So Who's Afraid of a Deficit? Economic sense in an age of superstition

National Review, May 14, 2001 by Alan Reynolds

Exempting more and more taxpayers from the income tax also shrinks the political constituency most likely to support restraint on taxes and spending. Opinion polls rarely show a majority being terribly concerned about high tax rates-largely because the majority now pays either no income tax at all, or a gentle 15 percent rate on the fraction of their income above the phased-out exemptions, deductions, and credits. By contrast, only 6.1 percent of individual returns in 1998 reported incomes above $100,000-but that tiny group bore nearly 58 percent of the burden.

But the politics are somewhat more complicated than this. Those who pay little or no income tax, for example, are literally indifferent to the issue. That means they will not be swayed by such pandering as $300 rebate checks or a 10 percent rate on the first $12,000 of income. What they do care about is how the economy performs. Many people of temporarily modest means, particularly the ambitious young, are far more aware than most politicians that lower marginal tax rates (on "the rich") have always been followed by better job opportunities and more valuable pensions for everyone.

Furthermore, those facing tax brackets of 28 and 39.6 percent are far more likely than non-taxpayers to be politically agitated by what the administration and Congress do about high tax rates. The percentage of tax returns affected by tax rates of 28 percent and higher jumped to more than 44 percent this year, by my estimate, up from fewer than 36 percent in 1993. And the percentage of voters directly affected by higher tax rates is higher than the percentage of tax returns-because two-earner households and small businesses are commonly reported on a single tax return with one high income, and because those with higher incomes are far likelier to vote. At least half of likely voters have probably been shoved into the top four tax brackets by now. In major metropolitan areas, where incomes look higher because the cost of living is higher, voters affected by the top four tax rates constitute an overwhelming majority. These people will be acutely aware of the Bush administration's success or failure in rolling back marginal tax rates.

If tax rates were brought down to 25-33 percent this year or next, Republicans could grab the credit. Democrats understand this, and that's why they have been willing to say and do almost anything to obstruct the one change they fear most: a prompt and permanent rate reduction in the higher tax brackets. The swing voters could very well swing to the GOP-if only Republicans would stop overtaxing them for the sake of the discredited sacred cow known as the federal surplus.