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Commentary: The Tax Bill: A Web of False Promises


If all goes as planned, on June 7, President Bush will sign into law a sweeping $1.35 trillion tax cut. But hold the balloons. This may be the worst piece of tax legislation in years. Liberals hate it because it drains so much money from federal coffers. Conservatives grumble because it does little to boost long-term investment. But most troubling are its gimmicks and false promises. "It is," says Robert V. DiClemente, chief economist at Salomon Smith Barney, "a triumph of cynicism."

In a nutshell, here's what the legislation promises: a $45 billion stimulus in 2001, followed by another $350 billion in tax cuts through 2005, mostly aimed at folks with taxable income below $50,000. From 2006 to 2010, the law promises $800 billion more in relief, mostly for upper-bracket taxpayers, thanks to rate cuts, generous new rules for contributing to retirement plans, and the repeal of the estate tax.

What's so terrible? To start, while the law provides an immediate kick to the economy, it does little to boost growth in the long run. Economic consultant ISI Group figures it will boost growth in late 2001 and early '02 by about one percentage point. But the stimulus quickly fades. Long-term growth requires new investment. This tax cut excels only at raising short-term consumption. The slow phase-ins of top-bracket rate cuts and other savings incentives trash its supply-side benefits. By the second half of 2002, Salomon's DiClemente figures, the cuts will generate little more than one- or two-tenths of a percentage point of extra growth. "I don't see any discernible long-term impact," he says.

Just as troubling, the law turns the tax code into a muddle. Just try tax-planning based on this bill. Families get new education tax breaks in 2002 but begin to lose them in 2006. Most couples will have to wait years to get any marriage-penalty relief. The estate tax isn't repealed until 2010. Then, in 2011, the entire bill is undone. Why? Because no one wanted to admit that it could cost another $250 billion in 2011. Says Yale University law professor Michael J. Graetz: "This is not responsible lawmaking."

There are other gimmicks, too. The law not only cuts official tax rates but also repeals two hidden taxes that reduce the value of personal exemptions and itemized deductions for upper-income families. For many, ending those backdoor levies would nearly double the benefits of the rate cuts.

But they are not fully repealed until 2010. Worse, many of those same taxpayers will get clobbered by the alternative minimum tax (AMT)--a separate set of rules for folks whose deductions and credits lower their tax bill too sharply. Because of the law's new rate cuts and write-offs, up to 35 million taxpayers will be tossed into the AMT by 2010. So the new law provides modest relief--but only until 2005. Then, just as the tax cuts start to kick in, the AMT protections disappear. The result: Millions of people who expect big tax cuts are in for a shock.

HIDDEN COSTS. The problem could be fixed--at a cost of $300 billion. And if all the ploys were dropped, the package would cost in excess of $2 trillion over the decade. Bottom line: The bill is either going to bust the budget or deliver a lot less than advertised.

Hiding that fact, rather than making serious tax policy, became the goal of the tax writers. Congress set a price for the new law of $1.35 trillion and then squeezed in as many goodies as possible. "They got themselves into a straitjacket of their own making," says Bruce Bartlett, senior fellow at the conservative National Center for Policy Analysis. "That led to this idiotic result."

If Bush and Congress had embraced quick, but smaller, rate cuts and ditched all the flotsam the bill attracted along the way, the new law would have been pretty good. As it stands, the ephemeral stimulus will be long forgotten in just a few years. But every Apr. 15, we'll be reminded of the mess President Bush and Congress just created. By Howard Gleckman


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