Bush Tax Plan: The Debate Takes Shape
Beyond the Politics, Complex Questions of Fiscal Health
By Richard W. Stevenson, August 26, 2000
WASHINGTON, Aug. 24 -- In the shorthand of presidential politics, Gov. George W. Bush's tax cut proposal is either an overdue effort to return to citizens what is rightfully theirs, or, as Vice President Al Gore puts it, a risky scheme to reward the wealthy.
Underlying that political debate are a welter of complex and ideologically charged economic policy issues that have a strong bearing on the government's fiscal health and the nation's chances of extending its long run of prosperity.
Does Mr. Bush's tax cut fit within the projected federal budget surpluses, or would it endanger the government's chance to pay off the national debt? Would the Bush plan extend the long business expansion or lead the red-hot economy to blow a gasket? Would it apportion the federal budget surplus fairly to everyone? Are tax cuts -- especially those, like Mr. Bush's, that would reduce income tax rates -- a more productive economic use of the surplus than increased government spending?
Objective answers are hard to come by, as they always are with tax policy, but the parameters of the debate are well defined.
Much of the focus is on the scale of Mr. Bush's plan, which would reduce all income tax rates, double the child credit, provide a break for married couples, repeal the federal estate tax and expand the deductibility of charitable contributions.
Mr. Bush's tax cut would reduce federal revenues by $1.3 trillion in the nine years starting in 2002, and it would use up $1.6 trillion of the surplus over that period. That figure includes the increased interest costs the government would have to pay if any of the surplus was spent or used for tax cuts.
But that would make Mr. Bush's plan considerably smaller than the tax cut championed by President Ronald Reagan in 1981. If it had not been partially offset by subsequent tax increases before it became fully effective, the Reagan plan as passed would ultimately have amounted to an annual tax cut equal to 4 percent of the gross domestic product, according to a calculation by Robert S. McIntyre, the director of Citizens for Tax Justice, a liberal research group.
If fully enacted, the Bush plan would eventually reduce taxes by about 1.5 percent of the gross domestic product, Mr. McIntyre said.
More important than its absolute size is whether the tax cut is affordable, given the size of the projected budget surplus.
Over the first nine years of the Bush tax cut, starting in 2002, the total surplus is projected by the Congressional Budget Office to be $4.3 trillion, assuming that government spending rises at the rate of inflation.
Of that, $2.1 trillion would be the non-Social Security surplus, which is the portion up for grabs for tax cuts and spending. (The two political parties have agreed that the portion of the surplus generated by Social Security should go only to reducing the national debt or shoring up the retirement system.)
So on the face of it, Mr. Bush's tax cut in that nine-year period -- $1.3 trillion plus $300 billion in interest costs -- would still leave $500 billion for other purposes.
But there are already many calls on that $500 billion. There is considerable bipartisan support for taking off the table, for tax cuts or spending, the portion of the surplus being generated by Medicare, which is more than $300 billion over the nine-year period.
Both parties are heading toward adding a prescription drug benefit to Medicare. There is backing in both parties for tax cuts not included in Mr. Bush's proposal.
And Mr. Bush has made expensive commitments of his own, from expanding access to health care to building a national missile defense.
Moreover, there is no assurance that the surplus will materialize as projected. Even if it does, history suggests that more of it might go to spending programs than is assumed in the surplus projections, given the well-established propensity of both parties to spend more than they say they will.
But Mr. Bush's team said there was plenty of money available for the tax cut and for other needs. Mr. Bush has said he can save $200 billion over the next decade by improving the way government operates, and he has vowed to crack down on government spending. His plan makes no provision for taking the Medicare surplus off the table. Even after adding $256 billion in spending increases over 10 years for the military, education, agriculture and other programs, his advisers say there would still be a substantial buffer left.
"Governor Bush asked us to identify the biggest problems in the tax code and come up with a way of fixing them," said Lawrence B. Lindsey, the head of Mr. Bush's economic team.
"The reforms he's suggesting do just that while preserving a balanced budget and allowing a paydown of the national debt," Mr. Lindsey said.
Even if the tax cut is affordable, there is a debate over whether this is the right time to enact it.
For the last several years, the economy has been running at or above what most economists consider to be its capacity for noninflationary growth, and by putting more money into the hands of consumers, a tax cut could be expected to further stimulate growth.
That in turn could increase inflation pressures, leading the Federal Reserve to try slowing the economy down again by pushing interest rates to a higher level than they would be otherwise.
Mr. Bush's team said the fiscal stimulus would be very modest, and in any case would be far less than the stimulus created by the government spending increases backed by Mr. Gore and President Clinton.
Moreover, Mr. Lindsey said, Mr. Bush's tax cut would be phased in gradually over the decade, and, "No one knows what the economic circumstances will be in 2004 or 2005."
As Mr. Gore has increasingly emphasized a populist message, he has tried to focus attention on who would benefit most from Mr. Bush's proposal.
An analysis by Citizens for Tax Justice found that 59.4 percent of the total tax cut would go to households with incomes in the top 10 percent, $92,500 or more, with that group getting an average tax cut of $6,410.
The bottom 60 percent of households, those with incomes less than $39,300, would get 12.6 percent of the total tax cut, an average of $227, according to the analysis.
Mr. Bush's team looks at the question from a different angle, suggesting that lower-income people would benefit proportionately more than upper-income people, at least relative to the size of their existing tax bills.
The Bush campaign produced figures showing that a family of four with two incomes totaling $47,500 -- the national median -- would see its federal income taxes decline by 56 percent under the Bush plan, to $1,493 from $3,393 under current law. By contrast, a family of four with one worker making $250,000 would see its tax bill fall by 13 percent, to $59,187 from $68,031.
would pay a bigger proportion of the tax bill after the Bush tax cuts
than before them," Mr. Lindsey said.
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© 2000 by Neil Mishalov