Have the Wealthy Been Made Worse Off By Tax Cuts?

Thursday, November 24, 2005 | 01:16 PM

Very interesting analysis by Robert H. Frank -- in addition to being an economics Prof at Cornell, he is the coauthor a textbook -- "Principles of Microeconomics" -- with new Fed Chair Ben S. Bernanke.

It may be a fool's errand to try to draw any conclusions about the new Fed Chief by what his co-author writes, but its certainly interesting to see his analysis:

"A careful reading of the evidence suggests that even the wealthy have been made worse off, on balance, by recent tax cuts. The private benefits of these cuts have been much smaller, and their indirect costs much larger, than many recipients appear to have anticipated . . ."

For example, deficits have led to cuts in federal financing for basic scientific research, even as the United States' share of global patents granted continues to decline. Such cuts threaten the very basis of our long-term economic prosperity. As Senator Pete Domenici, Republican of New Mexico, said: "We thought we'd keep the high-end jobs, and others would take the low-end jobs. We're now on track to a second-rate economy and a second-rate country."

Large deficits also threaten our public health. Thus, despite the increasing threat from micro-organisms like E. coli 0157, the government inspects beef processing plants at only a quarter the rate it did in the early 1980's. Poor people have died from eating contaminated beef but so have rich people.

Citing revenue shortfalls, the nation postpones maintenance of its streets and highways, even though doing so means having to spend two to five times as much on repairs in the long run. In the short run, bad roads cause thousands of accidents each year, many of them fatal. Poor people die in these accidents but so do rich people. When a pothole destroys a tire and wheel, replacements cost only $63 for a Ford Escort but $1,569 for a Porsche 911.

Deficits have also compromised the nation's security. In 2004, for example, the Bush administration reduced financing for the Energy Department's program to secure loosely guarded nuclear stockpiles in the former Soviet Union by 8 percent. Sam Nunn, the former United States senator, now heads a private foundation whose mission is to raise private donations to expedite this effort. And despite the rational fear that terrorists may try to detonate a nuclear bomb in an American city, most cargo containers continue to enter the nation's ports without inspection."

All the exmaples mustered so far are pretty straight forward and obvious. I have found that the area where most laypeople have some difficulty comprehending the enormity of the problem is trade and budget deficits:

"Large federal budget deficits and low household savings rates have also forced our government to borrow more than $650 billion each year, primarily from China, Japan and South Korea. These loans must be repaid in full, with interest. The resulting financial burden, plus the risks associated with increased international monetary instability, fall disproportionately on the rich.

At the president's behest, Congress has already enacted tax cuts that will result in some $2 trillion in revenue losses by 2010. According to one recent estimate, 52.5 percent of these cuts will have gone to the top 5 percent of earners by the time the enabling legislation is fully phased in. Republicans in Congress are now calling for an additional $69 billion in tax cuts aimed largely at high-income families.

With the economy already at full employment, no one pretends these cuts are needed to stimulate spending. Nor is there any evidence that further cuts would summon outpourings of additional effort and risk taking. Nor, finally, does anyone deny that further cuts would increase the already high costs associated with larger federal budget deficits.

Moralists often urge the wealthy to imagine how easily their lives could have turned out differently, to adopt a more forgiving posture toward those less prosperous. But top earners might also wish to consider evidence that their own families would have been better off, in purely practical terms, had it not been for the tax cuts of recent years.

Fascinating stuff. I wonder what Bernanke's views are on these and other related issues . . . 


Sometimes, a Tax Cut for the Wealthy Can Hurt the Wealthy
Economic Scene
NYT, November 24, 2005


Thursday, November 24, 2005 | 01:16 PM | Permalink | Comments (18) | TrackBack (2)
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Listed below are links to weblogs that reference Have the Wealthy Been Made Worse Off By Tax Cuts? :

» Tax Cuts That Benefit Nobody from Folley.net
Via Big Picture comes an interesting take from Cornell economist Robert Frank on the impact that Bush's tax cuts have had on the rich. While it's clear that those tax ... [Read More]

Tracked on Nov 28, 2005 12:23:59 PM

» Politics and Business from BusinessPundit
A couple of interesting posts bridging politics and business... Have the wealthy been made worse off by tax cuts? Corporate Tax Breaks often don't work. (I agree that spending that money to spur entrepreneurship is probably a better use) Democrats... [Read More]

Tracked on Nov 29, 2005 5:52:36 AM


Not buying this. According to this arguement one could target an optimum income level where the services received by the government are equivalent to the taxes paid. I highly doubt that equilibrium point is somewhere within the top 5%, regardless of how much their 911 tire and rim replacement cost is. As for the lack of government R&D- the utility of such expenditures is questionable. Projects such as the Apollo missions forced private industry to push the envelope- innovation didn't take place within the government.

The real issue here is whether the costs in America, particularly at the high end, are justified when compared with other countries. Is a $60 haircut in Manhattan equal to a $5 haircut ( a good one) in Shenzhen? How much of this differential impacts GDP in a false manner?

Posted by: Andrew Schmitt | Nov 24, 2005 3:51:31 PM

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