Winners and Losers from the Bush and Gore Tax
by Robert S. McIntyre
American Prospect magazine, October 23, 2000
Nothing so neatly differentiates the presidential candidates
as their views on taxes. George W. Bush offers a rather extreme
version of what passes for "conservative "fiscal policy
these days. This philosophy doesn't tout deficit spending per
se, but holds that low taxes, particularly on the wealthy, are
the Holy Grail. Many who support this approach hope to starve
the government of revenues and eventually shrink public spending.
Republican antitax activist Grover Norquist summarizes this position
when he argues that "a small government with a big deficit
is a lot better than a big government with no deficit."
But others in the antitax camp, epitomized by former Representative
Jack Kemp, offer the opposite theory. They believe that through
the miracle of supply-side economics, tax cuts will so stimulate
economic growth that revenues will go up and we will maintain
or even expand government programs. Oddly enough, it's not uncommon
to hear both conflicting views expressed simultaneously. Bush
himself frequently rails against "big government," but
also talks about the "additional revenues" his tax cuts
Unlike Bush, Al Gore is no borrow-and-spend supply-sider.
In fact, he knows that if he is elected, it will be largely due
to how well the economy and the federal budget have done since
Bill Clinton's tax increases on the rich in 1993. But Gore's political
ideology, based on the New Democrat theory that the truth is always
somewhere in the middle, has led him to propose at least some
tax cuts. Almost all of Gore's tax relief would go to middle-class
and lower-income households. But in the details of his plan, Gore
shows an unfortunate affection for using tax benefits as a substitute
for direct government outlays (which are politically out of fashion).
This both employs policy to micromanage people's lives and unnecessarily
complicates the tax code.
As I've written in these pages, it's not clear to me that
any substantial tax cut right now makes sense. The projected budget
surpluses that are supposed to pay for the tax cuts aren't in
hand yet; if and when they do materialize, they will be needed
to meet future program obligations. And anyway, sticking with
a prudent fiscal policy for the time being doesn't rule out tax
cuts in the future, should things turn out better than expected.
Indeed, paying down some of the national debt now can be the equivalent
of a future tax cut since it frees up tax dollars otherwise devoted
to interest payments.
VERY BIG DIFFERENCES
There are two huge differences in the tax plans of the candidates.
One has to do with the effect on the federal budget, the other
with who gets the benefits. By a wide margin, it is the Republican
who is less concerned about the fiscal health of the country.
Leaving aside Social Security and Medicare, the Congressional
Budget Office (CBO) currently projects a total of $1.8 trillion
in budget surpluses over the next 10 fiscal years. But that $1.8
trillion is based on admittedly unrealistic projections about
future federal appropriations. CBO, by convention, assumes that
these will merely keep up with inflation. If we note that appropriations
will also have to grow with population and real wages to maintain
the current level of public services, then about half of the supposed
$1.8-trillion surplus disappears.
In fact, both candidates seem to understand that maintaining
public services will require spending about $900 billion more
than CBO officially projects. Gore has outlined how he would spend
all of that and more-about $1 trillion-on things such as prescription
drugs for seniors, education, children's health, national defense,
and so forth. Bush, too, has an extensive list of spending plans
for defense, education, health care, agriculture, housing, etcetera,
that appear to cost upwards of $800 billion over the next decade.
Once these plans are taken into account, the remaining 10-year
surplus in everything but Social Security and Medicare is at most
only about $900 billion (give or take $100 billion).
Which brings us back to the candidates' tax plans. Gore says
that his proposed tax changes would cost close to $500 billion
over 10 years, including added interest. If all goes well, Gore
says his combined tax and spending proposals will allow him to
devote about $300 billion from the general fund to reducing the
national debt over the next decade. Bush, on the other hand, says
his tax cuts over nine years (2002-2010) would cost $1.6 trillion-which
leaves him at least $600 billion in the hole. And even this is
optimistic since Bush has probably understated the cost of his
tax package-by, among other things, leaving out its $340-billion
cost in its 10th year. Not even the radical-conservative Republicans
currently in charge of Congress have dared propose tax cuts as
large as what Bush is promoting.
