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  • Whether Taxpayers Face Tax Hikes or Tax Cuts in January is A Matter of Perspective

    Unless Congress and the President intervene legislatively, federal income taxes will soar on January 1, 2011 for millions of middle- and upper-income Americans. Tax relief enacted in 2001 and 2003 is set to expire. Whose money is this?

    Is it the taxpayer’s money taken by government, or government’s money left with the taxpayer as a benefit? If current policy is preserved, is it a tax cut, are tax cuts extended, or has Congress prevented a tax hike? As a recent Brookings report reveals, one’s core view of government determines how one refers to these events.

    Current policy has been the law of the land for 10 years. A tax cut then arises if a change in tax policy causes tax burdens to fall. A tax increase arises if taxes go up due to a change in policy. Conservatives would call the jump in tax revenues a tax hike, and the proposals in Obama’s budget allowing current policy to expire are the Obama tax increases.

    As the Brookings alert announcing the report indicates, many continue to refer to extending current policy as a tax cut, which is plainly wrong. An individual with the same income in 2011 as in 2010 will pay the same amount of tax in both years.

    But more responsible analysts such as the author of the report, Adam Looney, have adopted the language of “extending tax cuts.” Extending current policy is not a tax cut, but if the tax increases are avoided it will be because the 2001 and 2003 tax cuts were extended, so both uses of language—tax increase and extending the tax cuts—are technically correct. The choice of language one uses depends on one’s view of government.

    According to the Brookings report “full renewal of the 2001 and 2003 tax cuts will cost an average of $366 billion each year over the next 10 years.” Will cost whom? Will cost the government, of course. This captures perfectly the belief that the money belongs first to the government and citizens are permitted to keep some as an act of governmental beneficence.

    The conservative perspective is that the failure to extend the 2001 and 2003 tax cuts will likewise cost an average of $366 billion each year over the next 10 years. Will cost whom? Will cost taxpayers; the people who earned the money through their efforts, intelligence, and sometimes good fortune.

    So, depending on one’s point of view, raising taxes and not raising taxes would both cost $366 billion over 10 years. The difference depends on whose money it is in the first place. If the money belongs to the government, then preserving current policy costs the government. If the money belongs to the taxpayer, then allowing current policy to expire costs the taxpayers.

    The Brookings alert further displayed this dismissive attitude about taxpayer property when it observed that if the tax cuts are extended then “the wealthiest Americans would benefit.” Does the money belong to the government? Then the wealthiest Americans are getting a handout through a tax change. As the Brookings alert implies, no one can justify government handouts to the wealthy—though it happens all the time on the spending side of the ledger.

    Or does the money belong to the taxpayers? If so, then the “benefit” Brookings refers to is the benefit of being allowed to keep more of one’s own property. It is not a benefit to have less taken.

    Do citizens exist to serve the state, or the state to serve the citizens? As demonstrated by the language they freely use, in the national capitol of the state we are still fundamentally vassals of the state. Even the most Washington-centric would bridle at this interpretation, but the language they themselves choose to use convicts them.

    Posted in Economics [slideshow_deploy]

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