Tax Cuts Are Unfair

Republicans have been pushing for a 10 percent cut in income-tax rates. This proposal has encountered the usual protests that it would favor the rich. A typical comment appeared in a New York Times op-ed, "The Trouble with Tax Cuts" (February 24, 1999) by Frank Levy, an economist at MIT, and Iris 1. Lav, deputy director of the Center on Bud get and Policy Priorities. Levy and Lav argue that "the economy heavily favors the better educated" at the expense of less-educated and semi-skilled workers. "Since good times don't automati cally benefit everyone," they claim, "winners need to use some of their extra income to compensate losers." A rate cut of 10 percent, they assert, would "work in the opposite direction: it would increase income inequali ty." The upper tenth of the income distribu tion, with earnings above $90,000, would receive 55 percent of the tax cut. The bottom 60 percent would receive only 10 percent.

And the 35 million households that pay no income taxes would receive no benefits at all! In their view it's just not fair. Or is it? The case that Levy and Lav make against the tax cut is not a matter of econom4 ics but of morality, and their standard of jus tice is warped. Let's begin with two obvious points. First, a tax cut does not confer a "benefit" on taxpay ers, as if the money belonged to the govern ment, which was generously conferring gifts on its citizens. If you follow that conception to its logical conclusion, all income belongs to the state, and any tax rate below 100 per cent constitutes a gift. But that conception is wrong. It is the taxpayers who earn the income by producing it; it belongs to them. A portion is taken in taxes, and when govern ment lowers the tax rate it is simply refraining from taking as much as it used to. The second point is that the wealthy save the most from a lower tax rate because they pay the most in taxes. Levy and Lav complain that with a 10 percent rate cut, the upper tenth would receive 55 percent of the tax-cut total.

But those people are currently paying 62.4 percent of all income taxes. The bottom three quarters of all earners pay less than a fifth of all income taxes, while the upper tiers pay a vastly disproportionate share. So ofcourse the wealthy would save the most from a rate cut and they should. Deeper Flaws Beyond these obvious points, the argument is flawed at a deeper level. It rests on a false conception of how an economy works and of how people earn their incomes. The implicit premise of Levy and Lav's argument is that the U.S. economy is a collec tive enterprise in which income is distributed to individuals who are more or less passive recipients of what they get. The distribution is determined by various factors: the level of skill and training an individual gets from the educational system, the level of technology, market forces (including foreign competi tion), and government tax and spending poli cies, among others. The government, on this conception, has the responsibility of countering the effect of the nongovernmental factors so as to produce a fairer overall distribution than a free market would achieve. Levy and Lav assume that greater equality is good, less equality is bad.

But this whole outlook is misconceived. People are not passive recipients of an income "distribution." They acquire money by trading with others, earning income in diverse ways. Some people form long-term relationships with employers, trading their time, effort, and skill for a salary; others operate solo, selling goods or services directly to customers. Some trade the use of their property for a rent pay ment, or the use of their savings for interest. What determine a person's income are his own choices and the choices of individuals who trade with him. People differ in their desire for money, as opposed to leisure, time with the family, or other goods. They differ in the kind of work they find meaningful, and the kinds of working conditions they prefer. The market-which is just a sum of individuals who produce and trade-values some work more highly than others and pays more for it. And of course people differ in ability, knowl edge, and skill-sometimes because of innate capacity or the environment in which they grew up, sometimes because of previous choices they have made in their lives.

Each of us is an entrepreneur in his own life, with the capacity-and the responsibili ty-to find ways of acquiring money through trade, each in accordance with his talents and preferences. Each of us is an active agent, constantly making choices about how to exploit the opportunities we have-and how to create new opportunities for ourselves. And over time, virtually everyone increases the income he can earn as he acquires experience, training, knowledge, contacts, savings, and other productive assets. 5 Winners and Losers? The most offensive aspect of Levy and Lav's argument, morally speaking, is the notion that people with lower incomes are "losers" who must be compensated by the "winners." An economy is not a competitive scramble for shares of a fixed pool of wealth, but a process of cooperation in producing wealth on an ever-increasing scale. And those at the bottom benefit the most, not the least.

They are able to enjoy a standard of living made possible by those who created the indus tries they work in and the products they buy. As Ayn Rand observed, there's a pyramid of ability in which benefits flow downward, from the most to the least able. "When you work in a modem factory, you are paid, not only for your labor, but for all the productive genius which has made that factory possible," the industrialists, financiers, engineers, scientists, and other creators without whom the unskilled worker would not have ajob in the first place. Bill Gates's billions are but a fraction of the value he has showered on the office workers who use his software and earn higher wages because they can produce more efficiently; the home users who can track their finances and surf the Net; the retailers who sell the software or the computers that use it; the pro grammers whose software runs under Win dows; and on and on.

Are the "winners" in economic growth morally obliged to pay compensation to the "losers"? It just ain't so. There are no real losers-and that's because the "winners" have already spread the prodigious benefits of their productive ability to everyone with whom they trade. Let's cut taxes, and allow everyone to reap more of the benefits of their place in the pyramid of ability. -DAVID KELLEY Institute for Objectivist Studies The apple icon , identifies Freeman articles that are appropriate for teaching stu dents several major subjects-including economics, history, government, philosophy, and current issues. We also provide sample lesson plans for these articles on our Web site www.fee.org and in written form. Professors, teachers, and homeschooling parents need only to visit our Web site or request written lesson plans to take advantage of this unique service.