January 29, 2001
Mark Weisbrot
Knight-Ridder/Tribune Media Services, January 29, 2001
Sometimes honesty can be the best policy, even in politics. This is a hard sell here in Washington, where the truth is treated with so little respect, and spin is everything. But perhaps the Democrats and their allies are learning a lesson as George W. Bush’s proposal for a tax cut gathers momentum.
Here is a tax cut that is truly a gift to the rich and the super-rich. One of its biggest components is to abolish the estate tax. This would give hundreds of billions of dollars to those who need it the least: people who are born into enormous wealth. Two-thirds of this tax is paid by the richest two-tenths of one percent of all taxpayers.
This is no ambiguity here. Mr. Bush advocated this cut during his campaign for the Presidency, and the Republican Congress actually passed it last September. The legislation was vetoed by President Clinton.
You might think that the Democratic leadership, which opposes these tax cuts, would be bold enough to suggest that maybe Bill Gates’ kids don’t need another break at the expense of the US Treasury. Not so. They have chosen instead to argue from an ultra-conservative standpoint: we can’t afford the tax cuts because we need to use federal budget surpluses to pay off the national debt.
From an economic perspective, the idea of paying off the national debt as soon as possible has never made much sense. Of course anyone who has a mortgage on their house would like to save on future interest payments by paying it off early. But should they sacrifice their children’s health care and education in order to do so? Most people would say no. Economists would go further, pointing out that it does not make sense to use surplus funds to pay off debt when there is an alternative that yields a return higher than the interest on the debt.
Our national debt is quite low relative to our economy, and that is all that matters. It currently stands at about 35 percent of GDP, down from 49 percent just 5 years ago. It really shouldn’t be an issue, and if not for the demagoguery of politicians, it wouldn’t be.
The Democratic strategy was hit hard last week when Fed Chair Alan Greenspan said that we could indeed afford a tax cut, and that in fact he was concerned that without one we might pay off the national debt too quickly.
Greenspan’s remarks were obviously politically motivated. Would he have said the same thing if we had a president proposing $1.6 trillion in new spending– rather than a tax cut– over the next decade? To ask the question is to answer it.
But here, too, the Democrats have painted themselves into a corner by joining in the deification of Mr. Greenspan, exaggerating beyond recognition not only his impartiality but his competence.
This is a man who has repeatedly thrown hundreds of thousands of people out of work– by raising interest rates– in order to keep wages from rising. So anyone who reads the business press should not be surprised that he supports tax cuts for rich people.
If they want to give Greenspan credit for not pulling the plug on the economy for nine and a half years, fine. But this praise should be of the kind given to a compulsive gambler gone straight: he crashed the economy in 1990, sending it into recession by hiking interest rates to 10 percent the previous year. He kept unemployment much higher than necessary for several years, by adhering to a theory– now thankfully abandoned– that six percent was the best that we could do without accelerating inflation.
And now, as we see layoffs soaring at companies throughout the country, does it really take that much political courage to question the six interest-rate hikes since June 1999 that helped bring on the current slowdown? Or does the “Maestro”– as journalist Bob Woodward titled his fawning portrayal of Mr. Greenspan– only merit praise for trying to put the toothpaste back in the tube?
Now that the Democrats have been let down by both the Fed chairman and their own fatally flawed arguments, here’s a new, more honest strategy. Propose a tax cut for the majority of Americans, with an increase in the Earned Income Tax Credit for those at the bottom of the wage scale.
Then ask the citizens a simple question: who should get tax relief? The richest one percent of Americans, who have more than doubled their real (inflation-adjusted) after tax income over the last 23 years? Or the majority of Americans, whose income has stagnated?
They’ll get the answer they want to hear– and no one will care whether Mr. Greenspan agrees.
