The New Round of Bush Tax Cuts--Inequitable, Ineffective and Costly

Bush’s new tax cuts, thinly disguised as an economic stimulus plan, fail every test – whether that of equity, economic stimulus, or responsible budgeting that addresses the nation’s needs. The only test that the Bush plan passes is that of making the President’s wealthier constituents richer while forcing diminished government services upon the rest of us.

But, this is not 2001, when the first Bush tax cut passed. The nation is not enjoying unprecedented peace and prosperity and anticipating a $5.6 trillion surplus over the next decade. This is 2003, with growing federal budget deficits, fiscal crises in every state, increasing military and security needs, and an economic downturn that has led to rising unemployment, economic insecurity for middle-class Americans, and increasing deprivation for unemployed, low-income, and vulnerable families and individuals. When President Bush took office there was a budget surplus as far as the eye could see. Now there is no surplus, and no evidence that the first Bush tax cut has done anything but siphon off revenue that is sorely needed. Another tax cut should be soundly rejected.

This time there is evidence of strong opposition, even from those who could be expected to be supporters. This time the President has overreached. The American public does not want more tax cuts that require cuts in heating assistance for low-income families and the elderly, less affordable housing, and worse child nutrition, and that continue to fail to address problems like health care that remains out of reach for many people, inadequate education for our children, safe transportation systems, or the health of the environment. As states struggle to balance their budgets by cutting even more services or raising taxes, most Americans don’t see any sense in further reducing federal and state revenue in the midst of an existing crisis. To support his tax cuts, the President is planning to hold non-homeland security domestic spending at FY 2002 levels for at least the next two years. Even if that figure is adjusted for inflation, this formula means not only no increases, but big cuts, since it doesn’t account for population growth or greatly increased needs that have arisen with the economic downturn and higher unemployment.

On the equity side, the Administration’s assertions [1] that the tax cuts will help ordinary Americans are quickly being revealed as false:

The President says that 92 million taxpayers would receive, on average, a tax cut of $1,083 in 2003.

The “on average” qualification is misleading. If you average your income with that of Bill Gates, Jr., you too will be a multi-millionaire (“on average”), though you probably shouldn’t quit your job. The President’s average includes the big tax cuts people at high-income levels will receive (like the $24,400 tax cut per tax payer in the top one percent) with the small or non-existent tax cuts that people at very low-income levels can expect (like the 39 million taxpayers who will receive no break). Actually, according to an analysis [2] (Table 6) by the Urban-Brookings Tax Policy Center, those with incomes of $1 million or more will receive an average 2003 tax cut of nearly $89,000, while half of tax filers will receive $100 or less.

The President says that 13 million elderly taxpayers would receive an average tax cut of $1,384.

Again, the average is misleading. Tax Policy Center data (see link above) indicates that only 3.4 million elderly taxpayers would get this amount or greater, while 77% would get less.

Further exploiting an appeal to senior citizens in support of his dividends tax elimination plan, the President says about half of all dividends income goes to America's seniors, who often rely on those checks for a steady source of retirement income.

While it is true that many of us who have suddenly been elevated to the new “investor class" by virtue of our investments made to meet our retirement needs, an elimination of the tax on dividends would not really affect nearly as many people as the administration would have us believe. Those of us who are investors primarily by dint of having an IRA or 401(k) retirement account will pay normal income taxes on our retirement savings as we withdraw them whether they consist of wages, interest, capital gains, or dividends. We don’t get a break. Secondly, in order to eliminate the tax on dividends, the profit made by a company must first be taxed. If it is not – and we all know that the tax code now affords companies many legitimate ways to avoid paying taxes on profits – the actual dividend paid to an individual will, in fact, be taxable. Again, there is no break for most of us.

The President asserts that his plan will lead to economic growth and job creation.

The President's own Council of Economic Advisers acknowledges that the plan would produce only 190,000 jobs in 2003, less than 10 percent of the jobs lost in the nation's economy in the past two years. The President's plan only provides $59 billion in 2003, with the remainder of the short-term infusion not to come until income tax filings next year – even though we need an immediate stimulus in 2003.

The plan fails to meet any of the criteria widely recognized as being essential for economic stimulus: legislation that will spur economic growth and job creation, is temporary and will not worsen the long-term fiscal situation, will go into effect quickly, is fair, and is targeted to needs. The Bush plan isn’t designed to create jobs and income growth in 2003. It includes expensive permanent provisions that will increase deficits and most of it will not take effect this year, but in years to come. It is not fair, since it is overwhelmingly skewed to the wealthy and it does not address needs including the fiscal crisis of the states or increasing unemployment and job insecurity.

Likewise, the President has underestimated the long-term cost of the tax bill. If you add the increased interest charges on the national debt due to the increased deficits from a reduction in tax revenue, the true ten-year cost of the Bush tax cuts is more than $900 billion. (See this Center on Budget and Policy Priorities analysis [3].) Even that $900 billion cost is a low estimate, since it does not include costs of the federal tax changes to the states. Besides giving financially-strapped states nothing in assistance, the Bush plan will actually cost them revenue. States' dividends taxes are predicated on the federal tax, which means that when Bush cuts federal dividends taxes, states automatically lose that income, as well. Also, because non-taxable dividends will make people less inclined to buy state and, especially, municipal, bonds -- which, while being tax-free, can offer a smaller return than stocks -- states and localities will be forced to increase interest payments on these bonds in order to remain competitive. The Center on Budget and Policy Priorities estimates [4] that states will lose $4 billion a year due to the dividend tax elimination provision alone. Since the elimination of the dividend tax is a permanent provision, states will continue to lose money each year.

What have been some of the responses to the President’s Plan?

Sens. Lincoln Chafee (R-RI) and Dianne Feinstein (D-CA) introduced legislation [5] (S. 126 [6]) that would freeze the current top income tax rate (which under Bush’s plan would go from 38.6 to 35 percent this year) until budget surpluses return. This proposal would save $88 billion, the senators said. This is a good response -- not accelerating the 2001 tax cut, which we can’t afford, but postponing the phasing in of the tax cuts.

Several plans to provide assistance to states have been put forward, including increases in the federal matching rate of Medicaid. Most recently, Sens. Susan Collins (R-ME), John Rockefeller (D-WV), Ben Nelson (D-NE), and Gordon Smith (R-OR) introduced a bill (S. 138 [7]) that would assist states by providing designated Medicaid relief and an increase in social services block grants over 18 months. This, too, is a good response, since states are desperately in need of federal assistance, and such help would create economic growth.

In addition, a number of alternative economic stimulus plans have been put forward. A comparison [8] of the President’s plan with those of Sen. Max Baucus (D-MT) and Rep. Nancy Pelosi (D-CA) can be found on OMB Watch’s website, and a comparison of some non-Congressional plans is also available [9].

The first order of business must be to reject the President’s plan in its entirety and make a new effort to craft a stimulus plan that is targeted to those who need the help, infuses money into the economy quickly, and is temporary and will not do long-term fiscal damage. It can be done. It’s not a class war, it’s just common sense.