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The Inivisible Race

by april otterberg '06

Illustration

(Illustration by Ray Bartkus)

Tax cuts raise ante for all but richest

On April 16, a day after tax returns were due, Bush Administration tax policy got a thorough going over by some of the nation’s leading tax law experts, who spoke at a Law School symposium hosted by the Boston College Law Review and attended by more than 100 students and academics. In scrutinizing recent changes to the Internal Revenue Code, symposium participants weren’t looking for ingenious new tax-reduction schemes but rather for a sense of who benefits from the changes and how they’re affecting the US economy. The reviews were unanimous on both accounts: strongly negative.

Symposium participants painted a picture of a country where, its egalitarian principles notwithstanding, income inequality in the last few decades has eclipsed that of any other industrialized democracy. One cause, said Martin J. Mc Mahon Jr. ’74 of the University of Florida Law School, is the way we tax ourselves. While income taxation in the US is “mildly progressive up to $300,000” in adjusted gross income, Mc Mahon explained, this isn’t nearly enough to offset our regressive payroll taxes, which account for almost 40 percent of the federal government’s tax receipts.

Because they not only reduce tax rates on earned income but also drastically reduce the taxes, paid largely by the wealthiest 1 or 2 percent of Americans, on inheritance, dividends, and capital gains, the recent tax cuts promise to bring even more inequality, according to Mc Mahon and economist William G. Gale, a senior fellow at the Brookings Institution.

The Figures Tell All
Papers by both men bristled with statistical charts and graphs. Some particularly telling figures: In 2010, after the Bush tax cuts are fully phased in, households in the lowest quintile of income earners will save $35 as a result of the cuts, and households in the middle quintile will save $782. Households with income between the 95th and 98th percentiles will, by contrast, save an average of more than $3,669. The big winners, however, will be the super-rich, the top 1 percent of households, who, according to figures cited by Mc Mahon, will save more than $63,000.

Such an outcome, several of the day’s speakers noted, flies in the face of so-called marginal utility, the idea that it’s people with the least income who can make the best use of an extra dollar.

Then there was the awkward but inevitable matter of paying for the tax cuts, which are currently financed by borrowing—not a sustainable mechanism, according to symposium participants. Several predicted that if the cuts in estate and income taxes proceed as scheduled, they will eventually necessitate politically unpopular spending cuts or, more likely, an increase in payroll or federal excise taxes. The burden of increased taxation, according to Gale of the Brookings Institution, would fall most heavily on households with incomes below $200,000, most of which would experience a net loss in after-tax income, whereas most households with incomes over $200,000 would still see a net gain in aftertax income.

A Drag on the Economy
But haven’t the recent rounds of tax cuts given the economy a needed jolt? The day’s speakers spent less time on this than on the tax-fairness question, but the answer they gave was a qualified no.

Gale maintained that whatever mild stimulus the cuts would have delivered has been more than offset by the fact that they’re financed by borrowing, thus reducing the national savings rate. The net effect is a drag on the economy, he said. Other speakers questioned the “supply-side” theory behind the tax cuts, which argues that high marginal tax rates for the richest Americans will result in their working fewer hours or working less productively, thus depressing economic efficiency. Richard L. Shmalbeck of Duke University Law School said the theory seemed implausible, pointing out that the way most jobs are structured doesn’t allow workers to respond to changes in the tax code by adjusting the level of their effort up or down.

Meanwhile, Daniel N. Shaviro of New York University Law School analyzed the longer-term economic effects not only of the tax cuts but also of looming deficits in Social Security and Medicare, including those embodied in the recently enacted prescription drug benefit. In case the structural imbalances in tax and entitlement policies aren’t fixed—and Shaviro predicted they wouldn’t be—he advised the audience to “read up on Weimar Germany or, less ominously, contemporary Argentina. …Bet on eventual high inflation and interest rates. Lock in that long-term mortgage now.”

In a day of intriguing, if sometimes disheartening, presentations, perhaps the most intriguing came from Thomas D. Griffith of the University of Southern California Law School, who stepped back, at least to start with, from the tax-cut debate to ask the kind of big philosophical question that symposia are made for: What kind of economy best promotes human happiness?

Surveying the literature on the topic, which he said “has exploded in the last few years,” Griffith said people in wealthier nations are happier than people in poor nations, but that a small amount of extra income makes much more difference to the happiness of people in poorer nations—a finding consistent with marginal utility. “Once you’re above subsistence level,” as Griffith put it, “more money doesn’t make you much happier.” Griffith also cited research showing that people presented with a range of hypothetical alternatives were willing to give up 40 percent of their income to live in a society where others didn’t make more money than they did. Thus, he concluded half-jokingly, “when you make more money, you’re making other people unhappier. So if taxation reduces [economic] efficiency, that’s a good thing.”

According to Marjorie E. Kornhauser of Tulane Law School Griffith’s presentation raised an obvious question: “If progressive taxation makes us so happy, then why do we fight it so much?” An unabashed fan of tax progressivity, Kornhauser cited a tradition, going back to Shays’ Rebellion in 1786, that says, “To be anti-tax is to be patriotic.” In addition, she said, Americans are “incredibly ignorant” about the way our tax system works and how it affects their own bank accounts. Ultimately, she said, making the tax code more equitable will require a campaign of public instruction. She ended with a charge to the audience. “Do what this conference is doing,” she said. “Take what you know and what you’ve learned here. Go forth and educate.”

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