Keeping the centerpiece promise of his campaign, President Bush has sent his 10-year, $1.6 trillion tax cut plan to Capitol Hill. This is a remarkable moment, for the debate is not about whether there will be a tax cut–there will be one. The debate is over how much and who gets it and when it will happen.
Get ready for the show. Lobbyists will be out in force, trying to lard the legislation with special breaks. Republicans and Democrats will attempt, respectively, to ramp it up and scale it back.
As the White House and Congress haggle over the particulars, they ought to keep two broad themes in mind about the impact they will have on the tax code: Make it simple, make it fair.
Bush has an extraordinary opportunity to begin simplifying the Byzantine U.S. tax code. He also has an opportunity to demonstrate his vaunted bipartisanship by working with Democrats on a tax cut that provides benefits across the board.
Bush has made a good start on both counts. His proposal would lower marginal tax rates and reduce the number of those rates. Yes, that will give the wealthy a sizable tax cut; it will also reduce to zero the income tax burden for thousands of lower-income Americans.
Also included in the Bush proposals are elimination of the estate tax, elimination of the so-called marriage tax penalty, and a doubling of the child credit. All are likely to win considerable support in Congress.
There are several ideas that Bush has not championed, but deserve to be in the mix.
Congress should expand the earned income tax credit, which helps lower-income families to offset their total tax burden. Enhancements of the EITC, which has had strong bipartisan support, could give more tax breaks to those who need them most.
Congress also should simplify the tax code by sweeping out narrowly-targeted tax breaks and revising or abolishing the alternative minimum tax.
The AMT was originally passed to ensure that wealthy Americans who take advantage of many tax shelters and deductions still wind up paying taxes. It’s counterproductive to encourage certain behavior with tax breaks, then take away the benefit. Just as damaging, the AMT was not indexed for inflation. Under the Bush plans it will catch increasing numbers of middle-class American taxpayers. Eliminating targeted tax breaks and the AMT would make the tax code simpler and fairer.
It’s amazing to see how this debate has changed. Not long ago, Republicans were chastised by Democrats for proposing a 10-year, $792 billion tax cut. Too expensive, they said. This newspaper agreed.
But that was before surging surplus projections altered the political equation. A little more than a week ago, the Congressional Budget Office upped its own 10-year surplus projection to $3.1 trillion, nearly $1 trillion more than it projected just six months ago.
Now the momentum for a substantial tax cut has become overwhelming–and Democrats are proposing cuts topping $800 billion. Some Republicans are pushing for much larger cuts than their president is. Their dreams reach as high as $2.6 trillion.
In that light, two points deserve to be mentioned, just to keep everybody from getting tipsy on tax cuts.
Those gaudy surplus projections remain just that–projections. Congress can’t get so caught up in the chance to shower money on everybody that it gives away the superb opportunity to make a substantial reduction in the nation’s sizable federal debt. Yes, it’s your tax cut–but it’s your debt, too.
If the economy continues to slow, or heads into recession, the surplus projections are likely to shrink rapidly. As well, the forecasts count on Congress showing strict discipline on spending, which it hasn’t done.
The slowing economy is now cited regularly by the Bush administration, which has taken to selling its tax cuts as an economic stimulus. But history shows tax cuts aren’t the most effective way to immediately boost a faltering economy. By the time any tax cut becomes law–July looks like the target–the economy may well be growing robustly again. Accelerating the tax cuts would increase the overall cost of the plan, but wouldn’t bail the country out of a recession if one were to occur.
So let’s get on with the debate. House Speaker Dennis Hastert (R-Ill.) plans to take up the Bush package piece by piece, so the merits and fiscal impact of its various components can be debated. That’s a sound idea.
Make it simple, make it fair . . . and stay sober.
