A look back

To understand this post, you must first read this article, written by Daniel Mitchell on February 5, 2002. It article was written at a time when former president George Bush was planning to cut taxes, temporarily.

I decided to write about this because it may help to see fallacies in different arguments. The country is once again facing a “stimulus” and “debt” problem and a "tax" dilemma. As history often repeats itself, it may be constructive to look at the past.

http://www.nytimes.com/2002/02/05/opinion/cutting-taxes-faster-would-help-everyone.html

To begin with, the conclusion of the article: the pro-growth tax cuts should be made permanent and take effect immediately. Mitchell believes that lower taxes would increase the incentives to work, save, and invest, thus providing a significant stimulus to the economy. He specifies that cutting progressive taxes is not only economically sound, but it is actually fairer than a flat tax. According to Mitchell, critics want the tax burden to be shared progressively, emphasizing fairness. Supporters of the tax cuts support disproportionate tax reductions in favor of the wealthiest as this fosters more growth in the economy.

Before agreeing or disagreeing with the writer (which I am not planning to do), it is always important to look at the logic of the arguments and the language used.

First, be wary of bias language. Mitchell wrote that “Critics in those decades complained that rate cuts would allow the rich to keep too much of their money”. Notice the bias. Critics do not complain; critics criticize.

Second, be wary of ambiguous language. Mitchell wrote that “these rates will provide a significant stimulus”. Notice the ambiguity. How large does the stimulus have to be in order to be considered significant?

Third, watch out for false dilemmas. Tax cuts, such as rebate checks, do not really boost growth by putting some fixed amount of money into the pockets of consumers. This money comes out of another section of the budget. Only tax cuts that make saving and investing more attractive, such as lower income taxes, will have measurable impact. Mitchell presents this dilemma as if there were no other choices and ignores the fact that rebate checks may lead to more consumption than other chapters of the budget.

Fourth, make sure analogies and comparisons are accurate. This one is not. The 1960s’ tax cut corresponded to the necessary end of the burden of war efforts and occurred at a time of economic prosperity. While the incentive to work may be reduced with tax rates of 91%, it cannot be compared to tax rates at 30%. In the 1980s, the drop was of a dramatic magnitude (71% to 28%) that can never be replicated, implemented by a charismatic leader in peaceful times. Former President George W Bush was operating in the midst of wartime with a concerned population and could only implement a small tax cut.

Finally, the greatest fallacy in the article: Mitchell equivocates (uses ambiguous terms to hedge the issue). “Critics in those decades complained that rate cuts would allow the rich to keep too much of their money, but upper-income taxpayers actually wound up paying a greater share of the tax burden during those decades, in part because lower rates reduced the incentive to hide, shelter and underreport income.” Mitchell points out that, historically, when “the rich” get tax cuts, they end up paying more money and a greater percentage of the national tax burden. In other words even though their tax rate goes down they end up earning more money and paying more taxes in absolute terms. The writer is trying to imply that the money will “trickle down,” proving the truth of supply side economics. If, however, the money did trickle down, income disparity would have decreased. It hasn’t. The reason the rich pay a greater share of the burden is because the tax cuts have allowed them to receive a greater share of the income. Critics argued that the rich keep too much of their own money and Mitchell refuted by stating that the upper-income taxpayers pay a greater share of the tax burden. He not only avoids the accusation that “tax cuts are for the rich.” He actually refutes himself by equivocating!