June 13, 2003 | News Releases on Taxes
Many state governors cheered when they learned that Congress, as
part of the tax cut enacted late last month, would be sending them
$20 billion to help them balance their budgets. They claimed it
would bring much-needed relief to tax-weary state residents.
But Brian Riedl, a budget analyst at The Heritage Foundation, says it won't save taxpayers a dime: "The governors seem to have forgotten that the same taxpayers who fund state budgets also fund the federal budget."
The idea that a federal bailout would somehow help state taxpayers is just one of 10 widely believed myths about taxes, spending and budget deficits that Riedl explodes in a new paper from Heritage (available online at www.heritage.org/Research/Budget/bg1660.cfm).
He also challenges the belief that tax cuts single-handedly cause budget deficits. In the Reagan and George W. Bush administrations, Riedl notes, tax cuts were paired with spending increases-and higher spending, he says, was a major factor in creating a deficit both times.
However, Riedl points out, those deficits do not create high interest rates-another widely held misperception. "Today's global economy is so large-trillions of dollars move around the globe each day-that it can easily absorb the federal government's borrowing without triggering a substantial increase in interest rates," he writes.
In order to spend any money, the government must first tax it or borrow it-in short, somehow remove it from the economy. That, Riedl says, is why it's impossible for government spending to "pump new money into the economy." And the economy isn't helped by tax cuts that "put money in consumers' pockets." The right kind of tax cuts create incentives to work, save and invest. The wrong type, including the 2001 tax rebates, shift money around but do little to encourage productive behavior.
Riedl tackles three other myths: that Social Security surpluses are saved in a trust fund for future retirees (they're spent automatically); that the "wealthiest 1 percent" are mostly millionaires who pay less in taxes every year (most are unincorporated small business owners who have seen their tax burden grow); and that Congress is slashing domestic programs to fund a military buildup (it's added much more to domestic programs than to defense).