Gimme a (Tax) Break

Jan 04, 2001 |Todd Temple

In life, two things are unavoidable: death and taxes. We'll talk about death another day.

We’ve got a new year, a new president and another set of tax forms to fill out. Something tells me we’re about to hear plenty of people talking about taxes. Not wanting to be left out of all the fun, I’m going to talk about taxes too.

Wait a minute. You’re a college student. You pay little or no income tax. Why on earth would you be interested in this topic anyway? Wouldn’t it be more sensible to save this discussion for readers who pay lots of taxes?

Not quite. Even if you pay no income tax at all, your life is profoundly affected by tax policy. Your future career, salary, the price of your first house, even your current income and spending — all these things are affected by how much income tax other people pay right now.

I see you shaking your head. It’s true: Tax policy figures huge in your life. To see how, let’s put together a fictional tax hike and measure its economic effects.

Jobs & Taxes

Imagine for a moment that our government passes a new tax bill that raises the average individual tax return by $100. Of course, some people will pay more, some less — and you as a struggling student will probably wind up paying nothing at all — but the average comes out to a hundred bucks per tax return.

And since we’re just imagining things, let’s also say that this new tax revenue will be used to fund a grand jobs-creation program to get the chronically unemployed back to work. As a result, the politicians tell us, half a million people will be led out of the welfare line and back into the work force.

Well, if it can do all that, then how can we object? Paying another $100 in taxes isn’t fatal. We fork over the money, the government funds its program, and 500,000 jobs are created. Everyone’s happy, right?

Wrong. In a classic example of accounting deception, the proponents of this plan have added money into one column without deducting it from another. They’ve shown us the benefits of the jobs program but have failed to reveal the losses its funding has generated. Let’s do it for them. Just follow the money trail.

If the jobs program raised my tax bill by $100, then that’s a hundred bucks I won’t be using for other things. What would I have done with this cash instead? Well, I would have spent $80 of it … on more meals at my local taco stand, most likely. I would have deposited another $10 in my savings account. And maybe given the remaining ten bucks to charity. This is no economic disaster: My local taco stand isn’t going to shut down from my less frequent visits, my bank won’t close its doors for lack of deposits, and the local charity won’t notice my missing donation.

But I’m just one person. This year, about 125 million individual tax returns will be filed. Which means that if the average tax bill in this imaginary example is increased by $100, the federal government will receive an extra $12.5 billion. That’s $12.5 billion we don’t have to spend, invest and give away. If everyone followed my budget, the taco stands of America would see a $10 billion drop in sales. Banks would see $1.25 billion less in deposits while local charities would take a similar hit in donations.

Paychecks & Pink Slips

Just how many people will lose their jobs because of this employment program? How many businesses won’t be able to expand or even get their start because the banks have raised their lending rates to compensate for the drop in deposits? And how many charities will suspend services to the people who most need their help?

In reality, this jobs-creation program generates just as many pink slips as new paychecks. Sure, the news cameras can show you the happy faces of the newly employed. They’re easy to track down — the jobs-creation agency has their addresses in the computer our taxes bought them.

What you won’t see are the faces of people forced out of work by this new program. But they’re out there: Due to a drop in donations, an inner-city youth diversion program in Philadelphia will lay off its already underpaid staff. A start-up in Macon, Ga. will shut its doors and let 10 workers go because it can’t afford the interest on a business loan (when capital is scarce, lending rates go up). Wait, it gets worse.

The drop in taco consumption bankrupts a Wisconsin cheese maker, an Iowa farmer who grows corn for the tortillas, a little company outside Houston that manufactures the equipment used in making cornmeal. And Maria, who works at my favorite taco stand, just got fired.

Of course not everyone lives according to my budget. Each taxpayer’s hundred bucks would have moved through the economy in a unique way, so these funds – if left in the hands of us irresponsible consumers instead of being given to the government – would have spread far wider and deeper than I’ve illustrated here, making it impossible to track down all the victims of a tax increase.

This much is certain: Some businesses will be prevented from growing, some will be cut back, some will close their doors and some potential ventures will never get the chance to start. About half a million jobs, in cities and towns all across America, will be lost. Maybe yours.

Dollars & Destinations

The math is simple: You can’t redirect the path of $12.5 billion in our economy without affecting people’s lives. Every dollar that goes one place …well, doesn’t go another. The question is, Which path is best?

We’ve just looked at the path the proponents failed to show us: what happens to the people whose lives were otherwise destined to receive the money we handed over to the government instead. But to be fair, we need to look at the other path too. Where did the money go?

The $12.5 billion in this program didn’t get buried under the White House lawn. It, too, threaded its way through the economy. Whether the newly employed get their paychecks directly from the government or from employers subsidized by the government, they’ll spill those paychecks back into the economy just as the rest of us do.

But this path is still less efficient. For one thing, the government program itself costs lots of money to run: administrators and assistants, case workers and clerks, offices and furniture and computers and paper clips. If all this expense resulted in more employment, maybe it would make economic sense. But as we just saw, the program produces no net increase in employment. The only difference is that, whereas once the administrative expenses were covered by efficient employers who were already covering these things anyway, now they’re handled by a less efficient government agency.

Another problem: Let’s say that the jobs program concentrates its services in a particular part of the country (it’s no surprise that the government leaders who sponsored this tax bill hail from those states). Certain businesses in this favored region get a wonderful subsidy for employing these folks. This means that they can lower the cost of their products or expand their markets.

Unfortunately, you work for a company located elsewhere that must pay employees the old-fashioned way. To match the competition from the subsidized business, your company has to cut back expenses. Instead of a raise, you get a cut in pay. And some of your co-workers get laid off. The result is that inefficient companies are rewarded while efficient companies — and their employees — are punished.

Because of these inefficiencies, this jobs-creation program that sounded so wonderful in the leaders’ speeches winds up lowering employment, upsetting the economy and benefiting the favored few at the expense of all.

Hikes & Cuts

Three things before we go on. First, I chose this illustration not to argue against tax-funded jobs programs, but simply to point out that any tax-funded program whose aim is to improve the economy is more likely to do more damage than good.

Second, we’re talking economics here, not social concerns. Those who promote such programs on the basis of economic benefit stand on shaky ground, but they may have a solid argument when it comes to social justice. However, just as both sides of the economic issue must be measured, both sides of the social issue must be considered: Are the social gains to the beneficiaries of such a program greater than the social consequences to those who stand to lose by it? We’ll consider that question — a far more important one for Christians, by the way — in a future column. Stay tuned.

Finally, this illustration is about a tax hike, not a tax cut. But just as a tax hike decreases consumer spending, investing and giving, a tax cut increases these things. And that benefits everyone.

Including you. Because when consumers buy more, business grows to meet the demand: more hiring, higher wages. When consumers save, banks have more money to lend to these new and growing employers. And when consumers give, they help to eliminate the needs that must otherwise be met through our tax dollars.

So the next time you hear people discussing a tax cut, feel free to join the conversation. It’s not just about how much you pay come tax time. It’s about the economy that shapes your job and your future. And that’s worth talking about.

Copyright © 2000 Todd Temple. All rights reserved.

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