Volume 3, Number 77
15 July 2003

The Bush Tax Cut

Dear Friends,

Do I favor Mr. Bush's tax cut? Answer: No. If we are to waste billions of dollars in war and similar ventures, we must pay for them. Proclaiming "blood, sweat, and tears," both Churchill and Roosevelt were realistic about the cost of defeating Hitler. In the Vietnam war, however, we were told we could have both guns and butter, and the result was one of the biggest inflations ever. Mark my prophesy: Taken all together, Bush's programs will lead to a whopping inflation that our children will suffer.

If there were no wars and the budget were balanced, would I favor Mr. Bush's tax cut? Answer: with some modifications, Yes. But the Bush tax cut is biased in favor of the rich, less so in favor of the poor, and against the middle classes. (All tax brackets are reduced absolutely, but rich-bracket taxpayers gain the highest percentage of the total reduction, and lowest-brackets a little but not much. Since shares in the reduction must total 100%, the middle taxpayers pay more percentagewise while less absolutely. Can you follow that?)

A fair tax cut could be arranged if the reductions were allocated differently. Simply decide on the amount of the tax cut desired (in dollars), and — starting with the lowest bracket — exempt the poor from paying any taxes at all. Continue upward, bracket by bracket, and when the desired tax cut is reached (in dollars), stop. Let the richer brackets (above the stop sign) pay what they paid before. That way, the tax cut would be biased entirely in favor of the poor, which is the way it should be.

Any tax system has two responsibilities: (1) to be fair, and (2) to help the economy function efficiently. A third question is whether the government or private sector will be more responsible in handling money and investment, and a fourth is whether a tax cut will bring prosperity. Let us take them up in order.

1. Being fair

"Being fair" is subjective; one person's idea will differ from another's. I believe that "fair" means that all taxes should be based on income and/or property, and that they should be progressive. "Progressive" means that taxpayers with lower incomes or less property should pay lower taxes, percentagewise. No taxes should be levied on specific products, such as airlines or even cigarettes. (Donât relieve parents of the obligation to teach their children not to smoke).

"Fair" (to me) also implies a negative income tax: the government should pay out to the very low earners instead of taxing them. Thus everyone would have a minimum income, high enough to provide for basic necessities but not so high as to discourage work. The particular amounts should be worked out in Congress, but I would favor a plan by which lower income people (up to, say, $30,000 per year, and owning no property) should pay no tax, and those with higher incomes and more property should pay all the taxes. The negative tax might be paid to those with incomes of $10,000 or less. It would be graded so that as a person's income rises, the payment is reduced, but always in such a way that when the taxpayer earns more, he or she keeps more. (The amount of negative tax taken away would be less than the increment in earnings.)

2. Make the economy function efficiently

By this, we mean that the economy should produce all the goods and services that it can (the production gap, or difference between what we can and what we do, is zero), with little or no waste. Labor is fully employed in the jobs that each worker prefers, and investment is directed toward those processes that are most needed. The free market would tend toward an efficient economy, because the choices made by consumers and investors would be what they truly want. This presumed circular reasoning — because the choices they make are deemed to be what they want — is valid. In the efficient economy, no one has so much power as to divert laborers and investors from their free choices.

Therefore, a tax that does not alter which goods and services people would buy is generally an efficient tax. For the most part, that is the income tax. People paying income tax will buy less overall but will not be steered away from (for example) air travel as they would from a tax on airline tickets, or from foreign goods as they would from a tariff on imports. Some economists complain that an income tax affects the relative expenditures on goods and leisure, but they don't know which way. (A higher income tax may cause some persons to work more and others to work less.) Whether a tax is progressive or not does not affect efficiency, but most (including me) believe it is more fair.

The same principle applies to investment instruments. A tax on dividends but not on reinvested earnings is neither fair nor efficient. It gives companies incentive to reinvest earnings rather than pay them in dividends, because dividends are taxed to the recipients, whereas reinvested earnings are not. (Double taxation occurs because corporate profits are taxed to the corporation and again to the investor who receives dividends.) The inefficiency results from corporations raising capital through reinvested earnings or bond issues rather than stocks, when it may be less costly to raise it from stocks.

Some argue that the tax on dividends is fair because mostly stocks are held by the wealthy. This is true, but the same result could be obtained, with greater efficiency, by taxing income and property more heavily, while freeing dividends from taxes. This is the logic behind the Bush proposal on dividends, except that instead of taxing income and property more, he would tax it less — which does not make sense (to me, anyway).

3. Does the government use funds more or less efficiently than the private sector?

As you judge my viewpoint, remember the negative income tax. Under this tax, poorer people are paid money instead of having benefits (social security, health care, welfare) bestowed upon them. Economists (including me) believe the people concerned know better how to spend their dollars than does the government. They may want more or less for social security, or to retire at a different age, etc.

