February 15, 2001

February 15, 2001 | WebMemo on Taxes

Tax Cuts For Today and Tomorrow

President Bush's tax-cut plan has met with some criticism on Capitol Hill. The momentum is still favorable, however, as a new Newsweek poll reveals that voters approve of the plan "to reduce federal income-tax rates across the board" by a 67-28 percent margin. Democrats even support it by 49-45 percent.

The proposal reduces the five tax brackets under current law - 15 percent, 28 percent, 31 percent, 36 percent and 39.6 percent - to four at 10 percent, 15 percent, 25 percent and 33 percent, and provides an average of $1,600 in tax relief for a family of four. It eliminates the death tax, doubles the child tax-credit and expands the annual cap on contributions to education savings accounts from $500 to $5,000.

Though the debate will focus on Bush's specific plan, much of the language used in opposition will echo those who fought against President Ronald Reagan's tax cuts in the early 1980s. Bush dispatched Treasury Secretary Paul O'Neill to Capitol Hill Tuesday to counter the opposition - who are relying on numbers generated by the Center for Budget and Policy Priorities (CBPP). Numbers that, under examination, indicate that CBPP is guilty of "fuzzy math"

Robert Greenstein, CBPP's founder and executive director, makes major assumptions about the tax plan that are not contained in it, such as changes in the Alternative Minimum Tax (AMT). Moreover, he argues that the economy would be completely indifferent to the largest tax relief since Ronald Reagan took office 20 years ago. A position that history refutes.

Arthur Laffer, a member of President Reagan's Economic Policy Advisory Board, writes that "the history of tax cuts, politics and prosperity couldn't be clearer. … Pro-growth tax policies do wonders for the economy."

O'Neill touted the cut as one ingredient in trying to stave off a worsening of the economic slowdown. "This tax relief package is sound fiscal and economic policy,'' he said. ''It fits easily within our budget framework which walls off the Social Security and continues to pay down the public debt in increasing amounts each year. I like to refer to it as the Goldilocks tax relief plan -- not too big, not too small, just right."

But Majority Leader Dick Armey, R-Texas, has been spearheading a growing effort to increase the size of the tax cut, saying the President's plan is quite small in comparison to total federal revenue over the next 10 years.

In testimony to the Senate Budget Committee, Harvard Economics Professor Martin Feldstein said large tax cuts at this time "will help to assure a stronger short-term recovery from the current economic slowdown. … The increase in after-tax incomes and the expectations that such increases will continue in the future and will boost confidence as well as spending power." It seems Feldstein could've been quoting any number of Heritage studies - which have long pointed out the positive effects of cutting marginal tax rates, and other elements of supply-side economics, which is where the debate is heading.

"The purpose of a supply-side tax cut is to increase the expected after-tax return to work, saving, and investment so as to elicit more of each," writes National Review's Ramesh Ponnuru. "The more people expect that their current transactions will face lower taxes, the more likely they are to make them."

As Reagan himself said in his Farewell Address, "Common sense told us that when you put a big tax on something, the people will produce less of it. So, we cut the people's tax rates, and the people produced more than ever before. The economy bloomed like a plant that had been cut back and could now grow quicker and stronger. Our economic program brought about the longest peacetime expansion in our history: real family income up, the poverty rate down, entrepreneurship booming, and an explosion in research and new technology. We're exporting more than ever because American industry because more competitive and at the same time, we summoned the national will to knock down protectionist walls abroad instead of erecting them at home."

The bottom line is that the Bush tax plan, if made retroactive, will stimulate the economy immediately while costing a lot less because tax revenues will also increase. It will also represent a move towards broader reform of the tax code, and propel long-term growth of the economy. As far as Laffer is concerned, the the tax cut is the best way to help the poor. "The poor, minorities and the disenfranchised will have the best form of welfare-good, high-paying jobs."

Even the New Yorker doesn't mince words when it comes to describing the unfairness of the tax code. "If you divide the country into fifths by income, during [Bill Clinton's] Presidency the federal tax rate, and the share of taxes paid, went up substantially for the top fifth, especially for the top one per cent, and down for the other four-fifths," Nicholas Lemann writes in the latest issue. "Clinton didn't take from the rich and give to the poor, he took from the rich and gave to the broad middle class. He raised the top income-tax rate from 31 per cent to 39.6, and he cut taxes for working people through measures like the child credit and the earned-income-tax credit, which come out to about twenty billion dollars and thirty billion dollars a year, respectively. The top one per cent now pay about a quarter of all federal taxes, and the top five per cent about two-fifths."

But the tax code affects everyone. Pete du Pont, recently summarized the status of taxation in America, saying, "We pay to the government up to 40% of what we earn, half of anything left over when we die--our savings, investments, the family farm or business we have built--and it takes us collectively about six billion man-hours each year to comply with the tax laws."

Clearly, the time for relief is now.

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