Hidden Agenda

Judged simply on whether it makes good sense as public policy, the Republican tax cut narrowly pushed through Congress could hardly have been worse. Well, perhaps it could have been: Bush’s initial proposal was even more dreadful. But his basic vision remained intact. Here’s a short list of what’s wrong with the oh-so-slightly improved Congressional version.

• It’s bad tax policy, introducing tremendous uncertainty.
• It’s not very effective as a short-term stimulus to the economy.
• It’s grossly unfair.
• It’s likely over the long term to actually reduce growth.
• It’s extremely irresponsible fiscally.
• It’s dishonest and deceptive—in its design but especially in bringing Enron-style principles to government accounting.
• It ignores real needs and threatens government spending that would be good for the economy and society.

From the Republican point of view, those are meaningless objections, maybe even badges of honor. The real objectives of the tax cut are not economic, despite the rhetoric, but political.

In the short run, the Republicans hope to win in 2004 by running as tax cutters against tax-and-spend Democrats. In the long run, Republicans plan to starve and thus drastically shrink federal government, especially spending on social programs. As budgetary crises resulting from the tax cut unfold, the only solutions will be devastating cuts in programs—including Social Security, Medicare and Medicaid. And if the economy suffers, as is likely, the prescription will be more tax cuts.

Since the vast majority of people will be net losers and a few people at the top will be enormous net winners, lying has become an essential part of this strategy—lying that is made possible by swollen Republican campaign coffers and an increasingly concentrated and conservative corporate media.

Nor will this assault let up. Over the summer, Republicans are planning to push further tax cuts, including a permanent repeal of the estate tax. With the ink barely dry on the first tax cut, proposals are being floated to expand some of the tax cuts just passed and to extend earlier cuts that were deceptively designed to “sunset” at an arbitrary date (like with the estate tax, which was scheduled to be reduced to zero over the decade and then revert to its 2000 rate).

Republicans think they have Democrats in a trap, but if they do, it’s a trap the Democrats have helped to set. The Republicans figure that they have an advantage if voters are given a choice between Democrats campaigning for balanced budgets and fiscal responsibility and Republicans arguing for even more tax cuts. Even though polls show that by nearly two to one the public favors stimulating the economy by reducing the deficit or adopting other policies rather than cutting taxes, the Republicans may be right, given the limited success the GOP had arguing for balanced budgets prior to Reagan.

Earlier this year the Democrats did offer a much better designed tax cut package, which would have stimulated the economy and also would have been more fiscally responsible and fairer than the Republican alternatives. However, in a simple battle between a big tax cut and a small tax cut, as the Republicans and their media allies will portray the choice, the Democrats may still be at a disadvantage.

If offered the option of big tax cuts for the rich or health care for everyone, the public favors health insurance by 81 percent to 14 percent, according to a May Gallup poll (in a Wall Street Journal/NBC poll the public chose health care over tax cuts by a margin of 55 to 36 percent). Strong majorities also would choose preserving social security and Medicare over tax cuts. The Democrats do have a fighting chance if they offer voters the choice between lower taxes for millionaires or a long list of other goals, including better primary and secondary education, college scholarships, job training, health care for everyone, improved transportation, better home care for needy senior citizens, good child care and early childhood education, affordable housing, a clean environment, aid to state and city governments, and AIDS research. But first they will have to make a case both for what the tax dollars will do and for a progressive tax code. The Democrats can also gain by showing how the regressive tax cuts are part of an overall Republican strategy to attack the living standards of working people, such as making it much easier for employers to avoid paying overtime premiums to most workers.

Democrats must also drive the message home that the Republican tax bill is bad public policy. The legislation accelerates planned reductions in personal income tax rates and lowers the tax rate on both dividends and capital gains. It gives businesses depreciation breaks. It also provides increased child credits, reductions for some married couples and an expansion of the lowest tax bracket. The cost, in theory, is $350 billion over 10 years.

But if all of the provisions designed to “sunset” over the next few years are extended, as Republicans have said they will do, then the real cost will be at least $800 billion over a decade, according to the Center on Budget and Policy Priorities (CBPP). If Republicans succeed in extending all of the tax code changes set to sunset in both the 2001 and 2004 tax bills, the cost—not counting interest on growing debt—will be almost $2 trillion over the next decade, roughly equal to the official costs of all tax cuts passed under Bush, according to William Gale and Peter R. Orszag of the Brookings Institution.

