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Look past immediate effects of taxes, cuts

| Tuesday, Oct. 3, 2017, 9:00 p.m.
President Donald Trump, speaking in Indianapolis, calls the current tax system a 'relic' and a 'colossal barrier' that's standing in the way of the nation's economic comeback. He says his tax proposal will help middle-class families save money and eliminate loopholes that benefit the wealthy. (AP Photo | Michael Conroy)
President Donald Trump, speaking in Indianapolis, calls the current tax system a 'relic' and a 'colossal barrier' that's standing in the way of the nation's economic comeback. He says his tax proposal will help middle-class families save money and eliminate loopholes that benefit the wealthy. (AP Photo | Michael Conroy)

As predictable as death and taxes is the fact that any proposed across-the-board tax cut will be criticized by those on the political left as being a “giveaway” to “the rich.” Yet for three reasons this criticism is unjustified.

First, in a free society, income is produced by those persons who earn it. Incomes do not originate with government. So when government cuts taxes, it doesn't give anything to income earners; instead, government takes less from income earners.

Second, every income-tax system is designed to have higher-income earners pay more dollars in taxes than lower-income earners pay in taxes. This fact is doubly true when tax rates are progressive, as they have been in the United States since the federal income tax was instituted in 1913. Because of this fact, any across-the-board reduction in tax rates will always reduce the dollar amounts paid in taxes by the rich by more than it reduces the dollar amounts paid in taxes by the non-rich. Nevertheless, despite the impression created by tax-cut opponents, the rich continue, even when tax rates are cut, to shoulder a disproportionately large share of the tax burden.

Third, the proper way to assess the merits of any change in taxes is to examine its economy-wide consequences rather than only its immediate impact. The economic case for tax cuts does not spring only, or even mainly, from a desire to allow high-income earners to keep more of their earnings. Instead, the economic case for tax cuts springs from the belief that tax-rate reductions make the economy more dynamic and productive. The lower the tax rate, the greater the amounts of creativity, effort, and resources poured into entrepreneurship, constructive investments and gainful work. The economic pie grows and thereby enriches even those individuals and families whose incomes are so low that they pay no taxes at all.

Yet “progressive” opponents of tax cuts speechify and write as if the only effect of income-tax cuts is to allow the rich to keep more of their earnings. But in taking such a myopic stance on income taxes, “progressives” are inconsistent. When they evaluate the effects of carbon taxes to reduce greenhouse-gas emissions, they sing a different tune.

“Progressives” understand that raising the tax rate on carbon emissions has relevant economy-wide effects that extend well beyond the immediate impact on the bottom lines of industrial polluters. “Progressives” correctly point out that imposing or raising a carbon tax changes the behavior of businesses; it prompts businesses to emit less carbon into the atmosphere. And with less carbon emitted into the atmosphere, the risks of climate change fall.

You don't have to accept the arguments for climate change to appreciate the need to evaluate a carbon tax's consequences by looking beyond its immediate impact on business incomes to its wider impact on society.

But the same “progressives” who appropriately emphasize the society-wide impact of a carbon tax too often mysteriously ignore the society-wide impact of income taxes.

Opponents should stop treating income-tax cuts as if their only consequence is to raise the after-tax incomes of the rich.

The relevant economic question instead is this one: What is the economy-wide impact of cutting income taxes?

Donald J. Boudreaux is a professor of economics and Getchell Chair at George Mason University in Fairfax, Va. His column appears twice monthly.

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