Bush's Social Security privatization plan also poses a major
threat to our nation's fiscal health. Diverting 2 percentage points
of the Social Security payroll tax to private investment accounts,
as Bush proposes, means that Social Security taxes will immediately
fall short of the amount needed to pay benefits-a shortfall that
grows larger and larger as time goes by. Over its first decade,
the Bush proposal could take $1 trillion in payroll taxes away
from Social Security, plus about $300 billion in lost interest.
Not wanting to be accused of harboring a plan to reduce benefits,
Bush insists that he has "absolutely" no strategy for
how to cover this enormous hole in the overall federal budget.
The dramatic disparity in the size of the two candidates 'tax
programs is the most obvious reason to prefer one over the other.
But the plans also differ sharply in whom they are designed to
help the most.
By design most of the Bush tax cuts would go to upper-income
taxpayers. In fact, a startling 43 percent of Bush's tax cuts
would go to the best-off 1 percent. These fortunate few, whose
average income was $915,000 in 1999, would get an average tax
cut of $46,000 a year.
The centerpiece of Bush's tax-cut plan, reflecting about half
its revenue cost when fully phased in, is a major reduction in
personal income tax rates. Bush would lower the current top rates
of 39.6 percent and 36 percent to 33 percent, and reduce the 31
percent and 28 percent rates to 25 percent. The current 15 percent
bottom bracket would mostly be retained, but a new 10 percent
bracket would be gradually phased in (by 2006 it would apply to
a little under a quarter of the taxable income now taxed at 15
About a fourth of Bush's tax cuts would come from new or expanded
tax credits and deductions. The $500-per-child tax credit would
be doubled and extended to much higher-income families. Two-earner
couples would eventually be able to deduct the lesser of $3,000
or 10 percent of the earnings of the lower-earning spouse. Taxpayers
who don't itemize could deduct their charitable contributions
in addition to their standard deduction. The rest of the Bush
tax cuts reflect repeal of the federal wealth tax on very large
estates (24 percent of the total tax cut) and tax breaks for corporations
(2 percent of the total).
On the campaign trail, Bush frequently and falsely insists
that his tax plan is "especially focused on low- and moderate-income
families." At the same time, he is fond of pointing out that
because the federal income tax is progressive, it's completely
logical that well-off people get the bulk of his tax breaks. But
the truth is that Bush carefully chose both the specific taxes
he wants to cut-income taxes and the estate tax-and the way he
wants to cut them in order to get a regressive result. Bush conveniently
ignores the fact that for most Americans, payroll taxes and excise
taxes loom much larger than income taxes. In terms of overall
federal taxes, Bush's tax cuts range from a 5 percent reduction
for the bottom fifth up to a 14 percent cut at the top.
While Bush would allocate most of his tax cuts to people making
more than $100,000, almost all of Gore's tax cuts would go to
people making less than that. Half the projected net cost of the
Gore tax plan reflects a new kind of tax break for savings, which
he calls Retirement Savings Plus. Individuals making up to $50,000
and couples making up to $100,000 would get a government match
of up to 370 percent for money they put into special savings accounts
to use for retirement, college, or first-time home purchases.
These matching payments would be implemented through refundable
tax credits, and their size would depend on income level, with
the largest payments going to those who earn the least.
Gore proposes to increase the standard deduction for married
couples to reduce or eliminate the "marriage penalty"
for millions of families. (Almost all the benefits of this change
would go to couples making less than $100,000.) Many working families
(making up to $38,000) would see a boost in their Earned Income
Gore has a variety of tax credits intended to help people
in particular circumstances and at particular points in their
lives. Workers lacking employer-paid health insurance could get
a 25 percent refundable tax credit for purchasing coverage. Families
making up to $60,000 with children in day care would get a major
increase in the tax credit for dependent care expenses. The college
tax credit enacted in 1997 would be boosted to a maximum of $2,800
(from $2,000) and made available at somewhat higher income levels.
