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Soaked by the Taxman
Meet the Posterboy for Bush's Tax Cut


By David G. Young
 

Washington, DC, February 6, 2001 --  

As I toiled to fill out my tax forms last week, I couldn't help getting angry. Using an online tax service, I was incessantly barraged with questions about my eligibility for deductions.

Do you have any dependents other than yourself? No. Did you pay mortgage interest during 2000? No. Did you pay medical expenses that total more than 7.5 percent of your adjusted gross income? No.

In almost every single case, the answer was no -- I was not eligible. With no sizable deductions, I was shocked to find an effective federal and state tax rate of 32 percent. My combined marginal tax rate -- the tax on each additional dollar I earned -- was over 50 percent, including federal, state, Social Security, and Medicare taxes.

Such high tax rates might be expected for retired stockbrokers or movie stars living in palatial homes. But I don't have those kinds of lifestyles -- so why are my taxes so high?

As it turns out, my lifestyle is exactly the problem. America's tax code is so filled with generous deductions that unless you live your life the way Washington wants, you will be soaked by the taxman. Washington wants you to finance as expensive a home as you can afford, have as many children as you can, then wind up with a chronic illness or substance abuse problem. Powerful interest groups have successfully lobbied for these loopholes for their members to ensure their taxes stay low. Anybody who isn't part of these groups -- like me -- is simply out of luck.

This is precisely why an across the board tax cut -- as opposed to a targeted tax cut -- is so necessary. People arguing for special credits and exemptions have been polluting the tax code since its last reform in 1986, shifting the tax burden onto people like me.

Fortunately, a number of random events have conspired to make President Bush's once pie-in-the-sky tax cut proposal a real possibility. First, the economy went south. Then, Federal Reserve Chairman Alan Greenspan said tax cuts are necessary. Finally, new projections of the federal government's surplus have skyrocketed. Today, everybody in Washington agrees there will be a major tax cut -- perhaps retroactive to January 1 -- they're only bickering about who gets the benefits.

Since George W. is the new president, his proposal will be most influential, and the good news is that it isn't half-bad. Bush would cut rates for all existing tax brackets except the top end of the existing bottom bracket. This means that people whose taxable income is about $26,000 would get the worst deal -- a 7.6 percent tax cut. People making more would get cuts from about 8-17 percent, with the higher tax reductions going to those with higher incomes. Of course, these numbers doesn't take into count deductions, which greatly reduce tax bills for those lucky enough to receive them.

That brings us to the downside of the president's proposal -- the expansion of the existing child tax credit to $1000 per kid from $500.1 This special-interest loophole was thrown in as a bone to family-value conservatives who want to reduce the marriage penalty (for those who have kids, at least) and give even more money back to people who live the way Washington wants.


Income
Range*
Existing
Tax Rate
Bush's
Tax Rate
Top earner
savings
$0 - 6000 15% 10% 33%
$6000 - 26,250 15% 15% 7.6%
$26,250 - 63,550 28% 25% 9.8%
$63,550-132,600 31% 25% 15%
$132,600-288350 36% 33% 11%
$288,350- 1Billion 39.6% 33% 17%

Bush's Proposed Tax Brackets and Savings

* Incomes reflect post-deduction taxable income for 2000. Sources: White House1, IRS2


The Democrats, led by Senate Minority Leader Tom Daschle, want to do things quite differently. They think Bush's plan gives too much of the benefits to the rich, and not enough to the poor. They think the tax cut is too big, and much of the money should be used on new spending for populist things like education. They also think the tax cut should be scaled back just in case future surpluses don't exist.3

Democrats, however, have been hard-pressed to find a way to redirect the tax cuts to the poor, since they pay so little income tax already. They have proposed to give poor Americans money back for payroll taxes -- that is, the money they put in to the Social Security and Medicare programs. If such proposals were successful, it would be a true outrage. It would force higher-income people like me to pay other people' premiums for insolvent government insurance programs.

But what about the other argument? Is the tax cut too big? No way. The National Taxpayers Union, A non-partisan but pro-tax-cut organization, released a study estimating that the Bush tax cut proposal is smaller relative to the gross national product than either President Reagan's 1981 tax cut proposal, or President Kennedy's 1961 proposal. 4

Arguments about the surplus are beside the point. A surplus exists because people are paying more in taxes than the government needs to meet its commitments. Since the tax increases put in place by Clinton and elder Bush were justified by the need to reduce the deficit, how is it not reasonable to expect that taxpayers get their money back now that the budget is more than balanced? If future deficits materialize, politicians have shown themselves more than capable of raising taxes when necessary.

The simple truth is that the gigantic budget surpluses have been created because rising U.S. incomes have caused revenues to explode. Since the last major tax reform went through in 1986, the same tax basic tax brackets have existed. Both elder Bush and Clinton added higher brackets on top income earners5, but other than that the 1986 brackets have only been adjusted for inflation.

American incomes, however, have not been standing still. From 1986-1999, U.S. household incomes increased by 15 percent, throwing Americans into ever-higher tax brackets, and amounting to a built-in tax increase.6 It is high-time that these tax increases be repealed for everyone. The way to do this is by cutting taxes across the board.

Of course, cutting taxes across the board won't fix every problem. The loopholes that already exist will still remain to keep my taxes disproportionately high. And federal taxes and spending will both remain far in excess of anything reasonable. But at least people like me would get some relief, and that's more than we've seen for the past 20 years.


Notes:

1. White House, President Bush's Radio Address, February 3, 2001

2. Internal Revenue Service, 2000 Tax Table

3. The Washington Post, Democratic Response to Bush's Radio Address, February 3, 2001

4. National Taxpayers Union, Bush Tax Plan Is Moderate When Measured Against Kennedy, Reagan Tax Cuts, January 24, 2001

5. The Heritage Foundation, How to Measure the Revenue Impact of Changes in Tax Rates, August 9, 1996

6. U.S. Census Bureau, Earners -- Households (All Races) by Median and Mean Income: 1980 to 1999, December 13, 2000