Some object that poorer people, or those mentally deficient, will not know how to spend their money well. I believe separate arrangements can be made for these, such as counseling or even appointing guardians.

I will devote TQE #79 to this question, which requires much further discussion than the space allowed in a single Letter. (I have another topic in mind for TQE #78.)

4. Will a tax cut bring prosperity?

Keynesian economists will say the tax cut is essential to bring full employment (eliminate the production gap). The Bush argument for giving the best breaks to the rich is that they are the most likely to use their extra money to employ people, and their spending will spur the economy. There is, however, no empirical evidence that this is so; hence it is more likely that Bush is favoring his political cronies. Furthermore, most of his cut is delayed by several years, to assuage a disapproving Congress, and therefore would not be immediately effective.

My reasoning on the tax cut is therefore NOT based, one way or another, on the supposition that it will bring economic prosperity.


In normal circumstances (no war), I would favor abolition of the tax on dividends and lower taxes in general, provided the tax schedule is altered to favor the poor and not the rich. The poor would be provided for by the negative income tax, not by the government telling them what social security, health care, etc., they are allowed. However, I believe we have lost this opportunity by spending so many billions on war. We must pay for what the government spends "on our behalf."

Sincerely your friend,


Readers' Comments

Thank you Jack! For all that you do.

— Gerhardt Quast, Bridge City Preparative Meeting, Portland OR.

Your letters are always stimulating and I don't usually have the time to respond but this time I agree 100 percent so it is easy and quick to respond.

— Clyde Baker

I am but a Seeker, and an Episcopalian one at that. Only now have I looked into the internet and to the Friends. Somehow, quite accidentally, I found myself receiving your newsletter. I was initially turned off by one topic, but through your kindness and patient answering of my questions some things are becoming more clear. You have held open the door. Thus, do I know that it's true that the Friends mean it when they say "A Way Will Open." Jack, I am grateful for the serendipity and always the continuity and truth of the present moment. Thank you.

— Donna Casstevens, Episcopalian, Waco (TX).

I like what I see. Your articles echo my thoughts. Thanks.

— Jean McClelland, Unity Church, Palm Harbor (FL).

I have always wondered about the "double taxation" argument that people use to explain why there should be no tax on corporate dividends. If corporations benefit from being "legal" persons and benefit from the rights the state gives to persons, then they should be taxed as "persons," too. The owners of a corporation are not exactly the same as the corporation whose shares they own. Try to get access to IBM's books even if you are a stockholder/owner. You won't get past security.

Since there are two different legal entities being taxed, there is no "double taxation" as one tax is on the Corporation when they earn it, and the dividend payments are taxed when it becomes the property of the owners. Theoretically, they are the seen as being the same entity, but the reality is that they are different from each other.

— Free Polazzo, Anneewakee Creek Worship Group, Douglasville, Georgia

I agree with you on the tax cut. If we can ever get back to a balanced budget, I would like to modify the tax code to make it possible for people like me to help their grandchildren get into business or buy a farm with out having to pay a 72% death tax on the investment. (55% and then another 55% on the balance for the generation skipping.)

— Lee B. Thomas, Jr., Friends Meeting of Louisville (KY).

How about this to make taxes fair, the economy efficient, and the tax system manageable? The federal government simply sends every person a monthly check that is the minimum amount the people believe every person "needs" or "deserves" to survive on. All other income is then taxed at a flat rate with no deductions or credits. All other taxes are eliminated. Dividends are treated like interest, that is, deducted from taxable income by the payer and taxed to the recipient. Businesses calculate taxable income according to generally accepted accounting principles (thus eliminating distortions in the tax structure). All government welfare, entitlements, and subsidies are eliminated. This would free up millions of social security, welfare, and entitlement administrators, IRS employees, CPAs, and tax lawyers for productive employment.

— Bob Sheffield, Boulder (CO) Meeting of Friends.

I do agree that debt and equity should be treated the same way. The best way from an economic efficiency basis would be to eliminate the corporate income tax completely, and tax only the final recipient. This, as we all know, is politically unacceptable. The new tax law just makes a bad situation worse, without addressing the fundamental issue of the fairness of double taxation.

— Dick Bellin, Friends Meeting of Washington (DC).

