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Thursday, November 24, 2005

Have Recent Tax Cuts Made the Wealthy Worse Off?

Robert Frank of Cornell University, co-author with Ben S. Bernanke of "Principles of Microeconomics," looks at the costs and benefits of recent tax cuts for those at the higher end of the income distribution. When the costs are fully accounted for, he comes to the conclusion that recent tax cuts for the wealthy have made them worse off:

November 24, 2005 Economic Scene Sometimes, a Tax Cut for the Wealthy Can Hurt the Wealthy, by Robert H. Frank, NY Times: ...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 ... 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 ... expectation that doing so would make them happier. ...[H]owever, ... 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, ... 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 ... will exceed $300 billion for each of the next six years... [S]ince 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. For example, deficits have led to cuts in federal financing for basic scientific research... Such cuts threaten the very basis of our long-term economic prosperity. As Senator Pete Domenici, Republican of New Mexico, said: "We thought we'd keep the high-end jobs, and others would take the low-end jobs. We're now on track to a second-rate economy and a second-rate country." Large deficits also threaten our public health. Thus, despite the increasing threat from micro-organisms like E. coli ..., the government inspects beef processing plants at only a quarter the rate it did in the early 1980's. Poor people have died from eating contaminated beef but so have rich people. Citing revenue shortfalls, the nation postpones maintenance of its streets and highways, even though doing so means having to spend two to five times as much on repairs in the long run. In the short run, bad roads cause thousands of accidents each year... Poor people die in these accidents but so do rich people. When a pothole destroys a tire and wheel, replacements cost only $63 for a Ford Escort but $1,569 for a Porsche 911.

Deficits have also compromised the nation's security. In 2004, for example, the Bush administration reduced financing ... to secure loosely guarded nuclear stockpiles in the former Soviet Union by 8 percent. ... And despite the rational fear that terrorists may try to detonate a nuclear bomb in an American city, most cargo containers continue to enter the nation's ports without inspection. Large federal budget deficits and low household savings rates have also forced our government to borrow more than $650 billion each year, primarily from China, Japan and South Korea. These loans must be repaid in full, with interest. The resulting financial burden, plus the risks associated with increased international monetary instability, fall disproportionately on the rich.

At the president's behest, Congress has already enacted tax cuts that will result in some $2 trillion in revenue losses by 2010. ... Republicans in Congress are now calling for an additional $69 billion in tax cuts aimed largely at high-income families. With the economy already at full employment, no one pretends these cuts are needed to stimulate spending. ... Moralists often urge the wealthy to imagine how easily their lives could have turned out differently, to adopt a more forgiving posture toward those less prosperous. But top earners might also wish to consider evidence that their own families would have been better off, in purely practical terms, had it not been for the tax cuts of recent years.

[Update: See Kash at Angry Bear who disagrees with Frank's conclusion. I don't know for sure how the numbers would net out, but for me, the net effect isn't as important as the idea that costs must be fully accounted for when asking how benefits from tax cuts are distributed, and that includes any costs that accrue to other income classes as well. The exact quantification will always be controversial.]

    Posted by on Thursday, November 24, 2005 at 01:30 AM in Budget Deficit, Economics, Income Distribution, Taxes | Permalink  TrackBack (0)  Comments (30)

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