Bush's tax cuts: a shot in the arm or the foot?

Yale economics and political science profs weigh in on our country's economic future.  

BY NICHOLAS ZAMISKA

HYURA CHOI/YH

This was not a perennial lovers' quarrel. Rather, these two tax-savvy college students had devised a plan to circumvent the burdensome portion of the tax code that penalizes couples for filing jointly. The marriage penalty, which recently has come under heavy fire, is "ridiculous" and "stupid" according to MacAvoy. On Thurs., Mar. 29, a clear bipartisan majority in the House voted to cut income taxes for couples and to phase in a $500-per-child tax credit.

Consensus begins and ends with the marriage penalty, however. The debate over President George W. Bush's, DC '68, $1.6 trillion tax cut has embroiled Congress and the public. Proponents of the welfare state fear too large a tax cut will disproportionately aid the rich; others warn of ballooning surpluses that might restrain future economic expansion. Despite much disagreement, Yale professors in the economics and political science departments remain resolute and positively opposed to Bush's proposed tax cut.

Roaming the halls of 124 Prospect St. or 28 Hillhouse Ave., the headquarters of the political science and economics departments respectively, one would be hard pressed to ferret out the few professors in support of such a robust and comprehensive tax cut. Not surprisingly, 85 percent of professors, a bloc renowned for its liberal thinking, denounce Bush's plan despite a plurality of public support.

President turned salesman, Bush has proselytized in bully pulpits around the country to wrestle down the votes he needs in the House and Senate to pass his tax cut. He tempts the public and policy-makers alike with visions of a candy-coated economic future—a future that could dissolve like sugar in water if expected surpluses fail to materialize. He promises both guns and butter: an expanded national defense system in tandem with a sound Social Security program impervious to potentially unforeseen budget constraints.

Professors fault Bush's tax agenda on four main issues: elimination of the estate (or "death") tax, disproportionate tax relief for the most affluent, downsizing important government programs to fund his tax cut, and over-reliance on fiscal policy to regulate the business cycle. Of these four caveats, the estate tax most acutely highlights the ideological rift between Bush's cohorts and his rivals.

THE DEMISE OF THE ESTATE tax itself would delight Bush and fellow Republicans. Currently, estates over $675,000 are taxed, a measure that many professors deem critical in order to preserve the very fabric of American democracy: a true meritocracy un-distorted by the passing of wealth from generation to generation. "People don't seem to recognize the tension between inherited wealth and meritocracy," political science Professor Donald Green points out.

In response, MacAvoy claims that the death tax is a "wonderful target of radical socialists" and provides us with "an extreme case of class warfare." MacAvoy chastises the "liberal ideology" behind the estate tax as a "form of savagery"; since income taxes have been levied on inherited wealth, "[the government] comes after you a second time."

Factoring the estate tax into its calculations, Citizens for Tax Justice, an independent research institute, concluded that the lowest 60 percent of households on the income scale would only share 12.7 percent of the tax relief created by Bush's plan while the wealthiest echelon of society, or the top 10 percent, would benefit 60.3 percent. Figures such as these support professors' claims that the plan is a "stupid idea designed to make the rich even richer," as economics Professor John Rust puts it.

LOWER TAXES EQUAL LESS GOVERNMENT revenue. Which government programs will Bush cut to accommodate a more modest stream of income? "Even though he says that he's for all these `good programs,' he's cutting everything," Nobel Prize- winning economics Professor James Tobin says. Social Security will most likely bear the brunt of depleted tax revenues, making it difficult or impossible for Congresses and presidents in the near future to adequately reform a waning Social Security program. With a glut of baby-boomers set to retire in the next decade, many doubt the sustainability of the pay-as-you-go plan, which employs current tax revenue to pay out benefits. "When something goes wrong," Tobin says, "It [Social Security] will be his contingency fund." Bush has created a Social Security Commission to deal with the problem.

A host of other education, environmental, and social welfare programs will inevitably be cut or scaled back in order to achieve a new budget equilibrium. However, economics Professor Philip Levy contends, "Cutting tax revenues will force us to make useful choices about spending." With cutbacks an imminent necessity, Rust points out, "The cutbacks that do occur are usually cutbacks of benefits to the poor." "The Bush plan is just part of a larger scheme to make the rich even richer and cut transfers and services to the poor, assuming they can fend for themselves."

No matter which programs find their way on to Bush's list to be cut, the remaining programs certainly depend on the Congressional Budget Office's prediction that $5.6 trillion in surpluses will in fact emerge over the next decade. Even MacAvoy says, "Bush's numbers are rigid and unrealistic, relying on studies that don't yet exist."

The public supports Bush's tax cut... SOURCE: GALLUP POLL OF 1,016 ADULTS NATIONWIDE ON FEBRUARY 11, 2001 ...but Yale professors do not. SOURCE: NICHOLAS ZAMISKA FOR THE YALE HERALD (SURVEY OF 69 PROFESSORS IN THE ECONOMICS AND POLITICAL SCIENCES DEPARMTMENTS) 3/27/01 TO 3/29/01

NEARLY ALL professors agree that fiscal policy—or tax cuts—do not have a significant short-term effect that will "ward off recession," as Bush has said. The time frame within which the business cycle operates is simply too short for a tax plan to efficiently spur the economy. "When the leaves fall in September," MacAvoy says, "the current economic downturn will already be over." Monetary policy, the practice of adjusting interest rates in order to shave the peaks and troughs off of economic boom and bust periods respectively, has long been the preferred tool for regulating the business cycle due to the relatively short time period interest rates require to significantly effect the economy.

Alan Greenspan, chairman of the Federal Reserve Bank, has recently disappointed many investors by not cutting interest rates enough—a measure many see as necessary to cushion the recent freefall of the stock market. Fiscal policy measures designed to prop up a foundering economy appear more attractive when many see Greenspan as falling asleep at the helm. Political science Professor David Cameron supports Bush's tax cut for this reason: "An increasing surplus is contractionary and the economy's going down the tubes." At the same time Cameron adds that the necessity of $5.6 trillion materializing in the next decade is "highly problematic."

Most professors maintain, however that monetary policy should be the primary tool the government should employ to normalize the economy. While "the fiscal stimulus argument is not great" according to Levy, fiscal policy does find a place in some economic regimens. "A temporary, mild, quick tax cut could be a good bit of Keynesian medicine to pull the economy out of a potential recession," Rust says. But larger tax cuts, Rust adds, are based on a "fundamental distrust of the U.S. government." Green pinpoints the prevailing attitude among tax cut proponents: "They feel that they should keep what they earn."

Bush's brand of fiscal policy has little hope of having an immediate and measurable effect on the economy. The tax cut is "back-loaded," calling for a $1.6 trillion over 10 years with a mere $21 billion, or 0.2 percent of gross domestic product, coming into effect by 2002. While a vote along party lines passed the president's budget proposal on Wed., Mar. 28, Republicans rejected a $60 billion tax rebate to take effect this year proposed by Democrats to make some of the tax cut more immediate.

Fewer than one out of 10 professors support the plan, but within that minority, a further disparity emerges. Younger professors disproportionately support Bush's tax cut: 14 percent of associate or assistant professors support the proposal while a meager three percent of tenured faculty rally behind Bush.

MacAvoy—an ardent conservative whose breed is nearing extinction within the confines of academia—jokingly feigned relief when informed that a handful of younger economists have taken up his cause. "By God, there's hope yet. I thought I was the only rational thinker here at Yale." Graphic by Hyura Choi.

Photo courtesy Newsmakers.

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