Magazine

Tax Cuts for the Rich Are Even More Wrong Today


By Laura D'Andrea Tyson

This is a moment of national soul-searching. September 11 and the crisis within the business community have Americans reflecting on the dangers of greed and the need for values that reflect more than self-interest. Yet the Bush Administration seems oblivious to the new spirit. It's pushing ahead with enormous tax cuts for the very rich, while depriving poor children of the help they need to get a fair start.

Despite the Administration's protestations to the contrary, the Bush tax cuts are both expensive and biased toward the wealthy. According to a new analysis by Citizens for Tax Justice and the Children's Defense Fund, in 2010 the tax cuts passed by Congress last year will shower $121 billion in tax relief on the wealthiest 1% of American taxpayers, who will have average incomes of around $1.5 million. That's more than half of the total tax relief planned for that year. By contrast, the poorest 20% of American taxpayers will receive about 1% of the total relief. On average, the Bush tax cuts will add a paltry $98 to their discretionary income--clearly not enough for that ticket to the middle class trumpeted by the Bush Administration as a rationale for cutting taxes in the first place.

For most Americans, three-quarters of the Bush tax cuts have already occurred. In contrast, 80% of the cuts for the wealthiest, who already got an average tax reduction of $12,000 this year, are scheduled to take effect after 2005. Over the decade, these Americans will enjoy an average tax cut of $342,000 per taxpayer, draining $500 billion from the federal budget.

What's worse, the cuts come after a quarter-century during which both pretax and aftertax income and wealth have become less equal. According to Kevin Phillips in a disturbing new book on the threats to democracy posed by increasing inequality, Wealth and Democracy: A Political History of the American Rich, aftertax incomes for the bottom 60% of Americans declined, with the bottom losing 12%, while aftertax incomes for the top 1% more than doubled between 1977 and 1999.

Some argue that we shouldn't worry about such trends on the grounds that there is a high degree of income mobility in our society. According to this Pollyanna belief, many of this decade's rich are likely to become next decade's poor, and vice versa. But as data in Phillips' book reveal, the facts don't support this argument. Others say that since the wealthiest shoulder the heaviest tax burden, they deserve the most generous tax relief. But their share of the total tax burden is about 26%, while their share of the Bush tax cuts is more than 50%.

While President Bush waxes eloquent on the need to wage war against terrorism, he is busy waging a political war to repeal the estate tax--which affects only the wealthiest 2% of U.S. households. While the President is urging college graduates to eschew a culture of selfishness and embrace a cause larger than personal profit, he is trying to accelerate tax breaks for the wealthy on the grounds that it is their money.

Children stand to lose the most. During his Presidential campaign, President Bush embraced the motto of the Children's Defense Fund to "Leave No Child Behind." But his Administration's budgetary choices have consistently left millions of children behind. One out of five children in America, most in working families, is poor during the first three years of life. A majority of American fourth-graders still cannot read or do math at age-appropriate levels of proficiency. And only one of seven eligible children is currently covered by the federal government's block grant program to support quality child care for poor working families.

Yet under the 2003 Bush budget proposal, not a single additional child will be enrolled in Head Start despite the fact that the program serves only three in five eligible preschoolers and fewer than 5% of the infants and toddlers eligible for early Head Start. Bush's 2002 budget proposed 40 times more money for tax cuts than for education. Shortly after signing his "No Child Left Behind" education reform bill, Bush proposed a 2003 budget with the smallest increase in education spending in seven years.

Making the child-care tax credit fully refundable and expanding the earned-income tax credit could lift every poor family with children above the official poverty level at a cost of $34 billion a year--half the tax cut for the wealthiest 1% when fully phased in. This is a sound investment, because every year a child spends in poverty costs an estimated $12,000 in lost economic output over his or her lifetime. Every additional dollar invested in quality early childhood care and education saves $7 by increasing the likelihood that a child will be literate, enrolled in post-secondary education, and employed during his or her lifetime.

Most Americans sense that it's both morally wrong and economically wasteful to heap tax cuts on the rich while skimping on help for poor families. What will it take for the Bush Administration to get the message? Laura D'Andrea Tyson is dean of London Business School.


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