Of Public Interest

Volume 2, Number 13
September 2000

by Richard E. Wagner

With our federal government awash in money, Governor Bush and Vice President Gore have both pledged to reduce federal taxes. They would do so, however, in strikingly different ways. Those differences, moreover, have great significance for the health of our economy and for our system of constitutional governance.

The key part of Governor Bush’s proposed tax reduction is a general cut in the personal income tax. The present rate structure contains brackets where income is taxed at 15, 28, 31, 36, and 39.6 percent as income rises. Governor Bush would cut those rates to 10, 15, 25, and 33 percent, combining the upper two tax brackets in the process. Governor Bush’s tax cuts would be general and nondiscriminatory. Marginal tax rates would be cut for everyone. Those cuts would accrue to Democrats and Republicans, to old and young, to parents who have college-age children and to parents who do not, and to people who buy fuel-efficient cars as well as to those who do not. Your friends get tax cuts, but so too do your opponents.

In sharp contrast, Vice President Gore proposes what he calls "targeted" tax cuts. The current pattern of rates and brackets would be left alone. There would be no granting of a universal tax cut that would apply to everyone. Some people would have their taxes cut, but others would not. This, after all, is the central point of a targeted tax cut: some people are favored with tax cuts while everyone else goes without.

Many of the Gore tax reductions would take place through tax credits. People who spend money on these government-favored items would receive some credit against their federal tax liability for their spending. Some of the proposed credits include care for the elderly, college tuition, and buying what the government defines as a fuel-efficient car.

Experts project that the Gore program would reduce taxes by only about one-third of what would be accomplished by the Bush program. What people make about this difference seems to reflect many things, ranging from political beliefs and philosophies to attitudes toward the particular targets for tax relief. These are not unreasonable things for people to consider in making their evaluations, but there are also some other important factors that merit consideration in appraising these sharply contrasting approaches to tax reduction.

The Gore approach to tax reduction offers the political advantage of rewarding friends without rewarding opponents. To confine tax cuts where one’s political support is concentrated surely multiplies the political leverage from what a program of a general cut in rates across-the-board

could offer. Some simple arithmetic can illustrate this point. A general tax reduction that averaged $1,000 per taxpayer would cost $100 billion when spread over 100 million taxpayers. A targeted tax cut that was confined to 30 million taxpayers could average $1,500 per taxpayer and yet reduce federal revenues by only $45 billion. The preferred taxpayers would gain a 50 percent increase in their tax reduction. At the same time, the government would have an additional $55 billion of spending to distribute among its favored projects and constituencies.

Targeted tax reductions would seem to make good politics. You concentrate the rewards on those constituencies where the prospect for support is highest. Targeted tax reductions are pragmatically superior to general tax reductions as a means of securing political advantage. A modern-day Machiavelli would surely applaud the Gore approach to targeted tax reduction.

This political advantage, however, is a costly purchase, and for at least two reasons, one moral and one economic. Morally, targeted tax cuts degrade the long-standing belief that in a democracy we choose to tax ourselves, as represented by the principle of equal treatment under law. So long as taxes are generally or universally applicable, this is a plausible belief to hold. But as taxes come increasingly to be used as rewards to supporting constituencies and as penalties for others, this belief becomes increasingly a hollow myth. The political process comes decreasingly to be grounded on principle, and comes increasingly to resemble an auction where some people secure tax reductions while others do not.

Economically, targeted tax relief fails to bring any economic benefit in exchange for its moral damage. The economic benefit from tax reduction resides in the incentives that are created when marginal tax rates are reduced. The Bush program would reduce marginal tax rates, and thereby provide a boost to economic progress. The Gore program would actually increase marginal rates a bit, through the effect of what are called phase-outs, whereby deductions and credits are cut back as income increases.

The Bush program offers reductions in marginal tax rates, while remaining faithful to the central democratic value of generality and nondiscrimination. Sound economic principle is joined with a democratic morality of equal treatment under law. In contrast, the Gore program of targeted tax cuts provides no basis for economic gain to even set against the continued degradation of the principle of equal treatment under law that it simultaneously reflects and espouses.

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