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"In our political debates we typically argue about taxes, government spending, and high or low interest rates as though they were bad or good in themselves, in no relation to what allocation of the national product we want those policy instruments to achieve."

 

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The Case Against Bush's Tax Cuts

 
 

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Taken together, President Bush's two large tax cuts are likely to do great harm, but only long after the president has left office. And for what benifit? A little current demand-stimulation that could readily be achieved by measures that would do more good in the near term and cause no damage in the long term.

Much has been said about the effect of the tax cuts on the books of the federal government: budget deficits, debt, and the assets and liabilities of the trust funds. It is as though what mainly mattered was the effect of the budget on the budget. It's the wrong focus.

Decisions about taxes, public spending, and the supply of money are in effect choices about national output and employment, and about how the output is divided between private and public uses, and between consumption and investment. They also affect the distribution of income.

Put aside the possible need for near-term demand stimulation. The likely durable effect of the tax cuts will be to slow down growth in the supply of goods and services available to Americans.

Tax cuts increase taxpayers' after-tax incomes. Taxpayers typically spend some of the extra income on consumption. Unless the government reduces its spending on consumption dollar-for-dollar, total consumption, private plus public, will be higher. Barring a supply-side miracle (a reckless gamble), the share of output left over for investment will be smaller.

Less output will be available, over all, for increasing or improving the stock of infrastructure, housing, and business-owned plant and machinery, for enhancing the skill and health of workers, for research that adds to usable knowledge, and for adding to American-owned wealth abroad by way of a surplus of exports over imports.

Because the president's tax cuts will almost certainly reduce national investment, the economy's capacity to produce output for our own use will grow more slowly. As a result there will be less output available in 15 to 25 years, precisely when more output will be most needed - when our relatively few grandchildren who will produce it will have to share it with our many retired baby boomer children.

Reshuffling Social Security finance will not change that - not unless it reduces the share of output absorbed by consumption. (I leave aside the possibility of a large influx of immigrant workers.)


 





 

 

Preoccupation with the effect of the tax cuts on the budget is likely to cause us to compound the damage.

If, for example, we shrink the deficit by cutting federal spending on research and public health, or on grants to state and local governments that subsidize their spending on education or infrastructure - in other words, if we skimp on government investment - we will retard growth.

The president seems to believe that most nondefense public investment is "waste, fraud and abuse." He is mistaken. To take an obvious example, much private investment requires, for its own productivity, streets and roads that are largely the product of public investment.

In our political debates we typically argue about taxes, government spending, and high or low interest rates as though they were bad or good in themselves, in no relation to what allocation of the national product we want those policy instruments to achieve.

Yet, there are choices to be made here, not about deficits or debt as such, but about the best use of our labor and material resources.

For the near term, and also for the longer run future, how much growth in demand, and therefore output and employment, should the policy-makers aim for, with what margin of safety against inflation? How much consumption would we have to forgo to make room for the investment that would be needed? How much of the investment should go into new business plant and equipment, into housing, into more and better public infrastructure, into research and education? How should the output left over for consumption be divided between provision of private goods and of public services, and between the consumption of the well-to-do and what is left over for the chronically poor?

Neither the president nor his senior advisers seems to have confronted any of these choices. One has to wonder whether they have even understood them. Instead they bamboozle us, and most likely themselves, with slogans. Yet, whatever the government does about its budget - and the Federal Reserve about money - will powerfully affect the outcome.

-Francis Bator

Francis M. Bator, former deputy national security adviser to President Lyndon Johnson, is Littauer professor emeritus at Harvard's John F. Kennedy School of Government.

 
 
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