Commentary: How Compassionate Is Bush's Tax Plan?
George W. Bush's economic plan got a boost of credibility on Aug. 6 when it was endorsed in a newspaper ad by 300 prominent economists, including six Nobel Prize winners: Milton Friedman, Robert E. Lucas Jr., James M. Buchanan, Myron S. Scholes, Gary S. Becker, and Robert A. Mundell. Their endorsement singled out the Republican candidate's tax-cut plan for praise. "Tax rates are now especially high on people with low incomes," the endorsement said. Under Bush's plan, "The lower a taxpayer's income, the greater the percentage tax cut is."
Every word of the economists' statement is true. But don't jump to the seemingly logical conclusion that the Bush proposal would benefit primarily the poor and working class. In fact, the vast bulk of tax relief would land in the laps of upper-income families. Citizens for Tax Justice, a Washington research and lobbying group, calculates that 43% of Bush's tax cuts would go to the top 1% of earners. Even Lawrence Lindsey, Bush's top economic adviser, has conceded that about half of all the cuts would go to families earning more than $100,000 a year. (You won't find that out from the Tax Calculator on Bush's Web site, www.georgebush.com, however: It doesn't let you enter an income of more than $100,000.)MARGINALIA. Is it a bad thing that Bush's plan would help rich people? Not necessarily. After all, the rich carry the greater part of the tax burden. But voters deserve to know that if redistribution of money from rich to poor is what they want, they will be mightily disappointed by a Bush Administration.
The reason the Bush plan mainly benefits the rich is that it relies on shaving marginal rates. The cuts aren't much help to the poor and working class because they pay very little income tax in the first place. The biggest tax they pay is for Social Security, and that's not going down (although Bush wants to redirect part of the revenue into private accounts). What's more, rate cuts for low brackets also benefit people in higher brackets. For instance, if the rate on the first $6,000 of taxable income is cut to 10% from 15%, then even millionaires get to pay that lower rate on the first $6,000. And the income tax is only part of W.'s package. His proposed repeal of the estate tax would be a windfall for the wealthy.
If your No. 1 goal is to help the poor and working class, a more targeted way is to skip the cuts in marginal tax rates and beef up programs that benefit people with low incomes, such as food stamps and the earned-income tax credit--a rebate that can be larger than the actual tax paid. However, conservatives worry that these "means-tested" programs discourage people from working harder, because those who earn more money get fewer government benefits. The phaseouts, says a Bush white paper, "serve as a powerful disincentive to assume extra responsibility at the office, work an extra shift, take technical training, or invest in a higher educational degree."
But if Bush is a supplysider, he's on the wrong side of history. New economic research is challenging the supplyside theory that people are exquisitely sensitive to the effective marginal tax rate on their labor. A recent analysis by economists Jonathan H. Gruber of Massachusetts Institute of Technology and Emmanuel S. Saez of Harvard University concludes that people's work effort changes very little in response to movement in the tax rate, whether up or down. The taxable income that people actually report to the government is more responsive to rate changes--especially for the rich. But that, the authors conclude, is only because there are so many loopholes in the tax code. Says Gruber: "I learned something from writing this paper, which is, let's not be afraid to redistribute to the poor." Bush doesn't have to agree--but it would be nice if he were more forthright about who really wins from his tax plan.By Peter Coy; Coy Is Associate Economics Editor.