In his debate with George W. Bush on Oct. 3, Al Gore relentlessly attacked Bush's tax plan as a giveaway to the rich. Based on an analysis by the liberal group Citizens for Tax Justice, Gore charged that the top 1 percent of taxpayers -- those with incomes above $319,000 -- would receive 42.6 percent of the total tax cut.
Unfortunately, Bush did not respond very well to the Gore attack. He said only that "wealthy people pay a lot of taxes today, and if everyone gets tax relief, wealthy people are going to get tax relief." While a true enough statement, it lacks the power of specificity. Bush would have helped himself more if he had cited statistics on distribution of the tax burden and some of the problems with Gore's plan.
The latest data published by Congress' Joint Committee on Taxation show that those making more than $200,000 will pay 42.7 percent of all federal income taxes this year. Those making more than $100,000 will pay two-thirds of all income taxes. And those making more than $50,000 will pay 92.5 percent of all federal income taxes. The JCT data also show that the top 1 percent of taxpayers will pay 33.6 percent of all federal income taxes, the top 5 percent will pay 54 percent, and the top 10 percent of taxpayers will pay 66.4 percent.
At the other end of the income spectrum, those making less than $20,000 not only will pay no federal taxes, but actually have a negative tax liability. In the aggregate, they will get $12 billion from the federal government, while paying nothing. This is due to the Earned Income Tax Credit, which is refundable even for those who have no tax liability to offset with the credit.
Because these are aggregate figures, it does not mean that everyone making less than $20,000 pays no income tax. And of course, they all pay Social Security and other federal taxes. However, for the overwhelming majority of those with incomes below $20,000, they either pay no income taxes or have a negative liability. According to the JCT, of the 43.6 million tax filers with incomes below $20,000, 35 million, or 80 percent, pay no income taxes.
The point of this review is to illustrate just how hard it is to have a large tax cut that does not benefit the well-to-do. They pay the vast bulk of federal taxes and cannot help but benefit most. This is simply the nature of taxation. The only way of giving a tax cut to those who pay little or nothing in taxes is to disguise a direct spending program as a tax cut, which is what the EITC is. Although a part of the Tax Code, it is really just a spending program that more logically should be part of the welfare system. It exists as a tax provision only to allow politicians to say they are cutting taxes even for those who pay no income taxes.
While Bush would give a tax cut to every person who pays so much as $1 of federal income tax, Gore's tax plan is carefully targeted solely at attracting votes. As respected economist Martin Sullivan writes in the Oct. 2 issue of Tax Notes, "Gore's tax plan doesn't waste any money on Republicans who won't vote for him. Gore's multifaceted tax agenda is a grab bag of 'goodies' that play on high-profile issues. It is designed to strike a chord with anyone who cares about education, poverty, the environment or health care -- that is, a lot of voters."
Sullivan concludes that "the Gore tax plan may be a political masterstroke, but it is poor economics." It would clutter up an already excessively cluttered Tax Code with provisions that will misdirect economic activity and reduce economic growth. He adds that "there is sparse evidence that Gore's proposals can actually achieve their stated objectives." In short, it is a purely political plan utterly lacking in substance.
By contrast, Sullivan finds much in the Bush plan to recommend it. "High tax rates hurt the overall performance of the economy. The United States does have high marginal tax rates, and it probably would promote long-term economic growth to reduce those high rates," he writes. Like myself, he is puzzled as to why Bush seems reluctant to tout the positive impact of his plan on economic growth.
But even if the Bush plan has no impact on growth, it can still be justified, Sullivan believes. "Despite what Democrats say," he writes, "there is enough money around for a big tax cut. Or put it this way: If there cannot be a tax cut now, then when?" Indeed, there is danger in not cutting taxes, because projected budget surpluses are too tempting to big spenders in Congress. "A surplus not returned to the taxpayers in the form of a tax cut is a license for politicians to spend," Sullivan concludes.
In the October/November issue of The American Enterprise magazine, economist Kevin Hassett makes another important argument for cutting tax rates now. He points out that because of real growth in the economy, taxpayers are being pushed up into higher tax brackets. Hassett notes that there are 3.7 percent fewer taxpayers in the 15 percent bracket now than at the beginning of the Clinton administration, because they have been pushed up into the 28 percent bracket and higher. If this trend continues, the percentage of taxpayers in the 15 percent bracket will fall from 64.3 percent in 1993 to just 46.6 percent by 2010.
Hassett goes on to estimate that over the next 10 years this real bracket creep will raise federal taxes by $1.3 trillion, which is exactly the "cost" of the Bush plan. Therefore, Bush can argue that he is not really cutting taxes at all, he is just keeping them from rising.