Page 346 - Economics

CONFIRMING PAGES

Last
Word
PART FIVE
298 Long-Run Perspectives and Macroeconomic Debates
Tax Cuts for Whom? A Supply-Side Anecdote*

Critics point out that the tax cuts advocated by bill. Thus the fifth person would now pay nothing; the sixth
supply-side economists usually provide the greatest would pay $2; the seventh would pay $5; the eighth would pay
tax relief to high-income individuals and households. $9; the ninth would pay $12; and the tenth person would pay
$52 instead of the original $59. Each of the six people was bet-
An anonymous supply-side economist responds with
ter off than before and the first four continued to eat free.
an anecdote, circulated on the Internet.
But once outside the restaurant, the people began to com-
pare their savings. “I only received $1
Suppose that every day 10 people go out
out of the $20,” declared the sixth per-
for breakfast together. The bill for all 10
son. “But the tenth man saved $7!”
comes to $100. If they paid their bill the
“Yeah, that’s right!” exclaimed the fifth
way we pay our income taxes in
person, “I saved only $1, too. It is unfair
America, it would go something like
that he received seven times as much as
this: The first four people (the poorest)
me.” “That’s true!” shouted the seventh
would pay nothing; the fifth would pay
person. “Why should he get $7 back
$1; the sixth would pay $3; the seventh
when I got only $2. The wealthy get all
would pay $7; the eighth would pay $12;
the breaks!” “Wait a minute!” yelled the
the ninth would pay $18; and the tenth
first four people in unison. “We didn’t
(the richest) would pay $59.
get anything at all. The system exploits
That is what they decided to do.
the poor!”
The 10 people ate breakfast in the restau-
The nine people angrily confronted
rant every day and seemed quite happy
the tenth and said, “This is not fair to
with the arrangement until the owner
us, and we are not going to put up with
threw them a curve (in tax language, a tax
it.” The next morning, the tenth man
cut). “Since you are all such good cus-
did not show up for breakfast, so the
tomers,” the owner said, “I’m going to
other nine sat down and ate without
reduce the cost of your daily meal by
him. But when it came time to pay the
$20.” So now breakfast for the 10 people
bill, they discovered what was very im-
cost only $80. This group still wanted to pay their bill the way
portant. They were $52 short.
Americans pay their income taxes. So the first four people were
Morals of this supply-side story:
unaffected. They would still eat breakfast for free. But what about
• The people who pay the highest taxes get the most benefit
the other six—the paying customers? How would they divvy up
from a general tax-rate reduction.
the $20 windfall so that everyone would get their fair share?
• Redistributing tax reductions at the expense of those pay-
The six people realized that $20 divided by six is $3.33. But
ing the largest amount of taxes may produce unintended
if they subtracted that from the share of the six who were pay-
consequences.
ing the bill, then the fifth and sixth individuals would end up
being paid to eat their breakfasts! The restaurant owner sug-
gested that it would be fairer to reduce each person’s meal by *Anonymous, unknown author.
roughly the same share as their previous portion of the total
Because government expenditures rose more rapidly tax rates over a series of years partially “to return excess rev-
than tax revenues in the 1980s, large budget deficits oc- enues to taxpayers.” In 2003 the top marginal tax rate fell to
curred. In 1993 the Clinton administration increased the top 35 percent. Also, the income tax rate on capital gains and
marginal tax rates from 31 to 39.6 percent to address these dividends was reduced to 15 percent. Economists generally
deficits. The economy boomed in the last half of the 1990s, agree that the Bush tax cuts, along with a highly expansion-
and by the end of the decade tax revenues were so high ary monetary policy, helped revive and expand the economy
relative to government expenditures that budget surpluses following the recession of 2001. Strong growth of output
emerged. In 2001, the Bush administration reduced marginal and income in 2004 and 2005 produced large increases in tax
298

9/1/06 3:17:12 PM
mcc26632_ch15_284-301.indd 298 9/1/06 3:17:12 PM
mcc26632_ch15_284-301.indd 298