Mackinac Center for Public Policy

Posted: Monday, October 11, 2004

Tax Cut Stories Miss the Picture

By John R. La Plante

The Detroit News recently ran a series of articles called "Tax Cut Impact." "To pay for federal tax cuts," the News recounts, "many programs that served the working poor were reduced or eliminated as the deficit grew. This report shows that the amount of money millions of Americans now pay for services ranging from child care to housing is greater than the amount they saved through the tax cuts."

The News does lay out an impressive number of articles that are tied in some way to the tax cuts. The message: Because a few people get large tax cuts, government programs are gutted, and the poor suffer. Students cannot afford the high costs of college tuition; low-income seniors cannot get jobs; parents cannot get other people to pay for their child care; public housing units suffer from lack of upkeep; people can’t pay the rent; others face death when their federal utility-bill grants are inadequate; and elderly Americans who want food assistance must wait until someone already in the Meals on Wheels program drops out or dies. All this because of cuts in the dividend and estate tax rates — and, the News adds, "In many cases, the poorest lost services and got no tax cut at all."

A full review of these articles is beyond the scope of this commentary. Still, we should step back and examine broader principles. Despite reporting some compelling tales of individual struggle, the series misses larger truths that affect us all.

Just because we have done something a certain way until now does not mean that we should continue. Budgetary shortfalls, though difficult for government managers and the public to deal with, present chances to find new ways of doing things. When we are forced to revisit which programs are effective and which are not, it’s an opportunity for innovation. The Mackinac Center, for example, has recommended ways to cut $3.5 billion from the annual state budget, putting it on the road to structural balance. Much greater savings could be achieved at the federal level.

Government programs are seldom the solution they are advertised to be. Often, they duplicate efforts of the private sector, as well as each other. Further, they are not necessarily effective at their stated goals — a conclusion that both a Republican Congress and a Democratic president (Bill Clinton) reached in welfare reform. In addition to providing the wrong incentives, government programs aimed at the poor often end up, for political reasons, benefiting the middle class, too. Why not cut out the middleman and let the middle class keep its money, rather than funnel it through the political process? Private citizens would have a greater ability to voluntarily help those who need it if so much money was not being filtered through the political worlds of Washington, D.C., and Lansing, Mich. Moreover, deregulation and private efforts to promote entrepreneurship often improve the well-being of lower-income families as well as, or even better than, the best-run government programs.

It is easy to see the immediate effects of program cuts; it is harder to identify the overall benefits of tax cuts. If a government-run job-training program announces that it can now serve 100 people instead of 150, it will be easy to see an immediate, negative effect of reduced spending. Bad news dominates news coverage.

On the other hand, if businesses are able to hire more people as a result of a tax cut, it is usually not noted in the news. If businesses are able to retain people as a result of a tax cut, it is not newsworthy at all. Yet since the May 2003 round of tax cuts, the national unemployment rate has decreased from a peak of 6.3 percent in June 2003 to 5.4 percent now.

You cannot cut what does not exist. A record 40 million people in the United States pay no income taxes at all. These people already receive a de facto benefit, and they continue to do so even after a tax cut. Similarly, we should not be surprised that people paying less in taxes do not receive larger refunds when taxes are cut.

The budgetary problem is not too little taxation; it is too much spending. Federal outlays on domestic spending now account for nearly 16 percent of the national economy. In Michigan, state and local governments consume more than 10 percent of personal income. This amount comes on top of the huge sums that state residents pay in federal taxes.

The federal tax cuts of the past year have been a step in the right direction. But they address only one side of the budget. Both Congress and President Bush have emphasized the most politically popular path by cutting taxes without significantly reducing the size and scope of government.

Our officials in Washington, D.C., have been irresponsible. On President Bush’s watch, nondefense discretionary federal spending has increased a remarkable 35.7 percent. Perhaps afraid of offending any special-interest group, President Bush will almost certainly go down in history as the only first-term president since John Quincy Adams (who served from 1825 to 1829) to not veto a single bill.

Hidden in the various congressional appropriations bills are numerous special-interest tax credits, dubious federal programs and plain old pork-barrel spending. Meanwhile, high tax rates and regulation hinder economic growth, and a wretched education system — not mentioned by the Newsdoes more to harm the poor than tax cuts ever do.

The apparent cost of tax cuts does little to change the fundamental fact that most of the time, government is not the solution; it is just something that gets in the way.


John R. LaPlante is an adjunct scholar with the Mackinac Center for Public Policy, a research and educational institute headquartered in Midland, Mich. Permission to reprint in whole or in part is hereby granted, provided that the author and the Center are properly cited.

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