The tax revolution
Torn Bethel"
Washington The central problem of our era i's the collision of inflation and the progressivity of tax systems.' So wrote Jude Wanniski, the author of The Way the World Works and one of the leading advocates of supply-side economics in the United States. 'At 13 per cent inflation, it will not be many years before the teenager earning the minimum wage faces marginal income-tax rates and payroll tax rates originally designed for the Rockefellers.'
Keynesians have been unable to address or even formulate this problem because their economic universe is an averaged, aggregated, collectivised affair, in which marginal effects do not exist. They are also inclined to defer to socialist ideology, according to which people are forever Willing to toil away for the benefit of the collective, undeterred by high tax rates. The supply side revolution in economic thinking is thus a philosophical one. Its advocates insist that the individual, and the incentives or disincentives he faces at the margin, be restored to the centre of economic discourse. Such incentives, they argue, most conspicuously reside in tax rates. The tendency of inflation to carry all citizens willy-nilly into an ever-deepening sea of taxation is acute in the United States because the schedule of tax rates includes numerous steps or 'thresholds'. With every several hundred dollars of additional earnings, the taxpayer finds himself in a higher or more 'progressive' tax bracket. (The highest rate of 50 per cent on 'earned income' — i.e. excluding dividends and interest — is encountered by a single taxpayer at 41,500 dollars which used to be considered a high income.), Legislators, of course, have been the principal beneficiaries of inflation-induced 'bracket-creep', because they have been able to expand spending programmes without having to vote for tax increases. Lately, therefore, they have tended to dig in their heels and tenaciously resist suggestions that they reduce tax rates and permit the citizenry to spend more of its money. In their eagerness to preserve the existing tax structure, some big-spending legislators have even assumed the improbable guise of fiscal conservatives, unexpectedly warning us that tax cuts will only widen the budget deficit.
But they have found themselves in a tug-of-war with President Reagan, who, contrary to all the slurs and fashionable disparagement of his Hollywood background, has turned out to be a formidable advocate of his belief that tax rates are too high and must be reduced. Accordingly, the tax-writing committees on Capitol Hill, the Senate Finance Committee and the House Ways and Means Committee, convened last week and began to rewrite the tax code.
The Democrats apparently have concluded that, since tax cuts are inevitable, they might as well share the credit for enacting them. The Ways and Means Committee (controlled by Democrats) took up business tax cuts, and by the end of thee week had tentatively approved a scheme to reduce the corporate income tax over the years from the current top rate of 46 per cent down to 34 per cent. In addition, they have proposed that business machinery, instead of being depreciated over a number of years, should be written off, or 'expensed', in one year. Supply-siders, who now dominate tax policy in the US Treasury, and President Reagan himself, are likely to approve of these changes, which would favour small businesses and would replace the current system' of tax credits with one of added marginal incentives: supply-side theory being put into practice. Also last week, the Senate Finance Committee approved Reagan's plan to reduce income tax rates by 25 per cent at the margin over a period of 33 months. This committee, Republic-controlled, is expected to forge ahead with tax legislation with the intention of shaming Democrats in the House of Representatives into playing catch-up, at the risk of seeming to be the party of high taxation. The final shape of the next tax laws is uncertain at present — wrangling and bartering could continue for another two or three weeks — but a sizeable tax rate reduction, both for individuals and business, now seems certain. In any event, the exponents of the new supply side doctrine are likely to be able to claim a tremendous victory. Only a couple of years ago the supply side 'movement' consisted of about a dozen people, half of whom (for example Wanniski, and Representative Jack Kemp of New York) didn't even have degrees in economics, while those who did (for example Arthur Laffer) had no standing whatever in the academic community. But in no time at all they routed the 'pain and suffering' school of conservative Keynesians — tax cuts must wait spending cuts — exemplified by former Fed chairman Arthur Burns. (He has now been packed off as ambassador to Bonn — a position from which he is unlikely to continue his criticism of the supply-side upstairs.) Finally the supply-siders captured the US Treasury and the White House itself, The leading supply-sider, it is often said, is President Reagan.
The most important reason for the success of the new economic doctrine is that it has been advanced by people who are above all else zealous, some would say fanatical. The ideas themselves are no doubt sound. Who can doubt that people do work for themselves and their families, not for the collective or the state? But what is striking is that when ideas are zealously promoted, even by people lacking the correct credentials and expertise, then those ideas will prevail if they are not opposed by an equal and opposite zealotry. Ever since the simultaneous appearance of inflation and unemployment, and the consequent breakdown of the Keynesian consensus, that opposing force has been missing.
More and more senior government employees in Washington are retiring these days. Justice Potter Stewart's announced retirement from the Supreme Court last week was only the most visible illustration of the exodus. The main reason for the many departures is that, once retired, a Federal employee's pension is adjusted commensurately with the consumer price index, but while on the job his pay adjustments— provided there is no scope for further promotion — are at the mercy of the President and Congress. With bureaucrats increasingly unpopular, such raises have been more miserly than inflation in recent years. The senior bureaucrat thus makes a rational decision if he decides to retire early. Within a few years, there's a good chance that inflation will have cranked his pension above what his pay would have been if he were still sitting behind a desk. Plus he doesn't have to go to work. Since civil service salaries must remain below the level of Congressional pay, and Congressmen have virtuously held down their own pay increases recently, there is a public sector pay 'lid' in Washington at present. (Congressmen are paid 60,600 dollars a year, which may seem a lot but doesn't go far here. An undetermined number of Congressmen are now living in their Capitol Hill offices because they can't afford housing. One such example was recently discovered by a reporter who went into a Congressman's bathroom and spotted salt and pepper shakers on the wash basin.) Executive-level pay has risen far more swiftly in the private sector, so there are high paying opportunities for some government employees who decide to leave early.
The law of supply and demand tells us that Federal employees are still paid too much, however. Two years ago there was a report that about 100 people applied for every vacancy in the government. That ratio is undoubtedly lower today, but it is still high. The one thing you never, never hear in Washington — perks and job security being what they are — is that Uncle Sam can't fill a vacancy.
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