President George W. Bush was flanked by a group of working people when he announced his tax cut plans this week. He had a wonderful prop - a $1600 check, which he said represented the average amount that a family would get each year as a result of his tax cut. It is clear that Bush has taken a page from his predecessor’s book by using people as living props for his policy initiatives. But surrounding himself by working people won’t cover up the basic fact about this tax cut. It’s a gift to the wealthy, nothing more.

The logic that comes from the Bush camp goes something like this - wealthy people pay more taxes so it makes sense they should get more of a tax cut. The top one- percent of our nation’s taxpayers do pay 20 percent of all federal taxes. If the Bush logic were consistent, then perhaps they should get 20 percent of the cut. In fact, according to the Center on Budget and Policy Priorities, the top one percent of taxpayers will end up getting at least 36percent of the Bush tax cut. The Treasury Department says that the top five percent of taxpayers pay 36.5 percent of federal taxes. That group will get at least 49 percent of the tax-cut benefits under the Bush plan.

At the same time, many at the bottom will get nothing. Senate Minority Leader Tom Daschle had it right when he said that the rich could use their tax cut to go buy a new car, while those with average incomes could simply buy a muffler for their used one. Indeed, President Bush used the example of a $25,000 a year waitress in his radio address on February 3, but that waitress is not likely to gain much from the tax cut. Some analysis suggests that she would get nothing, failing to qualify, even, for the credit for child care costs. In contrast, the $250,000 attorney that the President used as an example in his radio address would receive a tax reduction of about $3100, more if the Alternative Minimum Tax is eliminated. The average tax cut for the top one percent would be $40,000.

The tax proposal includes provisions to create a10 percent tax bracket, for the first $6000 of earnings ($12,000 for a couple) and to double the child credit. These provisions, supposedly, will benefit low-income families. But even as the child credit is being doubled, it is also raising the income level for which this credit will apply. Because families with incomes up to $200,000 benefit from the child credit, 82 percent of the benefit for the child credit will accrue to the 40 percent of families with children that have the highest incomes. The bottom 40 percent, scraping to make ends meet, will get just three percent of the credit.

If Bush wanted to make his tax cut inclusive, there are a number of things he can do to address the needs of those with incomes below $25,000. He could address the payroll tax issue, which costs workers with incomes below $76,200 a little over12 percent of their pay. Because the payroll tax is capped at the first $72,000 of income, those with higher incomes pay a lower percentage of their income in payroll taxes. Addressing this issue, both by raising the limit on payroll earnings, and by supporting a reduction in payroll taxes for those at the bottom, would spread the tax cut wealth around more evenly.

This tax cut is a costly proposition. Mr. Bush once estimated that this cut would cost $1.3 trillion, but now the amount has increased to $1.6 trillion. Some economists say the amount will be even larger because Mr. Bush would like to make it retroactive to the first of the year. He says the tax cut will preserve work incentives, but people don’t really need incentives for work they have already done!

This may be a tax cut we cannot afford. The Congressional Budget office projected a $2.7 trillion surplus outside of the Social Security and Medicare trust funds. But they also note that a more pessimistic set of assumptions could yield a deficit of $0.6 trillion. This is important because the Bush tax cut is likely to cost $2 trillion (with the retroactive provisions) in the next ten years. Meanwhile, since this cut is focused on consumers, business interests are lining up asking for their tax cut, too. When tax legislation winds its way through Congress, it is usually burdened with dozens of add-ons. How much will business be able to add on, and what will it cost?

This tax cut is a bad idea. It should not be retroactive, it ought to focus more on people at the bottom, and it ought to be far more modest than $2 trillion. President Bush wants to honor his campaign promises, but Congress should not allow him to keep his promise at the expense of economic soundness.

Business and Economics & Commentary 
February 7, 2001