Tinkerbelle Economics
Copyright 1997 by Liberty Issues and Michael J.
Hihn. All rights reserved.
"Cato doesn't know what tax rate we pay now. ...
Moore also confuses gross income with taxable
income. I'm not making this up, as you can see for
yourself."
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In previous columns, I've
ridiculed -- with documentation -- the GOP notion that tax cuts of $100-250 billion
per year can pay for themselves. Apparently they can pay for themselves
-- if we believe they can -- a notion I now call Tinkerbelle
Economics.
The latest example of Tinkerbelle Economics comes
(sadly) from the
libertarian Cato Institute. Cato's ''Maxtax'' was announced in a January 14th Wall
Street Journal op-ed, written by Stephen Moore.
National
Review (2/10/97) chirps that the plan combines ''policy wonkery, political
savvy, and conceptual elegance.''
Well, no.
The conservative
media has again failed to apply healthy skepticism to what they want to
believe. So Liberty Issues readers get another scoop.
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Readers will
recall Hihn's Law (Tax Quacks):
It's impossible to replace the federal income tax with a single-rate tax on
income or consumption -- without either (a) ballooning the deficit, or (b)
creating huge tax increases on the middle class. Cato does both.
Their sales tax creates a massive tax shift to the middle class. Their
Maxtax would increase deficits by nearly $200 billion per year. Both
plans suffer from the same fallacy: Cato doesn't know what tax rate we
pay now. Over 70% of all taxpayers now pay no more than the 15%
marginal income tax rate. But Moore states a tax rate of 17.5%
''would lower marginal tax rates for virtually all taxpayers.'' This is a
major blunder -- and deceptive. It would reduce effective
tax rates for only those with over $100,000 in gross income. Moore
also confuses gross income with taxable income. I'm not
making this up, as you can see for yourself. Moore says: ''The
current income tax rate of 28% for middle-income households earning $40,000 per
year would fall to 17.5% ...'' There is no such current tax rate for
those households.. It's income-tax time, so pull out your 1040
Instruction Booklet. Turn to page 53. The marginal tax rate for
joint filers starts at $40,100 of taxable income -- after deductions
from gross income. (The 28% bracket began at $39,000 for
1995.) At the very least, $40,100 in taxable income requires
gross income of $49,350 -- two Personal Exemptions, Standard Deduction
(no itemized) for joint filers and widow(er)s. In that bracket, IRS
data show deductions and exemptions averaging 33% (1992 - See Table, next
paragraph). So, on average, the 28% marginal rate applies only to those
with gross incomes in excess of $59,850 -- roughly the top 12% of all
taxpayers. Don't take
my word for it. You can check tax brackets in your 1040 booklet.
For the distribution of taxpayers by income level, see Table
534 in the 1995 Statistical Abstract. Look also at effective
tax rates, the column labeled ''Tax as Percentage of AGI.''
Moore's effective maximum tax rate would be 17.5% -- which is tax cut
for only those with over $100,000 in Adjusted Gross Income (AGI). This
is yet another feature of Tinkerbelle Economics: falsely describe a tax
cut for the so-called rich as a tax cut for ''virtually all taxpayers.''
Yet another feature: Moore claims his plan will be subjected to
''ferocious opposition of Washington's army of special interests.'' Dick
Armey said virtually the same thing, and you've also seen
how bogus his plan
is. They flunk the math, so they instead demonize special interests
lurking in the Beltway's darker alleys. Then, when their plan gets
attacked as ''another tax cut for the rich'' -- which it is -- conservatives
will instead see some dark conspiracy at work.
HOW IT WORKS Moore's strategy is sound
enough. Instead of replacing the tax code, and battling every cherished
exemption, provide an alternative income tax. Taxpayers could then pay
either the current income tax, or Moore's Maxtax, whichever creates the lowest
tax obligation. With the Maxtax alternative, you'd pay 25% of gross
income, minus a tax credit for the payroll tax. For wage earners with
less than the maximum FICA-taxed income ($62,000), the income tax would fall to
17.5% -- 25%, less the employee share of FICA taxes. If you're
self-employed, paying both halves of FICA, then your income tax would fall to
only 10%. So the primary beneficiaries of Cato's Maxtax are the
so-called rich, and/or the self-employed. Perhaps coincidentally, those
are also the primary contributors to Cato. If you support tax cuts for
the highest-income taxpayers -- as I do -- then be honest enough to say so.
There are only two ways sell that kind of tax cut. Include a tax cut
for middle-class voters, which Moore fails to do despite rhetoric to the
contrary. Or start attacking that one trillion dollars in middle-class
loopholes, which only Liberty Issues seems willing to do
(more on that
next time). Oh yeah, you also have to cut spending.
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