I agree with nearly all of what you have said, but I have to take issue with your point that,"In the efficient economy, no one has so much power as to divert laborers and investors from their free choices." This is an intellectual abstract, and our economy as it operates today is not "the efficient economy." I can think of many instances to support the idea that people cannot always make the choices that they truly want: people take jobs they don't like because they are desperate, especially in this recession; low-wage earners purchase unhealthy fast-food because they don't have time to cook; as our mass media is allowed to conglomerate into larger monopolies, consumers don't always have the opportunity to partake of differing opinions for their news; advertisers push particular products onto children and other weak members of society to manipulate them into buying what the producers want to sell... the list goes on. It has always bothered me that economists presume the market allows everyone to make the choices most appealing to them, when the billion dollar profits the advertising industry enjoys would seem to counter this assumption. This is one of the key arguments for free-market reforms, and it just doesn't seem to hold up in the light of experience.

— Amanda O'Shea, Portland, OR

You mention (rightly) income & property, but then focus on income. What is wrong with taxing consumption and capital gains? This could be based upon a "double entry" tax form where today's wealth = yesterday's wealth + capital gains + income – consumption.

As economists we want taxation to be as non-distorting as possible, which means the tax rate should be as low as possible, and that the tax base should be as wide as possible. Why not tax capital at say 20% of the interest rate on a portfolio of Treasury securities (anybody should be able to get that!). Moreover the marginal incentive to find the best investment is unaffected. A sales tax or VAT is often described as "regressive" but combined with your minimum income this is less worry; and it is certainly less regressive than Bush-style tax cuts. Moreover, it does result in those who consume more paying more. Ideally taxes rates should also be easily collected, and so low as to not invite avoidance.

— Will Candler, Annapolis (MD) Friends Meeting.

I very much agree with your criticism of the Bush tax cut. As Noam Chomsky has put it, Bush and his associates are not at all conservatives in the traditional sense of favoring smaller government; quite the opposite: they have proven themselves to be large statists — more so than any administration I can remember. And worse, they try to hide this behind a tax cut that, as you rightly point out, appears motivated primarily to help their wealthy friends and peers. While it is the natural inclination of many politicians to enjoy programs that can be paid for by later generations of political leaders, this administration has taken that to an entirely new level. On the bright side, for the first time in nearly two years, some of the mainstream American media is finally beginning (the worthy New York Times has already been doing this all along) to open up to criticizing the Bush administration. Perhaps it will also begin to focus more attention on these contradictions in the Bush fiscal policies.

— Duncan Marsh, Bonn, Germany

I agree with your suggestion that if we are to have a tax cut at all, it should benefit the poorest first, and work its way up from there. But suppose before that happens you get your way and abolish minimum wages. Following the tax cut, the poor could afford a lower bid for their labor. They would end up with the same "after-tax" income, and the rich who hire them would pocket the difference. What kind of equity is that?

— Allan Abrahamse, Orange County Friends Meeting, Santa Ana, CA.

You state: "In normal circumstances (no war), I would favor abolition of the tax on dividends and lower taxes in general, provided the tax schedule is altered to favor the poor and not the rich." To me this is at least somewhat contradictory. By abolishing the tax on dividends (which I support on the grounds that they are already taxed as corporate income) we automatically lower taxes for people with money to buy stocks. These people generally earn more than the $30,000 cut-off you proposed in your tax plan. This action would shift the tax structure in favor of the rich.

— Beth Stevenson, Stillwater (OK) Friends Meeting.

Churchill said, "blood, sweat, toil and tears." Which, I believe, supports your argument even better.

— William Urban, Peoria-Galesburg Friends Meeting.

It seems to me that any tax system that is 'progressive' — the more you make, the higher percentage of income you pay — is inherently unfair. A 'progressive' tax in effect punishes those who are successful at generating income by levying increasingly large fines as one generates increasingly large income. The most 'fair' tax system would be a tax system based on consumption rather than income, implemented as a national sales tax with an exclusion for food, necessary medical care including prescription medicines, and low-income housing.

— Rick Enochs, Metro Denver Church on the Rock, Arvada (CO)

I would add two points to the concept of "Being Fair ;" (a) That the practical application, in reality works as it was designed in theory. The best example is consumption (sales) taxes, where in practise, almost 50% of collected taxes do not reach Government coffers. (b) Simplicity. The current US Code is unfair, due to the fact that it is so complicated, it favors the better educated and those who buy professional tax services.

— Kruskal Hewitt, Media Meeting (PA), currently in Japan.

The Bush tax cuts, which benefit you roughly in proportion to how rich you are, are consistent with long-standing Republican assertions that a) taxes are too high, and b) because rich people pay progressively more in taxes, an excessive burden has fallen on them. Bush doesn't come right out and say so, but he and his supporters believe they are justified in scaling the tax cuts to redress this injustice. But our tax rates are lower than anywhere else in the developed world, and we are running prodigious deficits. Obviously, tax rates are not too high. Furthermore, taxpayers do not benefit equally from services paid for by taxes: the richer you are, the greater the value of the services you receive, in police, fire and military protection and government favors, for example, and, especially, in our vast legal system, most of which is devoted to the affairs of the rich? We are taxed progressively, but we also absorb progressively more tax-funded services, the richer we are. Right now, people are getting a lot more services than they are paying for, the rich most of all!