There would be a new tax credit of up to $3,000 for long-term
Gore also proposes tax breaks for purchasing energy-efficient
products. He would offset a collection of business tax breaks
for various activities he favors by closing loopholes for things
he disfavors. Finally, some of the overall cost of the tax cuts
would be paid for with a 25-cent-per-pack increase in cigarette
taxes and other tobacco levies.
The charts on pages 24 and 25 show who would benefit from
the two candidates' plans. These charts are not exactly comparable.
We can show precisely which income groups would benefit from the
Bush program because it is built largely on changes in existing
tax provisions. Gore's plan, by contrast, is mainly a set of novel
tax credits. We don't know, by income group, just who would take
advantage of these credits, but we can show the income ceilings,
which demonstrate that nearly all of the benefit would go to people
making less than $100,000 a year.
COURTING AVERAGE FAMILIES
Despite the much smaller cost of Gore's tax plan, the two
candidates aren't wildly divergent when it comes to the total
tax cut dollars they target to all but the top income groups (where
Bush sends most of his tax breaks). This has caused each candidate
to compete with comically stylized examples to prove that his
tax cut is better for average families.
According to Gore, every family has one kid in day care, another
in college, and an ailing grandmother in a nursing home. They
all take the standard deduction and can afford some long-term
savings. According to Bush, nobody fits into these categories.
Of course, the reality is that Gore's tax breaks will be bigger
for some middle-income people while Bush's more generalized tax
cuts will be bigger for others. At the lower end of the income
scale, Gore almost certainly offers more because about two-thirds
of his tax breaks are "refundable," making them available
to taxpayers who don't owe income taxes (but generally do pay
other taxes such as payroll taxes).
Although Gore's tax cuts can be praised for being clearly
targeted to middle- and lower-income people, they do raise some
troubling issues. Gore would extend the recent bipartisan trend
of using tax policy to run what amounts to government programs.
It's a well-known political gimmick that enables politicians to
insist that we can cut taxes and increase spending. This approach
is somewhat sickening to those of us who favor keeping the tax
system as simple as possible and who worry about the IRS's ability
to administer all these "incentives." Why should tax
policy try to tell people how to run their lives? (Bush has raised
exactly this last complaint, although his own tax plan has some
similarly annoying provisions, albeit different ones of more benefit
to the rich.)
Take, for example, Gore's biggest tax incentive program, Retirement
Savings Plus. This is a new twist on the government's frequent,
heretofore failed attempts to promote private savings through
the tax code. It's nice that this time around the biggest incentives
would at least theoretically go to those who presently can't afford
to save anything. But is saving really the highest priority for
those who already have trouble paying for food, clothing, and
shelter? What happens to a family that is enticed to put some
money into an RSP and then faces an emergency when it desperately
needs the money? Will we just expand the list of approved withdrawals
beyond college, home purchases, and retirement? The truth is that
Retirement Savings Plus is a half-baked scheme. Nobody knows how
many people would use these accounts, so nobody knows what they'll
cost. And nobody knows whether they'll do more good than harm.
Some details of Gore's tax plan are fair game for criticism.
But far more important are the candidates 'big differences on
overall tax and fiscal policy. On one side, we have a moderate
Democrat offering something close to fiscal prudence and tax cuts
limited to middle- and low-income Americans-albeit tarnished by
far more complexity than necessary. On the other side, we have
a Republican who wants to sound moderate but offers huge tax cuts
targeted to the rich and an overall fiscal program that would
undermine our economic and fiscal health. One hopes the public
can tell the difference.
Robert S. McIntyre is director of Citizens for Tax Justice