The Bush Administration's Tax Cut Proposal
With Steven Pearlstein
Washington Post Financial Staff Writer
Wednesday, April 23, 2003; 11 A.M. ET
In his column today, Steven Pearlstein writes of the White House's proposed tax cut: "The battle over President Bush's tax cut is about to enter its final, decisive phase. Despite what you hear from administration officials, this proposal has nothing to do with jobs or economic growth. What this really is about is creating political momentum, breaking the back of the opposition and creating the appearance of doing something about the economy. It's about winning." Read the full column.
A Transcript of the Discussion Follows:
Steven Pearlstein writes about business and the economy for The Washington Post. His columns on the economy appear every Wednesday and Friday.
Editor's Note: Washingtonpost.com moderators retain editorial control over Live Online discussions and choose the most relevant questions for guests and hosts; guests and hosts can decline to answer questions.
Louisville, Ky.: Given the fact the Bush tax cut will generally benefit only the wealthy, and given the fact that many much needed social service and education programs will suffer due to the proposed tax cut, and additionally, given the fact that because the tax cut mainly benefits the wealthy and therefore is not likely to spur new jobs/economic growth, how can Bush defend it?
Steven Pearlstein: I think you've confused a number of different issues here. As a matter of political preference, you may think providing services is more important than giving people a tax break. Polls show most people agree with you. You may also think taxes on the rich should be raised to pay for tax cuts and services to the poor. That's more controversial. But those are different questions than what is the economic impact and rationale for a tax cut. If you decide a tax cut is necessary to stimulate the economy, then there is really no choice but to give a tax cut to rich people, since they pay most of the taxes. I say there is no rationale. The administration says there is.
Washington DC: Is there any evidence that a tax cut will promote any kind of economic stimulus? To me Bush's tax cut seems the height of irresponsibility, especially given the unknown costs of his current war, and any cost in rebuilding Iraq.
Steven Pearlstein: Me, too.
Indianapolis, IN: What are the chances that in order to declare victory -- which seems to be the most important thing to some -- that the resulting tax legislation will have SO MANY twists and turns; phase ins and phase outs; exceptions and exclusions that the final product will be something so confusing that no sane taxpayer would want to be bothered with it?
Steven Pearlstein: That is the likely outcome if they persist on doing a tax cut bill, which is another good argument against it. Not only won't it be tax reform and simplification, it will be the reverse, making the code more complex. Let's hope the the usual gridlock ties this up so long that they give up and go on to some other subject.
Gaithesburg, Maryland: I use my tax return to pay a little extra on my credit card bill. I do not understand how any one can argue that tax cuts stimulate the economy because the wisest use of the money for most people is to use the return to pay mortgages or other debt.
Steven Pearlstein: The best study on the last tax rebate showed that only 40 percent of the money got spent in the first year. The rest was saved, including such things as paying off debt. Increasing saving, however, isn't wasted in terms of stimulus: wherever the money is saved or invested, it provides more capital for investment, which might trigger spending by businesses. But it takes time and can be rather indirect, which is why fiscal stimulus is now rather out of favor with professional economists.
Washington, DC: I like my money as much as everyone else, but personally, I don't think a tax cut is smart right now with the war and increasing deficit. Let them keep my money to pay for these things!
However, what makes me angry about the debate is the way everyone characterizes tax cuts as "tax cuts for the rich" when in reality, these tax cuts are for everyone. If it is fair to make people who earn more pay more, then why isn't it fair that when taxes are cut, those who pay more save more?
From what I have seen, those in the lower-tiers will be getting a greater cut, percentage-wise, than those in the upper tiers. People say it is unfair that the "rich" will save thousands but the poor only a couple of hundred. But if a family of 4 with $50,000 income pays around $1,000 in taxes, how much can you cut from that on a pure number basis? How is giving back someone who pays $50,000 a year in taxes a couple of thousand and someone who pays $1,000 a couple of hundred unfair? Should only those who pay a piddling some in taxes get the benefits of a tax while those who pay the most get, at least percentage-wise, nothing?
The liberals say they want everyone, including those who don't pay taxes, to get their fair share of the cuts, but that is not really true since they don't want those who pay the most to get their fair share. Can you explain this position to me? I find it very frustrating.
Steven Pearlstein: You are right on the money. This Democratic instinct to characterize everything Bush proposes as giveaway for the rich is intellectually dishonest. Let's take the case of the last Bush income tax cut. Yes, in dollar terms, most of the money went to the upper brackets. But in terms of the individual taxpayers, the greatest percentage cut went to those at the bottom. This seeming contradiction is explained by the fact that the rich now pay the most taxes. So after the Bush income tax cuts, the tax code will actually wind up more progressive than it was before -- that is, a greater percentage of the total individual income tax burden will be paid for by those at the top than before the tax cuts. That's not, by the way, to say they were necessarily a good idea, which is a different question.
