The Triviality of Taxes

By Zachary Karabell Sunday, Dec. 12, 2010
    • Illustration by Harry Campbell for TIME

    It's all taxes, all the time, dominating the news since the thumping of the Democrats in the midterm elections. In part this is a necessary debate. The "temporary" tax cuts of the George W. Bush era are set to expire on Dec. 31 unless Congress acts, and neither party believes it is tenable to allow taxes to rise for the 98% of Americans who earn less than $250,000. Also at issue is the estate tax, even though in a country of over 300 million, the number of estates subject to it is only in the tens of thousands.

    But spending so much time thinking about taxes is also a sad symbol of how lost we are. Tax cuts may be the red meat of politics, but as even the Congressional Budget Office avers, on their own they are an effective form of stimulus only in the short term. Tax breaks and rebates tend to be saved or spent — not invested. If you take an extra few thousand dollars and sock it under a mattress or use it to pay off credit cards or buy presents, the effect is positive but structurally ephemeral. Tax cuts are a populist drug. The focus on them may be good for politicians, who are now in perpetual campaign mode and for whom two years is an eternity. But it is lousy for the future of the country.

    On Dec. 6, the parties appeared to have settled on a compromise. All cuts will be extended for the next two years, and the estate tax will be revived at a lower rate. That is less a compromise than a defeat for President Obama, who campaigned on a platform of raising taxes on the wealthiest — though as a sop, the Republicans agreed to extend unemployment benefits (at a cost of about $55 billion over the next 13 months) and allow a payroll tax break of 2%, which should return $120 billion to workers.

    The drama made for a perfect media play. The issues were easy to grasp and binary: up or down, on or off. Help the vast middle class or penalize the wealthy (or, as some took to calling them, "America's job creators"). Abandon the unemployed or maintain their lifeline. With economic growth tepid, power shifting on Capitol Hill and the combined effects of WikiLeaks and international summits dealing a blow to U.S. global leadership, the passion play over taxes was the perfect end-ofyear drama, occupying the airwaves and Wrapping up just in time for Christmas pageants, holiday parties and shopping.

    And here is another seasonal gift, one that is no more substantial. Alongside the tax-cut debate we have had the deficit discussion. The President's commission to reduce the deficit floated an audacious plan to reduce government spending that included cuts to the military, tax increases, a lifting of the retirement age and a curtailing of government medical benefits. But the recommendations failed to win the necessary majority of commissioners even as the tax-cut extension was being negotiated. In short, despite a tidal wave of public opinion expressing disapproval of government spending and a strong sense that we allocate resources ineffectively, the only thing Washington could agree on was ... to spend more.

    But of course it's not just Washington. It's the desire of all of us for gain, coupled with a NIMBY attitude toward pain. For tens of millions of struggling families, the extension of the tax cuts seems appropriate in a challenging time. But even here, the mystique of tax relief as a panacea needs to be dispelled. The right mythologizes the 1981 Reagan supply-side tax cuts, forgetting that these were followed by tax increases and a major overhaul and simplification of the tax code in 1986. The left believes that if rates were increased for the wealthy, it would reduce the burden on the rest, yet these cuts — $40 billion a year — are a pittance in relative terms, amounting to 0.3% of an economy of $14 trillion.

    Even if you accept the notion that the rich ought to pay more (something that Warren Buffett and Bill Gates believe), that moral position still doesn't move the economic needle. Talk of social justice and equity won't invigorate the U.S. or maintain its innovation and dynamism in a world where Shanghai seems to New York City what New York City once seemed to the capitals of Europe:humming with potential, exuding confidence. Tax cuts are political catnip; they excite, then they wear off. It is as if we are content to expend large amounts of energy just to stay in place —and this at a time when other nations are spending to upgrade their infrastructure: China with its airports and high-speed rail, Australia paying tens of billions of dollars to build a next-generation wireless network for the entire country.

    It is easy to spew jeremiads, and the U.S. has always been home to raucous politics and mediocre politicians. Yet at other times, Americans have channeled their energy and resources with urgency and passion into building a new world. If today's tax debate is an indication of what lies ahead for the U.S., a future that once burned bright is growing dimmer by the hour.

    This article originally appeared in the Dec. 20, 2010 issue of TIME Europe Magazine.