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Can We Afford a Tax Cut?


May 1995

On May 25th,1995, the Senate passed a spending plan intended to eliminate the budget deficit by the year 2002 by decreasing government spending while cutting taxes. The Senate's plan is less extreme than the plan passed by the House a week earlier, and both chambers hope to agree upon a compromise plan before the July 4 recess. This may prove a more difficult feat than it appears. While the two plans are similar in substance, they differ widely in the size of the tax cuts proposed. The House plan would cut taxes by $353 billion, while the Senate plan calls for a tax cut of $170 billion contingent upon the passage of spending reductions. Both plans exempt Social Security from cuts, increase military spending, and cut funding for Medicare, Medicaid, and student loan programs.

Though the numbers may still be at issue, all sides agree that taxes must be cut. But is a tax cut wise? Fifty years ago The Atlantic published an article by the then-managing editor of the Monroe Evening News, Karl Zeisler. In his article "Who Wants Taxes Cut," (October, 1945) Zeisler makes a persuasive argument against the low-tax lobby and the low-tax ethic itself. Zeisler's argument is, in effect, that in government as in business you get what you pay for--and in the case of taxes, he theorizes, the more citizens pay on a local level the more likely they will be to insist that they get their money's worth. Inadequate funding for schools and salaries so low that they fail to attract competent individuals to civil service jobs ultimately cost the citizenry more than would a tax increase. Because Americans are not willing to spend the appropriate amounts at the local level to assure that salaries for teachers and civil servants are sufficient to attract the best and the brightest, they are doomed to dissatisfaction with their local governments. In Zeisler's view, the majority of the troubles that citizens complain of come as a direct result of insufficient funding. And for this, says Zeisler, the low-tax lobby and the small-but-powerful interests that profit from lower taxes are largely to blame.

In "Can We Limit Taxes to 25 Percent?," former dean of Harvard University Law School Erwin N. Griswold argues against a proposed constitutional amendment to limit income taxes, estate taxes, and gift taxes to 25 percent. With Congress constitutionally prevented from levying taxes, Griswold theorizes, the possibility for a balanced budget is compromised, and states would be forced to raise their taxes concomitantly. Moreover, Griswold argues, the tax burden would be shifted from the rich to the poor.

In "The Coming Tax Reform," written almost twenty years after Zeisler's article, John Doe (an anonymous author and tax lawyer from New York City) echoes Griswold's argument and takes a long look at the inequities of the tax system in 1963, which contained a "wilderness of special provisions" that shifted the majority of the nation's tax burden away from high-income individuals and corporations and onto the salaried majority. Doe examines the effects of a tax system that forces "intellectual producers"--who most often live on straight salaries, without capital gains and exemptions--to bear the greatest relative tax burden and ultimately draws the able and educated away from schools and civil service and into business. Without incentives to keep qualified individuals in careers like education and civil service, the tax system risks sacrificing the long-term health of the whole for the short-term gain of a limited constituency.

Nearly twenty years after Doe, in his 1980 article "Getting Serious About Tax Reform," M.I.T. economist Lester C. Thurow makes the argument that the tax system needs to be reconfigured, but along slightly different lines. Productivity, Thurow warns, is down, our standard of living is in jeopardy, and America is becoming ever less competitive in world markets. Indiscriminate tax cuts, he argues, are not the answer. Instead, addressing the "economic disaster" that America now faces will require strategically structuring taxes so as to encourage industry and investment while discouraging consumption: "Taxes," he argues, "will have to go up on consumption and down on both investment and work effort."

While many of the tax loopholes that Doe refers to have since been closed, his point is still germane in light of the trend toward cutting both corporate taxes and funding for education. Are the cuts proposed by the Republicans poised to give the states and individual citizens more control by allowing them to retain significantly more of their earnings? Or are these merely symbolic savings that will ultimately lead to the further decline of the much-lamented education system and a renewed dissatisfaction with an ineffective government hamstrung by lobbyists's demands for lower corporate taxes? Is there any way that Thurow's proposed consumption taxes can be made palatable given the current enthusiasm for further tax-cutting measures?

In conjunction with these articles, we're including Neil Howe and Phillip Longman's examination of the current state of middle-class entitlements "The Next New Deal" (April, 1992) and William Greider's "The Education of David Stockman" (December, 1981), his classic look at the behind-the-scenes budget wrangling that went on in the Reagan administration.


Copyright © 1995 by The Atlantic Monthly Company. All rights reserved.
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