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The Tax Cut Controversy
By Imad-ad-Dean Ahmad, Ph.D.
21/03/2001
It begins with the budget surplus. The government expects to collect $125 billion dollars more in tax revenues than it plans to spend in 2001, which can be allocated in three possible ways: 1) the government can increase spending; 2) it can reduce its enormous debt; 3) or it can return the extra to taxpayers by cutting taxes.
President Bush is opting for the final choice. Is this the best alternative? And if so, is Mr. Bush's tax structure the best way to go about it?
Bush's proposal is an "across-the-board" tax cut that reduces tax rates for every class of taxpayers. The first part of the proposed $1.6 trillion tax cut (to be phased in over a ten-year period beginning retroactively) passed the house earlier this month; however, it is not expected to pass the Senate unchanged.
According to the proposal, by 2006, those in the top 39.5% bracket will pay a marginal rate of 36% while those in the bottom 15% bracket will pay a marginal rate of 10%.
In this article, we will consider the alternatives to this tax cut.
There are actually some people who think the government doesn't spend enough money. Some Democrats have objected to passing a tax cut in the absence of a detailed consideration of the whole budget.
The farm lobby has geared up to demand an increase in agricultural subsidies beyond the $842 billion in Bush's contingency funds. It seems absurd that farmers need subsidies more than the rest of us need tax cuts when the average farm household earns $59,855 per year, substantially more than the average non-farm household. Further, a demand for more agricultural spending is ironic given that American agriculture is the sector that stands most to gain from the U.S. government's repeated demands for increased free trade and its opposition of agricultural regulations and subsidies in other countries.
Whether or not the farmers succeed in obtaining a share of the surplus, Colin Powell has successfully convinced the Administration of the need for an increase in the State Department's budget. Given the prevailing political winds, it is difficult to believe that either increase will benefit the Muslim community.
More persuasive are the arguments for reducing the government's debt. Servicing it is now the third biggest single item in the budget. In other words, more federal income tax money is spent on the payment of interest ($362 billion in FY 2000) than on any other budget
lines - The Social Security Administration ($442 billion) and the Health Care Financing Administration ($413 billion) are larger line items in the budget, but obtain substantial funding from other payroll taxes and
co-payments. Debt reduction now will make greater tax cuts possible in the future.
Regarding tax cuts, President Bush's favorite pro-tax cut argument is that the money really belongs to the taxpayers from whom it was taken. Personally, I like this argument; however, if one takes it seriously, the proposed tax cuts are nowhere steep enough.
This argument is actually relevant in considerations other than just returning a current surplus. What it really implies is that anything taken in the absence of a taxpayer's consent or a compelling government need should be returned. Not only is most government spending less than compelling, and the funds to cover it taken without my consent, but also there are many budget items that I would gladly pay to oppose (consider the Israeli occupation, for starters).
Finally, there is the question of the structure of the cuts. To call this a tax cut for the rich would be a misrepresentation. Still, one could legitimately ask whether a tax cut that favors the lower and middle classes more would make more sense.
While I do not deny that all taxpayers, including the rich, are overburdened, I think that a tax-cut proposal should take into account the relative pain that taxes inflict on the different sectors of the population. Whereas everyone who is not an ascetic values a dollar, it should be obvious that the poorer a person is, the greater their subjective value of that dollar. If someone robs Bill Gates of $1,000 he might not even notice it missing before his accountant points it out to him. But, if someone robs a poor man of the $1,000 he plans to use for rent, he may lose his humble apartment.
For this reason, I favor a tax reform that would raise the floor below which people pay no taxes at all. Instead of lowering the tax on the bottom rung of the 15% bracket to 10%, why not lower it to zero?
Under our current tax structure, after taking the standard deductions, a couple with four children struggling with minimum-wage jobs and earning a paltry $10,000 each would have to pay $219 per year in federal income taxes. The Bush plan would reduce this to $110. Why should people this poor pay anything at all?
Of course, there is a way that our hypothetical poor couple could eliminate their taxes altogether under the current system. They could divorce, and then each take custody of two of the children (this shocking "solution" is made possible by the "marriage penalty" under which married two-wage-earner households are more heavily taxed than equivalent single people).
Since the Messenger of God (SAW) said that there is nothing permissible that Allah hates more than divorce, perhaps Muslims should lead the charge to eliminate the marriage penalty; thereby, ending this economic incentive for the breakup of families. This initiative would make an attractive addition for the Senate to place in the tax cut bill, as it is a means for protecting families and stimulating the economy at the same time.
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