August 4, 2004
During political conventions, most economists hope that
journalists will not ask them the relevance of the economic claims being
delivered from the podiums and written into the platforms of the two major
Of course economics is important, but the fast and
loose economic principles pronounced by the two parties are usually so
difficult to defend that most economists would rather not be asked to try.
For example, why are tax cuts for the middle class better than those for the rich or the poor. I can answer why the politicians do not discuss reducing tax burdens for the poor. This is because most poor do not pay income taxes. (They pay lots of sales and payroll taxes, however, and have property taxes reflected in their rents.)
On the surface, one might argue that the rich can
afford to pay more taxes, so they should.
However, the economic cost inflicted by raising taxes depends upon
the value lost by those paying the taxes.
If the rich are more motivated by incomes (after all, why did they
work so hard to gather them), they might actually feel more pain from paying
a tax than the middle class.
I always argued that the rich gain more from defense
and justice, which protects their wealth, than others. Therefore, they should pay more; but I cannot make that claim
on strong economic grounds. Thus,
the claims that middle class tax cuts are better than tax cuts for the rich,
a clear principle of the Democrats, is not easy to prove.
Similarly, Republican claims that permanent tax cuts
help the economy also rests on shaky economic grounds. Certainly, when the private sector is unwilling to borrow,
government can more effectively raise resources through borrowing than
taxing. Thus, temporary tax
cuts to stimulate economic behavior in a soft economy certainly has many
When the economy recovers, however, government
borrowing will be displacing desired private borrowing.
Interest rates will rise and desired capital improvements may be
delayed or never materialize. If
tax cuts create a structural deficit (that is a deficit that does not go
away even when all resources are utilized at intensities that begin to
threaten inflationary problems), those cuts may be very wrong.
There is a movement within the Republican party to
oppose any tax increases, even if they are needed to finance tax reductions
that result in a better tax code. In
short, the no tax increase faction virtually denies any tax reform.
When I hear politicians claiming they have never and will never raise
taxes, I want to ask if that is because they are happy with the current tax
code. (I know the answer to
that question, but who said politicians must be consistent in their economic
Many Democrats also claim that taking resources from
the rich to give to the poor will improve the country. If such transfers cause the poor to lose incentives to remove
themselves from poverty, many economists might even say that such a program
is undesirable. If the programs
open up opportunities that otherwise are denied to the poor, then the
programs might be beneficial.
Even in this latter case, if the poor receive more opportunities, but the costs include reduced incentives to become more innovative by entrepreneurs and inventors, then this income transfer must be questioned.
Certainly we would like to see the homeless housed, the
starving fed, and the poor with more opportunities. But none of these resource transfers are costless.
Why do the Democrats believe the costs of obtaining those resources
can be ignored?
Frankly, both parties are ignoring the costs of
existing retiree programs promised by government even as both have added to
those promises. The Democrats
want medical burdens to become even more of a government responsibility than
they currently are. The
Republicans have launched a prescription drug program that supposedly is
financed through shifting medical service purchasing behavior (that’s how
the program is financed, even if you cannot understand what I am saying).
Neither party has owned up to how the gap between what
has been promised and what is being accumulated will be closed.
Will payroll taxes rise even further (either with higher rates or
more earnings subject to the tax)? Will
retiree benefits be delayed even longer for the children of the current
retirees? Will some people who
were promised benefits be denied because they “can afford it”?
Will we allow individuals to administer some of their
government retirement investments, although cash flow needs will never
require any individual to opt out of the government programs without
impairing the benefits of current recipients?
Will we run the government programs with fiduciary responsibility?
Now those issues would make for an interesting debate.