Taxes and promises

Republicans in Washington are using evidence of the weakening economy to sell their tax cut. The idea is to sell their $1,600bn program as a "Goldilocks" cut - one that is not too big, or too small, but "just right".

The chances that the Grand Old Party will actually succeed in providing just the right level of incentives to stop a recession are about as real as any fairy tale. Economists generally tend to believe that tax cuts can make an economy more competitive. But no one in Washington actually knows if a $1,600bn plan is better than a $1,200bn or $1,900bn one in this particular instance. No one even knows exactly what the plan will cost, as hearings this week demonstrated. And President George W. Bush has an ultra slow schedule for his cuts; this year's reductions are a drop in the economic budget.

If the economy turns up before he settles with the House and Senate on a plan, which it looks like it may do, the Bush argument that he is precision bombing a potential recession will look pretty silly.

That's too bad, since there are plenty of good reasons for tax cuts that range beyond economic fine-tuning. One of them is the moral argument.

The moral argument says the same standards that hold in the rest of society should hold where taxes are concerned. It says that when you make a promise, you should keep it. And when it comes to taxes, there is a contract that has yet to be fulfilled.

Recall the story.

Back in 1986, the top tax rate was 28 per cent.

Then came an unexpected national emergency: the widening deficit. President Bush decided he had to raise taxes temporarily to stop the red ink from flowing. He asked the wealthy to make a special sacrifice, raising their rate to 31 per cent from Reagan's landmark 28 per cent. The hike was supposed to be temporary, until the problem got fixed. Bush explained, "I want to see the deficit down".

But there were still deficit troubles when President Clinton was elected. Again, Washington turned to higher earners, raising their top rate again to 39.6 per cent. In his book, Agenda Bob Woodward reports that Bob Rubin, who later became treasury secretary, thought a lot about how to ask this special favour of higher earners. "You can't say, we're going to make the rich pay more taxes, you've got to say we will ask the well-to-do to pay their share."

And the rich kept their side of the bargain. Or more. In 1990, the top 1 per cent of households in America paid 25 per cent of all the income taxes. By 1998 they were paying 34.6 per cent. Back in 1990, the top 5 per cent of earners were paying 43.6 per cent of the tax bill. In 1998, they were paying over half of all the income taxes.

Fast forward to 2001. The ogre deficit is gone. In fact, the nation has surplus, trillions of surplus. So isn't it time for the government to pay these people back? After all, their industry and virtue in the same period helped to create jobs and generate the 1990s boom. And isn't that what the new President Bush plans?

Sort of. His cut is good as far as it goes. It brings the top rate to 33 per cent. But that isn't even a return to his father's 31 per cent. And what happened to the old 28 per cent at the beginning of this agreement?

Political disillusionment is a big topic in America. It's why the country's biggest debate, after tax cuts, is currently Senator John McCain's campaign finance reform proposal.

But political disillusionment isn't just about campaign finance. It's also about taxes. Politicians need to do what they promised to keep voter faith. Seen in the moral context, the trouble with Mr Bush's plan is not that it goes too far in cutting taxes. It is that it doesn't go far enough.

© Copyright 2001 Financial Times

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