Analysis: Much of Debate on Bush Tax Cut Is about Human Economic Behavior
Uchitelle, Louis, THE JOURNAL RECORD
The nation's economists are deeply divided over whether President Bush's tax-cut plan would hurt the economy over the long run, or make it stronger and more efficient.
Strip away the politics, the slowing economy, the argument over whether the rich will get too much, and the Bush plan rests on two propositions. One is that people will work harder, with greater dedication and efficiency, if they pay less in taxes. The other is that the country will run better if the government spends less.
Those are the beliefs put forth by many conservative economists who supported the tax cuts proposed by President Ronald Reagan 20 years ago and now favor Bush's plan to cut taxes by $1.6 trillion over 10 years. It is a view that liberal economists attack as steeped in misconceptions.
"The debate reflects very different priorities and very different conceptions of the way people behave," said Joel Slemrod, an economist and tax expert at the University of Michigan.
Those who favor a tax cut say that people would work harder if they were paying income taxes at a top rate of 33 percent in the Bush proposal, rather than the 40 percent that now prevails. And leaving the budget surplus in government hands rather than returning it to the citizenry through tax cuts, they say, encourages all sorts of wasteful spending.
"If you are offered an extra dollar of pay, and told that you are going to get to keep 70 cents of it instead of 60 cents, you are more likely to work harder to earn that raise," said John Makin, an economist at the American Enterprise Institute, a conservative Washington research center.
Makin's assertion is a basic tenet of supply-side economics, one often challenged by liberal economists like William Dickens, a senior fellow at the Brookings Institution.
"Most people don't get to choose how many hours they work," Dickens said. "If they have a job, they work a certain number of hours as well as they can."
For those who oppose the Bush tax cut, the projected $5.6 trillion budget surplus over the next decade is needed to meet important social and economic goals. The money is needed not only to help build up Social Security funds to pay for the coming retirement of aging baby boomers and to finance long-neglected social programs, but also to support corporate investment indirectly.
The best use of the surplus, from this point of view, is to pay down government debt. The people who held the debt, in the form of Treasury securities, would then shift their repaid savings to corporate bonds and stocks. Companies, in turn, would invest this extra money in new equipment, in new technology, in skilled workers - - the building blocks, in sum, of a more productive, robust economy.
"You have to ask yourself, would I rather have $100 billion spent to subsidize child care or to pay for new television sets and vacations in the Bahamas, and people value these things differently," said Robert M. Solow, a Nobel laureate in economics at the Massachusetts Institute of Technology. "I am a knee-jerk liberal, so I prefer subsidizing child care. But I also value, even before such public spending, the building up of private savings through the repayment of the government's debt."
Conservative economists see a very different dynamic. For them, entrepreneurs who are allowed to keep more of each dollar they earn become willing to invest their money in riskier ventures. The economy, as a result, grows more rapidly, and at some point, the growth is fast enough to generate rising tax revenues, even though tax rates have been cut.
In this supply-side view, the stimulus to human activity from a tax cut outweighs the payoff that would accrue to society from the government's having spent the money on child care, health insurance, mass transit and other public services. …