O'Neill hits the what-ifs on tax

Posted: Mar 05, 2001 12:00 AM
At a White House briefing featuring Secretary of the Treasury Paul O'Neill, fine things were done, however lightly. Mr. O'Neill was there with budget director Mitch Daniels and National Economic Council director Larry Lindsey to explain the president's tax plan. Toward the conference's end, questions were raised that generated philosophical answers. As might be expected, one question had to do with how much the rich will get out of it.

Mr. Lindsey answered by coming in at the other end. The rich are going to end up paying a larger share of the tax. "People making more than $100,000 ... now pay 61.9 percent of the taxes. They will pay 64.1 percent of the taxes under the president's program."

Percentages can be playful entities, and the questioner instantly prodded the director. "The question I'm asking is, of the $1.6 trillion being cut, what percentage of that is going to the top 1 percent of the richest Americans?"

All Mr. Lindsay would do is aver that the figures being used by the Bush administration are those of the Joint Committee on Taxation, which "only scores income taxes." That is the committee on whose findings both parties rely in making their projections, so that all Mr. Lindsay would say was that the income taxes that would be paid under the Bush plan would fall more heavily than under existing codes on the rich.

How can that be? Well, if the tax burden is reduced, say, by 10 percent, with the poorest being the principal beneficiaries, then those who are paying at the higher level are likely to increase the percentage of the whole. But this invited a look into the intricacy of the whole tax question, and one correspondent wanted to know what it costs us to reduce taxes in that to do so delays paying back the debt.

One dollar's reduced debt load means, say, 5 cents of interest payments on the debt. Therefore, a tax cut of a dollar not only deprives the government of a dollar, it deprives it also of the relief it would enjoy of 5 cents' interest no longer due.

That did it to Secretary O'Neill.

"Well, I'll tell you," he said. "It's part of the crazy conventions that we have of what I would call half dynamic scoring. You know, the convention is ... that if you propose a tax reduction ... then it's necessary to assume that that money otherwise would have been used to pay down the debt" -- which of course does not historically happen, the money usually going to federal spending. "And if you're not paying down the debt with that tax reduction, then you have to penalize yourself for the cost of the interest" you'd otherwise have been paying.

Mr. O'Neill went on to say: Look, if you want to count that derivative factor -- reduced interest benefits forsworn -- go ahead, but weigh also other derivative factors. Most direct of these is the "economic feedback." People who have more money to spend spend more money. O'Neill cited Martin Feldstein of Harvard. "In his testimony before the Congress a week or 10 days ago, (Feldstein) said he thinks the feedback effect from the president's proposal is $600 billion over this 10-year (plan)."

That projection sniffs at supply-side postulates, which don't tell you that tax cuts pay absolutely for themselves, but do insist that a dynamic view of the effect of tax cuts needs to consider what they do in the way of generating more revenues.

Mr. O'Neill was wound up and spoke out soul-thoughts on the general subject. "We talk about tax cuts ... about distribution effects, as though the government owned the money. Right? The money came in here, and as soon as it got here it lost its parentage. So we (the government) now have an opportunity to re-decide what the equitable distribution of tax should be. We didn't have that conversation when we decided where it was going to come from in the first instance."

He held back another raised hand to conclude, "I would remind you, as a recent fugitive from the private sector, that all the money that comes in here comes from people out there who work hard for a living. And they pay their share. I've paid my share. I have no regrets about paying my share."

It was a mistake to say that. Because it invites everyone in the house, most vociferously the class-warfare types, to insist that they know what a fair share is. The Socratic manner, Max Beerbohm observed, is not a game at which two people can play. If the government engages in redistributionist policies without any sense of the superordinate right to property, there are no theoretical limits to the progressivity of taxation.