— Tom Cooper, Lafayette (CA).

I think it is obvious that if we have a tax cut, the bulk of the dollars going back to the taxpayers will go to the individuals who have paid most of the taxes. However, if the effect of the tax cuts is to reduce the amount spent on social services — schools, police, roads, conservation, both directly by the Federal government and indirectly thru reducing funds which had gone to the states, then you have an effective reduction in real income for the least affluent. I find most amazing that the administration which is prepared, and desirous, of spending huge amounts on the military and the wars we are in should do so without asking any of us to at least pay the same amount of taxes that we were paying before we embarked on empire building. In my view Bush's pitch for the war in Iraq should at the very least have said we will have to give up any tax cut until the war is over and paid for.

— Dick Wolf, Coral Gables, FL.

An indirect reason I object to intervention is a glance at our US tax code. Originally this was a simple system, my measurement of "simple" defined as thickness in inches of the code. Passing years have encouraged Congress to increase the thickness, that is the complexity, of the code. We now have a code that is — how many inches, feet, meters, thick? — and it begs to be changed yet again. It stands to reason that any system of instruction, whether it be tax code or instructions for baking a cake, will be found to contain errors or outdated information. These errors should be discarded, and replaced with better instructions. This seems obvious when cake-baking, but why is it not obvious with tax code instruction? We should expect a slow increase with code thickness (i.e. as new forms of income and savings arise), but generally we should see as much faulty code discarded as new code introduced.

— Andrew Hirzel, Kalamazoo (MI)

I agree completely with your basic premise that we ought to buy social benefits, not expect the government to tax us and then magnanimously give back our own tax money to us. But of course this is nothing more than the classic Libertarian viewpoint, which, except for a courageous few of us, is a non-starter in the Religious Society of Friends.

— Dick Bellin, Washington (DC) Friends Meeting.

I like your "recommended society". It's good — even to the point of utopian. One point you didn't answer, though: would corporations still be taxed on their money, as individuals? And what about businesses that fall below some standard? Even a standard as narrow as their own past performance. Say Amtrak, which has been profitable in the past, but now is dipping into the red. Do we pay them the negative income tax? People don't want to see Amtrak disappear. Or would we relegate corporations to less-than personhood status, and give them a different tax system? Just curious.

— Amanda O'Shea, Portland, OR


RSVP: Write to "tqe-comment," followed by "@quaker.org" to comment on this or any future Letter. (I say "followed by" to interrupt the address, so it will not be picked up by spam senders.) Use as Subject the number of the Letter to which you refer. Permission to publish your comment is presumed unless you say otherwise. Please keep it short. Letters will be edited for spelling, grammar, clarity, and brevity. Any letter over approximately 100 words may be returned without being read. Please mention your home meeting, church, or synagogue, if any (this is not required), and your location.

To subscribe (or unsubscribe) at no cost, send an email letter with subject "subscribe," to tqe-subscribe (or tqe-unsubscribe), followed by "@quaker.org". No text is necessary in the body of the letter.

Each letter of The Quaker Economist is copyright by its author. However, you have permission to forward it to your friends (Quaker or no) as you wish and invite them to subscribe at no cost. Please mention The Quaker Economist as you do so, and tell your recipient how to find it.

The Quaker Economist is not designed to persuade anyone of anything, although viewpoints are expressed. Its purpose is to stimulate discussions, both electronically and within Meetings.

Publisher and Editorial Board

Publisher: Russ Nelson, St. Lawrence Valley (NY) Friends Meeting

Editorial Board:

  • Roger Conant, Mount Toby Meeting, Leverett (MA)
  • Carol Conzelman, Boulder (CO)
  • Ann Dixon, Boulder (CO) Meeting of Friends
  • Virginia Flagg, San Diego (CA) Friends Meeting
  • Asa Janney, Herndon (VA) Meeting
  • Janet Minshall, Anneewakee Creek Friends Worship Group, Douglasvillle (GA)
  • Jack Powelson, Boulder (CO) Meeting of Friends, Principal Editor
  • J.D. von Pischke, a Friend from Reston, VA
  • Geoffrey Williams, Attender at New York Fifteenth Street Meeting

Members of the Editorial Board receive Letters a week in advance for their criticisms, but they do not necessarily endorse the contents of any of them.

Copyright © 2003 by John P. Powelson. All rights reserved. Permission is hereby granted for non-commercial reproduction.

Previous Letter | Home Page | Next Letter