Tax cut math

Bruce Bartlett
Posted: Oct 16, 2000 12:00 AM
Al Gore has been getting a lot of mileage lately out of claiming that George W. Bush's tax plan would give almost half its total benefits to the top 1 percent of taxpayers. This is a damning charge, one that Bush has not done a particularly good job of refuting. Following is an effort to try and explain what the truth is. First, it is important to know that determining what the distributional effects of any tax proposal are is more art than science. Since the 1970s, it has been possible to use computers and tax return data to figure out how tax changes may affect taxpayers. Only the Treasury Department and Congress's Joint Committee on Taxation have access to actual tax returns, in order to protect privacy. But it is possible for private organizations to get a statistical sample of returns to do their own analyses of the distributional effects of tax changes. Such methods appear to add accuracy and precision to the analysis of how tax changes may affect real people. But in practice, the analyses are done based on large groupings of taxpayers by income, with estimates being made of the average impact of tax changes on all taxpayers in a group. The result is that the distinctions between taxpayers with the same income are almost entirely lost. For example, the tables lump married couples and single persons with the same income together, those with and without children, and those retired and living off investments with those having only wage income. Furthermore, for reasons that have never been clear to me, the Treasury, JCT and most private groups invariably "adjust" the income data in their tables so that it bears no relationship to that which taxpayers report on their IRS returns. There the basic measure of income for tax purposes is something called Adjusted Gross Income, which all taxpayers can find on line 33 of their latest tax return. But the Treasury, JCT and other groups add many other items to AGI to get the measure of income used in their distribution tables. The JCT, for example, adds municipal bond interest, the value of employer-provided health benefits, the employer share of Social Security taxes and other forms of tax-exempt income to AGI in their distribution tables. The effect is to artificially inflate income in the tables that people actually pay taxes on. A 1987 Treasury study found that its measure of income increased the percentage of taxpayers making more than $200,000 by 25 percent over what would be measured just by AGI, and reduced the number making $10,000 or less by 75 percent. The net impact of all this is to make all tax cuts appear to being going more to the rich than they really are, because in effect everyone becomes a lot richer when they are credited with taxable income they don't have. With this in mind, let us look at Gore's claim that the top 1 percent of taxpayers -- those making over $319,000 -- get almost half of all the benefits of Bush's tax cut. These numbers come from a liberal group called Citizens for Tax Justice, which says that 42.6 percent of the Bush tax cut goes to the top 1 percent. Thus Gore is already exaggerating when he says "almost half." The JCT says that the top 1 percent of taxpayers are those making above $296,828. But this number is probably 25 percent higher than the equivalent level of AGI, which is likely closer to $223,000. Thus the CTJ figures are probably 40 percent higher than the equivalent level of AGI, because of various adjustments, thus making Bush's tax cut appear much more skewed toward the rich than is actually the case. CTJ also says that Bush's proposal to phase-out the estate tax is a kind of income tax cut, when of course estate taxes are paid out of assets at death, not incomes during life. Moreover, CTJ assumes that the burden of the tax falls on the deceased rather than heirs. Since the former tend to be wealthier than the latter, the effect again is to make Bush's tax cut seem much more oriented toward the wealthy than it really is. Leaving out the estate tax and using the JCT's methodology, the top 1 percent of taxpayers probably get closer to 30 percent of the total tax cut, not the "almost half" that Gore claims. There are many other problems as well with the data Gore relies upon. One is that the CTJ figures only show a dollar figure for tax cuts, without telling anyone how much tax people in each income group are paying presently. According to the JCT, those making more than $100,000 per year pay 52.5 percent of all federal taxes while earning just 40.6 percent of total income. It estimates that this group would get 51 percent of Bush's tax cut. Those making between $30,000 and $100,000 make 47 percent of all income, pay 42.3 percent of all taxes and would get 44.1 percent of the Bush tax cut. The truth is that taxpayers would benefit from Bush's tax plan roughly in proportion to the taxes they pay, with those in the middle doing a little better than those at the top. This fact is borne out by the JCT data, which show the distribution of federal taxes being almost exactly the same before and after the Bush tax cut. Bauer complained that Bush gave a "lackluster defense of the sanctity of life," and that Cheney "surrender(ed) on the defense of traditional marriage." He claims that the Republican ticket has forsaken the "fundamental questions that most define the differences between the two parties."

But gay marriage and abortion aren't the "fundamental questions" defining the two parties. These are merely symptoms of the real fundamental difference between the two parties, which is: We believe in the Constitution and they don't.

The whole point of the Constitution -- written by men much smarter than we are -- was to prevent the likes of William Brennan, Harry Blackmun, Franklin Roosevelt or Gary Bauer from attaining too much power. (To be fair to Gary, these braking mechanisms only seem to work with conservatives.) Our Constitution is the most brilliantly freedom-promoting document ever conceived in the minds of men. So it would be really cool if people (like presidents, Supreme Court justices and Gary Bauer) would read it.

Liberals don't read it, and certainly have no intention of living under it. They say it "grows" and, surprisingly enough, the Constitution always seems to "grow" in ways they like. It never grows a right to school vouchers or a right to bear machine guns or a right to free champagne for blondes. It just keeps growing rights like the right to stick a fork in a baby's head, and the right to discriminate against disfavored racial groups, especially white men.

But back briefly to the real Constitution, the one composed of words and not "penumbras" -- the Constitution nowhere grants the president, Congress or the Supreme Court authority either to ban or to require abortion. It grants no one in the federal government the right to ban or require gay marriage. It doesn't say anything at all about abortion or gay marriage -- or lots of other things, many of them big and important (like free champagne for blondes).

The genius of the Constitution is that it gives the federal government almost no power over anything important. It was precisely because of one Supreme Court's refusal to abide by those limits, and its outrageous arrogation of power to itself, that we ended up with Roe vs. Wade in the first place.

If given a choice between a country in which gay marriage is prohibited at the national level by federal law, and a country governed by the Constitution, I'll take the Constitution. For one thing, in brute realpolitik terms, somehow elevating every petty tribal dispute to a federal issue hasn't really worked out for conservatives. We win in Topeka; we lose in Washington, D.C.

Moreover, the states and towns would create a perpetual marketplace of laws, regulations and ideas. If you don't like porno being sold at the corner market, you could move. If you don't like porno not being sold at the corner market, you could move. (And then at the end of the year, we'll tabulate which town has more crime, venereal disease, rape and unwanted pregnancies.)

States and localities would be free to sculpt themselves into whatever kind of place the denizens prefer. If an individual feels unduly oppressed by those laws, he can move. And it's a lot easier to move to the town next door, or even the state next door, than to move to Canada. That's how federalism creates the maximum freedom possible.

Liberals always hate freedom and want to jam their hateful ideas down the entire nation's throat. But now even some conservatives have decided total federal hegemony sounds more fun than living in freedom under a Constitution (which it is, I guess -- provided you get to be dictator). If the Supreme Court can "grow" the Constitution to suit its political agenda, why can't our guy do the same from the Oval Office?

It really serves liberals right. In a way, I wish there were more conservatives like Gary Bauer demanding federal laws that would outlaw sex education, communism, atheism, condoms, Birkenstocks, New York Times' editorials -- everything you can think of that would cause a liberal to screech.

But George Bush and Dick Cheney recognize that they are not running for dictator. The greatest president America ever had was the only man who didn't want the job -- and the first man to hold it. It ought to warm conservative hearts that Bush and Cheney eagerly admit that there are limits to the powers of the offices they seek.