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Dividends & Deficits

A Look at President Bush's Tax Cut Plan

Commentary by Russell Newquist
www.RussellNewquist.net

PART 2

Most of President Bush’s tax plan has been obscured by the controversy over the dividend tax cut. This sleight of hand may help it sail through Congress without much public debate. Although most of these cuts are good, some points deserve serious debate. What is good politics for the President may not be good policy for America.

Tax Code Goals

The effects of taxes are far reaching. In addition to determining the budget for our government, they affect the flow of resources through our economy and can even alter social and cultural behaviors. Therefore, we must be extremely careful when we choose the forms our taxes take.

http://www.chuckiii.com/Reports/Economics/Effects_of_Taxes.shtml

When we shape the tax code, we should keep three goals in mind. First, we must raise enough money for our government to fulfill its obligations to the people. Second, we must ensure that the burden is spread upon those who can bear it and placed where it will have minimal economic impact. Third, when we determine that certain behaviors lead to a better or worse nation, we can mold the tax code to encourage or discourage them appropriately.

http://www.taxfoundation.org/prmedianfamily.html

http://www.ncpa.org/pi/taxes/pd022499a.html

These goals are often competing. It is rarely possible to achieve all three simultaneously. The arguments begin when we make the inevitable tradeoffs. The Bush administration decided that the most important goal this year is the second – reducing the burden on our economy.

In principle, I agree with the President. My gut reaction is always in favor of tax cuts (I don’t like paying them any more than anybody else), and it’s clear that the economy could benefit from some additional stimulation right now. The Bush tax plan has elements that are very appropriate, but there are some parts that should be rethought, and it has some outright problems.

http://www.bea.doc.gov/bea/glance.htm

http://www.whitehouse.gov/news/releases/2003/01/20030107.html

The Good

The best part of the Bush tax plan is the 10% tax bracket at the bottom end. The Democrats tend to like this part because it helps the poorest taxpayers – and that is a good benefit of it. Bit I like it because it helps all taxpayers. If you pay taxes this will help you, if only a little. Best of all, it doesn’t cost very much. Over ten years, the expanded 10% bracket is project to cost just $45 billion. At $4.5 billion per year, that’s roughly 0.3% of the annual federal budget – a small price to pay to help everybody.

http://www.alternet.org/story.html?StoryID=15558

The increased child tax credit is also a wonderful move. This one helps everybody who has kids (which is an awful lot of Americans. This change moves us closer to two of our goals. It reduces the economic impact of our taxes. It also makes it easier on parents, which helps us build a stronger nation. This one is definitely a keeper.

Along the same lines, the elimination of the marriage penalty is a solid move. The cost still very small, and it encourages a very important behavior. Although the liberals don’t like to admit it, research shows over and over again that children raised in a two-parent home do better throughout their lives. Eliminating the marriage penalty won’t eliminate single parent homes – but we shouldn’t be encouraging them through our tax code, either.

The Bad

Designed as a way to keep the richest of the rich from avoiding taxes altogether through various loopholes, the AMT hasn’t scaled well for inflation. Now many middle class Americans are in danger of owing substantially greater taxes because of the AMT. The Bush tax plan proposes to raise the threshold for the Alternative Minimum Tax (AMT). On the face of it, this looks good. But it just masks the problem. In reality, we need to truly reform the AMT, and this will not happen as long as we can merely paper over it.

http://www.fairmark.com/amt/

The biggest problem with the plan, however, is that it offers very little in the way of stimulus. The plan calls for the acceleration of tax cuts for the top brackets, which will put more money into the pockets of consumers. But the consumers it targets are the consumers who habitually spend the least of their extra income. This will help more than many critics claim, because many of these same people will invest it, which is good for the economy. But they also tend to be the people who don’t need the extra money.

http://money.cnn.com/2003/02/11/news/economy/greenspan/

Even though I fall into this category myself, I would rather see an increased reduction at the bottom of the tax code, or perhaps a reduction in the so-called “payroll” taxes. This would help everybody across the board, and put money back into the hands of the people at the bottom who need it more.

http://edition.cnn.com/2002/ALLPOLITICS/01/04/daschle.economy/

The Ugly

President Bush wants to help small businesses with the increase in breaks for capital expense purchases. In and of itself, this is a reasonable idea. The problem is that small businesses don’t suffer from over burdensome federal taxes. In reality, state and local taxes take the biggest chunk out of their income. Reducing the heavy state and local tax burden on small businesses would provide the best economic stimulus package possible. Unfortunately, coordinating tax breaks among all 50 states and their municipalities is impossible. Bush is trying his best here, but there’s not much he can do.

Mr. Bush also wants to accelerate the reductions in base income tax rates. In principle, I agree that current rates for top income tax brackets are higher than they should be. But I think it is better to phase in the rate reductions, as already planned, rather than to do it in one lump sum at a time when we already have large deficits. I say this as somebody who is actually affected by this plan – I’ll postpone my own tax cut in the name of fiscal responsibility.

Conclusion

The Bush tax plan is flawed, but it has the potential to provide what our economy needs. Hopefully, we can rely on partisan politics as usual to push this bill into the center and get it on the right track.