liberals moved us two steps toward more equal opportunity, conservatives one step back.

Twenty years ago, after the election of Ronald Reagan, this neat ratcheting process was disrupted. Then, as now, a new Republican president proposed a massive tax cut, tilted toward his upper-income constituency.

Then as now, the Administration’s projections promised a rosy scenario.

Then — hopefully, not as now — Democrats joined in a bidding war to give away the public revenue.

Reagan’s economics were – to put it gently — crackpot. His politics, however, were brilliant. As his chief economic advisor later described Reagan’s view of possible deficits: “One, they won’t occur; two, they’ll be temporary; three, when they stick, they serve a good purpose – they keep liberals from new spending programs.”

He succeeded. Bill Clinton, the next Democratic president spent his two terms paying off the debts run up by Reagan and George Bush I. This further postponed needed spending on health care, education, environmental protection, and other social investments. When he handed the keys of the White House to George Bush II, the federal budget had been in the black three years in a row.

Like his Republican predecessor 20 years ago, the new president has promptly demanded a massive tax cut, the political purpose of which is to keep Democrats from financing social investments.

History, it has been said, repeats itself — the first time as tragedy, the second time as farce.

Indeed, if it weren’t that the stakes are so high, it would be impossible to examine George W. Bush’s tax proposal with a straight face.

First, the notion of making permanent tax reductions on the basis of simplistic “straight-line” predictions about the economy over the next ten years is an affront to the adult mind. No corporation would commit itself to a dividend policy ten years from now – even a year from now – on the basis of some guesstimate of future revenues. Focus groups report that voters are skeptical of surplus projections. Quite sensibly, they suspect that anyone who claims that they can predict the economy ten years from now is a fraud or a fool.

Secondly, the distribution of the proposed tax-cut package is transparently unfair, with over 40 percent of its benefits going to the top one percent. “Well,” says our new president, “it’s only right. They paid more of the income taxes.”

And so they did. Income taxes of course are levied on those who make the most income. So, implicit in this notion is that the last decade’s economic growth was the work of those who received the most income – the self-sacrificing, puritanical, nose-to-the-grindstone…American rich, who created prosperity all by themselves.

Who fixed their computers and connected their cables? Who waited on the table at their power lunch? Who cleaned the filthy offices after the stock traders went home? Who taught their kids, picked up their garbage, fixed their airplanes, and nursed their dying parents?

The richest one percent of Americans saw their income rise by 114 percent since 1986. Their effective income tax rate dropped from 33 to 27 percent. The notion that our country’s number one priority is to cut their income and estate taxes is a vivid illustration that some ideas are beyond satirizing.

Third, the majority of Americans don’t want it. As the ABC-Washington Post poll reports, only 22 percent of Americans think an income tax is more important than more spending on health care, education, and other domestic programs.

According to the polls, there is one argument for a tax cut that is resonating – that it might stimulate a lagging economy. We should take this seriously. Even the optimists among economists expect the unemployment rate to rise over the next few months. If so, worried voters will demand government action. George Bush is hoping that this will be his ace in the hole.

But Bush’s tax cut proposal is “backloaded” — designed for maximum impact in future years, not to put cash in the hands of consumers this year. As Eileen Appelbaum of EPI and Richard Freeman of Harvard have pointed out, this argues for a temporary one-time “prosperity dividend,” which would put as much as five times more money into the economy this year than would Bush’s plan, without giving away future revenues.

Given its lack of economic sense and political support, why are we assuming that we need a permanent tax cut — of any size?

“Well,” says the President. “We have this surplus….”

According to my dictionary, surplus means: leftover, superfluous, unneeded. Thus, you can’t calculate a surplus until you first calculate what you need to build the kind of future you want. Investment is the act of creating the future. Social investment is, in particular, the act of creating society’s future. So the starting point for thinking about the future is not, what is “left over.” Rather, it is what kind of America do we want?

We cannot credibly predict the economy over the next ten years. But we have learned something about the needs generated by this so-called “new” economy – de-regulated, privatized, union-free. Until recently, this new economy was supposed to have eliminated most domestic government functions. The market would solve our problems. Unemployment had been abolished, stock prices always rose, and all the incomes were above average.

The new economy has gotten old quickly. Economic growth has slowed to a halt. High tech stocks have tanked. And thanks to all those computerized personnel systems, new economy employers are even faster to lay off workers.

Whether you think this new economy is good or bad, one thing is quite clear; it has made life less secure for the overwhelming majority of our fellow citizens. The days when a person of ordinary ability could count on making enough to support a family by showing up every day and doing a good job are gone. The bonds of loyalty — between employer and employee, between customer and company, between company and community – are being ripped to shreds by the pressures of global and domestic competition. For most people, the foundations for a decent middle-class life — job security, health care, old-age pensions, the price of electricity — are now at much greater risk.

They will get riskier.
As they do, more will be required of government, not less. A few years ago, high on the fumes of the new economy, electricity de-regulation cut through the California legislature like a hot knife through butter. Few wanted to hear that de-regulation inherently means more risk, volatile prices, and sudden shortages. And when the inevitable crisis occurred, who did the people turn to? The market? The Heritage Foundation? The Chamber of Commerce? No, the good old State of California, which is now stuck with a bill for a massive bailout of the industry.

We were assured that the de-regulated global market would provide new markets and new good jobs for Americans. Instead we have in the last two years alone lost 600,000 manufacturing jobs in the United States – the shrinking core of opportunity for people without college educations. After a decade of growth, Americans are working longer hours, are barely making as much in real terms as they were ten years ago, and have less health care and pension coverage.

It is this economic reality — much more real than the guesses at what the gross domestic product will be in 2011 — that should be driving our decisions on the spending and tax priorities of the next decade. Today, we have some 75 million Americans with major health care insurance risks — 45 million without health care insurance and another 30 with health insurance that is not worth much. If we do not address this issue the number in 2011 will certainly be higher. Is that the kind of America we want?

Let us get our language straight. Tell me we have a surplus — something “left over” — after we have provided every American with access to affordable health care. After we have made sure that every school child has access to computers, to textbooks and to world-class teachers. After we have drug treatment centers to all that need them, cities that are not strangling in traffic, safe day care for every working parent, and clean air and water for the next generation.

None of this is in the president’s ten-year plan. Yet this is what America needs — and wants. Not a pie-in-the-sky tax cut of $1.6 trillion.

Not even a tax cut of $900 billion. Those who seek to split the difference with George Bush II should not deceive themselves. His proposal is not just about taxes. It is a blatant attempt to deny Americans the ability to use the democratic process to shape their common future. We are watching the beginning of a Ronald Reagan re-run; a ten-year giveaway to those that need it least. Twenty years later, we are still paying they price.

Fool me once, goes the old saying, shame on you. Fool me twice shame on me.

Let us not be fooled again.

It is time, finally, to come out of Reagan’s shadow. It is time to give the American people the debate George W. Bush does not want them to have — a debate on what kind of America they want to see ten years from now. He doesn’t want them to have that debate, because he knows he can’t win it.


Jeff Faux is the President and a co-founder of the Economic Policy Institute.

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