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Slowly but steadily, Congress is working its way through a compromise $1.35 trillion, 11-year tax cut. And perhaps as early as later this spring, President Bush will sign the measure with all the appropriate fanfare. No question, it'll be a solid political victory for Bush. But for the rest of us, there are only two numbers to keep your eye on: What you'll get for 2001 and maybe for 2002, if you're lucky. After that, forget it.
Oh, it has been advertised as a $1.35 trillion tax cut. But only a small chunk -- $100 billion for this year -- is money in the bank. That should mean most American families will get an extra few hundred bucks sometime this fall. And tax breaks for the year or two after that look solid as well. But that will add up to only $250 billion. As far as the remaining 80%, don't count on it.
Here's why: To squeeze so many tax goodies into that $1.35 trillion box, lawmakers will stretch out the largesse over many years. Because Congress does its budget calculations over just a 10-year period, it can make the overall cost of the cuts look smaller by delaying them for several years. That's why Bush would cut the top tax rate from 39.6% to 33%, but not before 2006. And it's why he isn't planning to repeal the estate tax until 2010.
HISTORY LESSONS. Many things can happen between now and 2010 -- or 2006, for that matter. The budget surplus could be significantly higher or lower, prompting Congress to revisit the tax code. Before the "death tax" is scheduled to die, four new Congresses and perhaps two new Presidents will have been elected. And any of them can redo, or undo, what today's lawmakers are doing now.
Truth is, the tax law is a lot like Kentucky Derby winner Monarchos: It doesn't stand still for long. I don't know what the top tax rate will be in 2011, but it won't be 33%. It might be higher, or even lower, but I'm willing to wager it won't be 33%.
How can I be so sure? Let's take a quick look at history. Since 1980, Congress has passed 146 separate tax bills. No kidding. Most were minor, but at least a dozen made major changes in the way we pay taxes. Never in the history of the income tax -- not one time since 1913 -- have basic tax rates remained unchanged for 10 years.
In 1981, Congress passed President Reagan's groundbreaking tax cut. Much of it was supposed to be phased in over just three years. But Congress rolled back a chunk in 1982. It trimmed a bit more in 1983. And it took another whack in 1984. In truth, a good bit of Reagan's tax cut never happened.
UP IN SMOKE. It was a similar story in 1986. That year, Congress dramatically reformed the tax code. One key change: By 1988, the top rate was gradually slashed from 50% to 28%. But in 1990, the rate was bumped up to 31%. By 1993, it had crept back to 39.6%.
In the old days of federal deficits, if it needed money, Congress had to actually raise taxes. But now that the federal government projects a surplus for the foreseeable future, Bush has a much easier chore. His plan kicks in so far in the distance, you would need the Hubble telescope to find it. So future pols won't necessarily have to boost taxes -- they can just delay cuts that won't have happened yet.
Truth be told, Bush and Congress realize that most of this tax relief will never happen. More than $900 billion of the $1.35 trillion won't kick in until 2006 and beyond. Just do the math: If Bush adds $300 billion to the defense budget, and Democrats add a like amount for domestic spending, that would leave about $300 million of the future tax cut. And that's before the exploding costs of Social Security and Medicare wipe out the entire surplus in about 15 years. Small wonder one Senate GOP staffer concedes that "we're cutting taxes now so we can raise them later."
So when you get your real tax cut this fall, enjoy it. Spend it, or maybe invest it. But once that's done, don't expect much else. The rest of this $1.32 trillion tax cut is a pipe dream.
Gleckman is a a senior correspondent in BusinessWeek's Washington bureau. Follow his views every Tuesday in Washington Watch, only on BW Online Edited by Douglas Harbrecht
Copyright 2001 , by The McGraw-Hill Companies Inc. All rights reserved.
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