Sometimes, a Tax Cut for the Wealthy Can Hurt the Wealthy

[Thom Little]

By Robert H. Frank
New York Times
Thursday, Nov. 24, 2005



When market forces cause income inequality to grow, public policy in most countries tends to push in the opposite direction. In the United States, however, we enact tax cuts for the wealthy and cut public services for the needy. Cynics explain this curious inversion by saying that the wealthy have captured the political process in Washington and are exploiting it to their own advantage.

This explanation makes sense, however, only if those in power have an extremely naïve understanding of their own interests. A careful reading of the evidence suggests that even the wealthy have been made worse off, on balance, by recent tax cuts. The private benefits of these cuts have been much smaller, and their indirect costs much larger, than many recipients appear to have anticipated.

On the benefit side, tax cuts have led the wealthy to buy larger houses, in the seemingly plausible expectation that doing so would make them happier. As economists increasingly recognize, however, well-being depends less on how much people consume in absolute terms than on the social context in which consumption occurs. Compelling evidence suggests that for the wealthy in particular, when everyone's house grows larger, the primary effect is merely to redefine what qualifies as an acceptable dwelling.

So, although the recent tax cuts have enabled the wealthy to buy more and bigger things, these purchases appear to have had little impact. As the economist Richard Layard has written, "In a poor country, a man proves to his wife that he loves her by giving her a rose, but in a rich country, he must give a dozen roses."

On the cost side of the ledger, the federal budget deficits created by the recent tax cuts have had serious consequences, even for the wealthy. These deficits will exceed $300 billion for each of the next six years, according to projections by the nonpartisan Congressional Budget Office. The most widely reported consequences of the deficits have been cuts in government programs that serve the nation's poorest families. And since the wealthy are well represented in our political system, their favored programs may seem safe from the budget ax. Wealthy families have further insulated themselves by living in gated communities and sending their children to private schools. Yet such steps go only so far.



http://www.nytimes.com/2005/11/24/business/24scene.html

[1932]

1. '64 tax cuts for wealthy were part of perfect storm resultng in inflation

along with huge defense spending and Fed Reserve raising interest rates.

Richard Parker writes about this in his galbraith biography (at about page 420).

[Hypatia82]

5. The 64 tax cuts...

cut income tax rates across the board. Still rates as the biggest tax cut in the history of the income tax in terms of percentages. Also raising interest rates is supposed to head off inflation. But either way, interest rates are a fools toy for trying to regulate the economy. Nevermind that rising prices alone while the definition of inflation as accepted, don't really say much about anything.

[1932]

6. Read Parker's biography of JK Galbraith. Approx. page 420.

There's a section on how the 64 tax cuts made the code less progressive and that, along with vietnam spending and the increase in the interest rates caused inflation.

Increasing interest rates reduces investment by companies, which means fewer jobs. So unless the economy really is doing well, raising interest rates compounds other problems.

[Hypatia82]

7. I've read that...

also read Galbraith's work itself. Thing is looking at price increases alone is rather useless. Also have to look at wage increases.

[1932]

9. Then you remember what Parker said about wage increases in the 60s.

What did he say?

[1932]

2. The book The Health of Nations has a much more interesting argument

about what this article is trying to talk about.

Frankly, I think the inflation-causing impact of flat taxes is enough for rich people to look this gift horse in the mouth, but if they want to talk about what every increasing house sizes means for the health of society, there's a smarter analysis in Health of Nations.

This article seems to sugges that you'll be happier if you buy an even bigger house -- ie the problem is that everyone can afford a big house now. Huh?

[Hypatia82]

3. That's only half the picture...

after all, with purchases come other tax revenues. Buy a bigger house, pay more in property tax, buy a new car pay various taxes on that. And even adding up all the taxes from increased spending would still not be the whole picture.

[Commie Pinko Dirtbag]

12. Ah, a fan of "tricke down". How precious. (nt)

[aquart]

4. They're greedy, not smart.

[applegrove]

8. These tax cut people are delusional. They will end up living in 20th

Century South America style countries. They will end up living in Mexico.

They are crazy.

But they were told and like the dupe "it sounded too good to be true so I thought it was".

Absolutely.

The thing that differenciates the West from the poor nations have been our system of laws. And that means regulations that make sense.

[SharonAnn]

10. And they will end up living like Venezuelans, or Cubans

If the lower income population is repressed enough and the gap between the average person and the wealthy becomes too big, revolution results. Either by elections or by violence.

[applegrove]

11. Right. But you would think that living behind walls and terrified

of crime would be bad enough.