Creative Thinking

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Dean Baker
The Guardian Unlimited, December 17, 2007

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The Republican presidential candidates have some really funny ideas about how the US economy works.

Since several of the Republican presidential candidates regard creationism as a serious theory in biology, it should not be surprising that their economic views also have little connection to reality. In fact, the Republicans’ test scores in biology are probably somewhat higher than in economics. Creationism is a minority view among the Republican presidential candidates. By contrast, all of them seem to be spouting some pretty crazy views on the economy.

Of course tax cuts are central to the Republicans’ economic story. They have great plans to reduce taxes, especially for people who don’t work for a living. For example, Mitt Romney has a bold plan that commits him to taxing custodians at a higher rate than millionaires. Romney insists that anyone with an income of less than $200,000 a year should pay no tax on any income from dividends, capital gains, or interest. Under the Romney plan, a person who collects $200,000 a year in interest on $4 million held in government bonds would pay zero tax. By contrast, a custodian working two jobs to earn $40,000 a year can look to pay around $4,000 a year in taxes.

In the same vein, Mike Huckabee has proposed the “Fair Tax,” which his website claims is “based on wealth,” although it is described as a sales tax. Huckabee proposes to have his Fair Tax replace all other forms of taxation, including the payroll tax, the income tax, and the estate tax. If a national sales tax is to replace all other federal taxes, then it would have to be in the neighborhood of 25 percent to 30 percent. (Huckabee wants to fully rebate the payments of low income families, so that means that more money must be raised through the tax to cover these rebate checks.) If we don’t tax items like health care and house sales and the savings on rent that a family gets by living in their own home, we might be up to 40 percent with Huckabee’s Fair Tax.

But this is where the fun comes in. Typical workers will probably have to pay President Huckabee’s Fair Tax on almost everything they buy throughout their life. But, the smart folks who make their money by inheritance, striking it rich on Wall Street, or work in highly paid professions can simple skip out on the Fair Tax. Suppose these folks manage to accumulate $1 million or so by age 50. They have paid zero tax on their accumulation. They can then move to some other country and never have to pay President Huckabee’s Fair Tax. Their tax burden will get passed on to the teachers, fire fighters, custodians and the others who are left behind. What could be fairer?

Fred Thompson also deserves credit for creativity. He proposes the option to pay tax at a marginal rate of 10 percent for couples on earnings below $100,000 and 25 percent on earnings over $100,000. This would be a modest cut in taxes for most workers, but it would reduce taxes by more than a third for the richest 1 percent.

Of course all the Republican candidates want to eliminate the estate tax. Many push the line about the tax forcing families to sell family farms and businesses. The reality is that virtually no farms or businesses anywhere in this country have been sold because of the estate tax. The exemptions have always been very high and have recently been raised. Furthermore, special provisions allow for lower tax payments that can be deferred for a decade for family owned businesses. The Republican candidates also want to extend President Bush’s tax cuts past their scheduled expiration date in 2010.

All the Republican candidates claim to be devout believers in tax cut creationism: the view that tax cuts pay for themselves due to their effect on stimulating growth. Even Rudy Giuliani and former straight talker John McCain claim to believe that tax cuts pay for themselves.

It is important to understand that this one is not a debatable point, as often claimed in the media. Tax cuts do not come close to paying for themselves, there is no serious dispute among economists on this issue. The Congressional Budget Office recently did a study examining the range of predictions from the available theoretical models on this topic. It found that the most optimistic model showed that growth replaces less than one-third of the lost revenue, and even this gain was only possible for a limited period of time. In short, when the Republicans claim that they can have large tax cuts without any offsetting cuts in spending, they are prescribing a route to really large deficits.

Of course, this suggests an important reason why some people may opt to support the Republican contenders. With the Democrats backing down from plans to end the war in Iraq, the war may continue long into the future if Democrats take the White House. On the other hand, the tax cuts proposed by the leading Republicans could take away the money needed to prosecute the war. In short, when it comes to the war in Iraq, the only way out may be to “starve the beast.”


Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of The Conservative Nanny State: How the Wealthy Use the Government to Stay Rich and Get Richer (www.conservativenannystate.org). He also has a blog, "Beat the Press," where he discusses the media's coverage of economic issues. You can find it at the American Prospect's web site.