Nobody can fathom a $1.6 trillion tax cut. But putting it in terms of how many $20 toasters it would buy might help clarify matters. President Bush’s tax cut would provide enough money to buy 80 billion toasters over 10 years.
Here’s the catch. Not every American would receive the same amount of toaster-purchasing power via the tax cut. In fact, those earning more than $100,000, representing roughly 4 percent of all taxpayers, would be in toaster heaven, according to Bush’s tax tables. They would get enough back in lower taxes to buy more than half, perhaps more than 60 percent, of the 80 billion toasters.
Can this be fair? Well, it depends on how your bread is buttered.
Much outrage has been vented over the issue of how this toaster-purchasing power should be parceled out. It crescendoed last week when the House approved the first installment of Bush’s tax reduction, its centerpiece $958 billion cut in tax rates. Democrats squealed that the bill amounted to Robin Hood in reverse. Republicans praised it as a fair return to those who actually pay the taxes.
On one thing they agree: The GOP says it wants nothing of these crazy Democratic schemes to redistribute income from rich to poor through the tax system. Democrats say they want nothing of those crazy Republican schemes to redistribute income from the poor to the rich through the tax system.
Each side says it is right.
Sorting through the tax/toaster maze takes some doing. But the debate can be boiled down to differing perspectives: The Republicans emphasize who pays the income tax, while Democrats emphasize who gets the cuts.
Bush sees nothing wrong with enhancing the toaster-purchasing power of the wealthy through a tax cut, saying that those who pay the taxes should have a rate reduction just the same as the poor and the middle of income. And, he says, the estate tax (known as the death tax among Republicans) is unfair and should be repealed, even though the rich would benefit the most from its abolition.
The president’s tax tables, which the Democrats do not trust, show that Americans earning between $100,000 and $200,000 now pay 27.1 percent of income taxes. After the tax cut is totally effective (excluding the estate tax), this group would pay 28.3 percent, a tad more. Similarly, those earning over $200,000 now pay 42.9 percent of income taxes and would be paying 45.9 percent after the cut.
Think-tank Republicans such as Bill Mitchell of the Cato Institute and Dan Mitchell of the Heritage Foundation said Bush actually went out of his way to make the tax bite a little heavier on wealthier Americans.
Democrats scoff at such comments and say the only way to measure fairness in the tax code is to do one thing: Follow the money.
They cite estimates developed by the Citizens for Tax Justice, headed by Robert McIntrye, a group with a reputation for left-of-center leanings. His distribution table on the House-approved tax bill declared that the top 1 percent of taxpayers by income group, those earning $373,000 or more, would receive 44.3 percent of the tax cut–and that also excludes estate tax repeal.
If the estate tax is repealed, he said, the share of the tax relief for the highest 1 percent in income would top 60 percent, concentrating the buying power for toasters even more.
Under the across-the-board cut alone, McIntyre said that the bottom 60 percent in income, those earning less than $44,000, would receive 16.5 percent of the tax cut when it is fully phased in over a five-year period, while the top 10 percent, those making more than $104,000, would get more than three times as much, 56.5 percent.
Even Bush’s figures show that 45.2 percent of the income tax cuts go to those earning more than $100,000 or more, while those earning under $50,000 a year would get only 23.6 percent of the cuts. Len Burman, an Urban Institute economist who formerly served in the Clinton administration’s Treasury Department, said most all of the $266.7 billion estate tax repeal would go to this high-income group.
Burman said that, using Bush’s own figures, this would mean that 55 percent to 60 percent of the total $1.6 trillion tax cut would go to those making more than $100,000 annually.
These are a lot of numbers, but McIntyre said they mean one thing: Wealthier Americans are making out big time. By cutting taxes so much for the elite, he said, the Bush tax-cut program would over time deny funds for many essential services. “The long-term impact is that the government will go to hell,” he said.
Bush’s budget shows that by 2010, government spending will fall to about 16 percent of gross domestic product, the lowest level since the 1950s, McIntyre said. The federal budget of $1.9 trillion is now more than 18 percent of the GDP.
Republicans say the Bush tax plan is fair because he roughly maintains the current tax burden among various income groups. But some GOP analysts do see one problem: Many Americans in the 15 percent tax bracket would get little or no tax cut at all under the Bush plan, while the top bracket of 39.6 percent would be slashed to 33 percent. The average adjusted gross income in this bracket is more than $900,000.
The tax-cut debate really turns nasty when it turns to the question of whether the wealthy are making out like bandits with this tax cut. Mitchell of the Heritage Foundation, which generally supports Bush, calls such an argument ridiculous. Reducing America’s tax rates increases work effort and investment and enables more people to rise into the higher brackets, he said.
In Hong Kong, which has a flat tax, Mitchell said the top 10 percent of the population in income pay 75 percent of the tax burden, financing government programs for the low-income population.
The Center on Budget and Policy Priorities, headed by Robert Greenstein, a former Clinton administration adviser, said the Bush tax cut would give disproportionate help to high-income taxpayers who made out extremely well during the 1990s boom.
A study by the center’s Isaac Shapiro and Joel Friedman said the incomes of the wealthiest 1 percent of Americans increased an average of 47 percent between 1992 and 1998, while the bottom 95 percent in income saw only a 9 percent increase.
“There was a tremendous widening of income distribution in the 1990s despite the strong expansion,” said Barry Bosworth, an economist at the Brookings Institution. “In the last 10 years, most of the gains went to the top end of the distribution to an extent we never saw before in our history.”
Republicans said Democrats are engaging in class warfare in bringing up the whole fairness question. William Beach, an economist at the Heritage Foundation, said such an analysis entirely misses the point about an across-the-board tax cut such as Bush’s–that it is expected to bolster America’s economic performance.
Beach said Democratic analyses such as that of the Citizens for Tax Justice neglects the fact that reducing tax rates causes major changes in economic behavior and helps more people move into higher income brackets than otherwise would be the case. Economic growth will be so much stronger that there will be no doubt the Bush tax cut is affordable, he said.
There is another issue not frequently mentioned in the tax debate, but it is one that will likely have to be addressed–the alternative minimum tax, or AMT for short. It has the capacity to reduce some of that purchasing power that might be generated by the tax cut.
The AMT was originally set up in 1969 after reports that many wealthy Americans were paying little or no income tax. So Congress approved a new levy on tax shelters, subsidies and various other tax preferences taken by wealthy Americans. As time has passed, through bracket creep and higher income growth, the alternative minimum tax is suddenly a potential menace to the middle class.
According to the Joint Tax Committee of Congress, the number of taxpayers subject to the alternative minimum tax will rise from 1.5 million taxpayers this year to 20.7 million in 2011. Unless Congress does something to fix it, Bush’s tax relief plan would be slashed by $292 billion over 10 years because more people will be paying it, according to the Center on Policy and Budget Priorities.
The Bush plan does not allow for the AMT fix at the moment, but Treasury Secretary Paul O’Neill said it will before the entire tax package clears Congress. This will add another $292 billion to the $1.6 trillion package–enough to buy 14.6 billion more toasters at $20 a pop.
And if you don’t want a toaster, this is what you could do: If your household income is
$15,000-27,000 the cut ($168) could buy you a small TV.
$27,000-44,000 the cut ($316) could buy a community college class.
$44,000-72,000 the cut ($511) could pay for three nights at a city hotel.
$72,000-147,000 the cut ($761) could pay for a Caribbean vacation.
$147,000-373,000 the cut ($838) could pay for a new car transmission.
$373,000 plus the cut ($28,256) could become the down payment on a vacation cottage.
Source: Citizens for Tax Justice.
