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Politics & People; The Biggest Whopper: The Bush Tax Cut

By Albert R. Hunt, Dow Jones,
12 October 2000

Writing before last night's debate, the winner for the biggest exaggeration is easy: George W. Bush and his tax cut.

The GOP nominee claims his tax measure principally will help the working poor and middle-class Americans. The rich, he says, will get a smaller percentage than they currently do, and the tax plan comfortably fits with projected budget surpluses and his Social Security plans.

None of that is true.

Instead of making the case that a huge tax cut is necessary to reward the productive elements of society who will make the investments that ultimately benefit everyone, Mr. Bush misrepresents the size and the shape of his proposal. He suggests that after setting aside half of the 10-year surplus for Social Security, he will divide the rest between tax cuts and initiatives in areas like education, health care and defense. In truth, he proposes over $1.3 trillion in tax cuts and less than $500 billion for those other initiatives, not including $196 billion of unspecified reductions in discretionary spending.

The particulars are worse. The campaign insists the tax cuts primarily benefit working- and middle-class folks; the governor cites the $22,000-a-year single mother of two who faces an onerously high marginal tax rate, and the family of four making $50,000 a year who'd get a 50% tax cut under his plan.

That $22,000-a-year single mother with two kids would get a $72.50 income tax liability that is rebated because of her Earned Income Tax Credit. Under the Bush plan, she gets a $72.50 higher rebate or tax cut. But under Mr. Gore, who liberalizes the EITC, her rebate would be $186 larger. If she has child-care expenses the Gore proposal, but not the Bush plan, would give her more benefits.

Bob Greenstein, director of the Center on Budget and Policy Priorities, when asked what effect the Bush tax cuts will have on the working poor, replies that there would be none. "Working poor families (families below the poverty line) with children would be unaffected," he notes. The Bush plan "does not reduce taxes or lower the marginal tax rates to families that owe no income tax before the Earned Income Tax Credit is applied."

It's a bit more complicated for middle-income taxpayers -- that $50,000-a-year family. Simply put, the Bush tax cut is slightly more favorable to those middle-income families who itemize their tax returns, because some do better if they have various expenses for which the vice president offers write-offs. But families who don't itemize do better under the Gore plan because of his more-liberal standard deduction. According to the IRS, two-thirds of families making between $40,000 and $50,000 a year don't itemize.

The Bush claim that his tax cut not only doesn't reward the rich but actually makes them pay more (W. the Redistributor?) is really phony. With help from the formerly non-partisan congressional Joint Tax Committee, the campaign concludes that the top 1% of the nation -- as measured by income -- only get a little over 20% of the tax cut. There are two problems with this. One, it's made to look better by basing the calculations on five-year figures rather than standard 10-year costs. Two, these assumptions assume the proposed repeal of the estate tax doesn't occur and thus has no effect on distribution.

Under Mr. Bush repeal would occur, becoming fully effective in nine years. In the final year of the Bush tax cut, abolition of the estate tax would result in a revenue loss to the Treasury of $55.3 billion, or 24% of the size of the tax cut that year. That benefit would go to an estimated 65,000 Americans. The Bush prescription-drug plan for millions of seniors would cost less than half that.

When the Citizens for Tax Justice, using an accepted standard model, reported that 91% of the benefits of the estate tax cut would go to the top 1%, as would 42% of the overall reductions, the Bush defenders screamed this was a left-wing group. This is irrelevant, but focus instead on a more conservative study worked on for years by career Treasury economists that found that 64% of the estate tax would be paid by the top 1% of Americans and 91% by the most affluent 5% of Americans. Under this conservative calculation, the top 1% would get 36.2% of the Bush tax cuts and the top 5% would get almost half.

Next, these champions of the truly deserving rich argue that decedents may be wealthy, but the real benefits of the estate tax repeal "falls to the widow and orphan," as top Bush economic adviser Larry Lindsey recently proclaimed. It's nice to know Mr. Lindsey worries about Anna Nicole Smith, but the same Treasury study finds basically no income distribution difference between the deceased who leave estates and the heirs who get it.

Under any calculation the Bush contention that the wealthy would pay a higher percentage of taxes under his plan is disingenuous. It ignores payroll taxes, which disproportionately fall on the lower- and middle-income classes. The reality is that under the Bush plan the after-tax income of the most affluent would go up more than middle-income taxpayers, thereby rewarding those who have prospered the most in recent years.

But to appreciate the effect this huge tax cut has on governance under a Bush administration, consider just two areas: defense and Social Security.

The Republican nominee has been unsparing in his criticism of the Clinton-Gore administration's defense, claiming more needs to be done on pay, readiness and missile defense. Yet over the decade, the Gore budget envisions spending $55 billion more than Mr. Bush proposes. Why? The Texan can't afford it, given his tax cuts.

The press has tripped all over itself to praise Mr. Bush for suggesting a "solution" to long-term Social Security with partial privatization. Yet unlike the serious Social Security proposals -- such as Sens. Pat Moynihan and Bob Kerry -- Mr. Bush insists he can do this without any cuts in Social Security benefits. He could, if he'd be willing to cover the $1 trillion transitional cost over the next decade by tapping into the general revenues. But you can't do that when the majority of any surplus is eaten up by tax cuts.

Under the Bush "reform," Social Security receipts will be less than the benefits that have to be paid out by 2005, and without cutting benefits or adding general revenue, the system will be broken in less than 25 years.

There is a way to fashion tax cuts that principally help working- and middle-class Americans who have not flourished during these good times and still not penalize wealthier Americans. The Gore tax plan falls short: It further complicates the tax code and would provide tax rewards for behavior that might take place anyway.

But it is benign next to the Bush plan, which probably is, as the Democratic nominee charges, dangerous. It certainly is duplicitous.