Each year the revenue costs will grow. In 2013, the cost of just extending the sunset tax provisions will be $430 billion. That’s about 2.4 percent of the gross domestic product, or about triple the size of the official shortfall projected for Social Security over the next 75 years, according to Gale and Orszag.

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From a technical point of view, the legislation is bad tax policy because it introduces so much uncertainty, making it difficult for businesses or individuals to plan. It also is likely to create a new surge in tax shelters, according to Len Burman of the Urban Institute, as rich individuals try to shift ordinary income to lower-taxed capital gains.

Not surprisingly, the tax cuts offer little short-term stimulus. That was only a public relations gambit by the Bush administration, which wants tax cuts in good times and bad. About one-fifth of the tax cuts are targeted for the next two fiscal years, so clearly this bill is not aimed at the immediate problem of economic sluggishness and unemployment.

And while the tax cut package also includes $20 billion in aid to the states over two years, which Bush had long opposed, that barely addresses the $80 billion in deficits faced by the states this year. These deficits will lead to some combination of increased state taxes, reduced state programs and cuts in state jobs, all of which will swamp the legislation’s modest stimulative effect. Also, unless states “decouple” from new changes in the Federal Tax Code, they could lose $3 billion over the next two fiscal years (and $16 billion in revenue over the next decade), according to CBPP. As a short-term stimulus “this proposal is the worst of all worlds,” says CBPP executive director Robert Greenstein.

The bill will do little to boost the economy, largely because it is so unfair. More than two-thirds of the new tax cuts will go to the richest 10 percent of taxpayers, and more than half to the richest 5 percent, according to Citizens for Tax Justice (CTJ). Only 7.8 percent will go to the bottom 60 percent. The richest 1 percent will average almost $100,000 a year in tax cuts over the next four years, CTJ calculates. Bush contends that the average family would get $1,000 in tax cuts and every taxpayer will see a tax cut. But the cuts for the bottom 60 percent will actually average less than $100 a year, and more than one-third of all households—including millions of taxpayers—will receive no tax cut at all in 2003.

Republicans deliberately excluded providing help to low-income households. While figuring out a way to shoehorn more benefits for the rich into the final law, Republican conferees dropped a Senate-passed provision that would have provided a small increase in an existing refundable child tax credit for working families that make between $10,500 and $26,625. This means that families of nearly 12 million children—one sixth of all children in the United States—will not receive any help, according to CBPP, since they already make too little to pay income taxes. In addition, according to the Tax Policy Center of the Urban Institute and Brookings Institution, 8.1 million taxpayers—mainly low-income single people or heads of households with no young children—will receive no tax reduction.

Excluding low-income households from the benefits of the tax cuts undermines the progressive principle that people should be taxed according to their ability to pay and fails to provide any meaningful help to those who need it. It also gives little or nothing to those who would be most likely to spend their tax cut immediately, providing needed economic stimulus. Instead, as CTJ’s analysis shows, the richest 1 percent not only receive the biggest immediate tax cuts, but their share of federal taxes also declines most dramatically through 2010, as a result of all three Bush tax cuts—while the share paid by upper-middle-income taxpayers rises over the same period. The share paid by the bottom 60 percent will remain basically constant. And if the “sunset” tax changes are extended, the rich will benefit even more.

While Republicans have claimed that their cuts will spark long-term growth, several studies—including analyses by the Congressional Budget Office and the Joint Committee on Taxation as well as by non-governmental economists—suggest that the legislation will have at best little effect on long term growth or, more likely, a slightly negative effect. Increased government borrowing, for example, could raise interest rates enough to negate any possible mild incentive for increased investment spurred by lower dividend or capital gains taxes.

Yet the lies and distortions continue, including the suggestion that Americans are overtaxed. In reality the United States taxes less than all other major industrial countries and has higher levels of inequality. With this legislation, the federal government will collect less income tax as a share of the economy than at any time since 1943.

The big question is: How long can this Enron style of government continue before it crashes, or before citizens replace the CEO?