Southern Maryland: The federal tax code is so Byzantine that I wonder if anyone really knows the effects of tinkering with it. My suggestion would be to switch to a flat tax with two deductions -- the personal exemption and home mortgage interest. But I don't see that happening. Each deduction in the tax code is there because some interest group wanted it there.
Steven Pearlstein: I'm with you on that, but why do you include home mortgage deduction. This deduction represents a transfer of income from renters to homebuyers, and from big homebuyers to small ones. That doesn't make much sense to me.
Gaithersburg, Md.: Everyone is in favor of a tax cut until they realize that they will have to start paying higher taxes on everything else. Unlike the war on Iraq, I do not see a lot of media support pushing the tax cut. Where is the support coming from? Can they get a tax cut passed if most Americans are indifferent towards it.
Steven Pearlstein: The answer to your last question is yes, they can get it passed. Washington works by its own logic and once the President stakes his political manhood on such a thing, the Republican party and their corporate lobbying network falls in line and it is kind of hard to stop it if both houses of Congress are in Republican hands. Stupid? Yup. But that's the way it works around here.
Alexandria, VA: You note in the column that the mortgage refinancing wave pumped more than $100 billion into the economy last year. What about the growing concerns of a housing bubble? If that pops, would the justification for the Bush tax cut package increase?
Steven Pearlstein: I'm not a housing bubble worriers,although prices could fall 10 percent in some high priced areas that have recently experienced a lot of runup, like Washington D.C. If I'm wrong and there were a big decline in housing, then maybe some really drastic measures would be necessary, including TEMPORARY tax cuts. Some economists argue taht temporary tax cuts aren't as effective in stimulating the economy as permanent ones. But you get the point where permanent tax cuts are just irresponsible because they rob the government of the ability to provide the services that voters need and want and will always demand.
Somewhere, USA: Re: SOUTHERN MARYLAND and the home mortgage interest deduction. I guess homeowners are a special interest group, too. I've always thought it was funny how people who complain about welfare (don't know if SOUTHERN MD is one of those) gladly accept federal largesse in the form of tax deductions.
Bush talks about "our money", but what about "our debt" ?
Steven Pearlstein: Yes, indeed. When Bush says he wants to give us back our money with a tax cut, in the context of $400 billion budget deficits, he's got it wrong. He's giving us back our kid's money.
Arlington, Va.: I keep stumbling across commentary comparing the U.S. economy today to the Japanese economy at the end of the 1980s -- teetering on the edge of a long period of negative growth. The comparisons between Japan and the U.S. are weak, in my opinion, but what do you think of this general argument, and how does tax policy play into your view?
Steven Pearlstein: I spoke yesterday to economists like John Makin and Allen Sinai, who support a tax cut largely on the basis of fears that the economy is very weak, deflationary pressures have not abated and strong action is needed. Alan Greenspan and many others aren't that pessimistic. I think most of the Japanese comparisons are strained, myself. And although I was one of those who wrote early and often about the coming recession back in 2000 when forecasters were still all rosy in their scenarios, I feel the economy has now turned the corner. I cite the stock market, recovering corporate profits, overall personal income growth and falling oil prices.
Laurel, Md.: Steven: Your column reads to me like a cogent analysis of the economic motivation (or lack thereof) for this particular tax cut at this particular time. It contrasts starkly with the commentaries I read on the Washington Times site, in which one after another conservative columnist discusses the need for tax cuts as not just providing necessary immediate economic stimulus, but being an important tool of American freedom, a moral imperative, and necessary for long-term growth.
Is the tax cut debate more about the Republican-controlled government's vision of what American stands for, than about any current circumstance?
Steven Pearlstein: Really, I think Bush the younger is like the general fighting the last war. His father won the last war against Iraq but was thrown out of office on economic grounds. He wants desperately to avoid that mistake, and thinks a tax cut inoculates him against that fate. So he's told everyone the future of Republican control of the White House depends on passage of the tax cut. That's the beginning and the end of the logic here. It has nothing to do with economics.
Washington, D.C.: The political momentum this tax cut generates is a desire to push these irresponsible super-rich politicans toward the exit door.
I recall vividly the result of Reagan's economic plan... most of us got poorer, lost assistance programs, lost opportunities for education, and generally went downhill while the rich got richer. Here we go again.
Why do you think the super-rich minority that runs things is so greedy? Why are they so opposed to sharing? What is their problem? If someone has enough money to live for multiple lifetimes, they have too much money.
Steven Pearlstein: As I said in response to an earlier question, I don't think you've got the analysis right on this one. This is not primarily about rich Republicans helping their rich friends, although that may describe the motivation of some of the groups lobbying in favor. It's about a religious belief in tax cuts and free markets and the wastefulness and incompetence of government. And I fear that the more the left engages in ascribing class war motives to the Republicans, the more irrelevant it will become. Don't question their motives, question their judgment.
Baltimore: Assuming Bush managed to get his full $700+ billion tax cut. Assuming the jobs situation still stinks in 2004. Assuming states continue to slash funding for schools, health care, etc, and we're spending Billions rebuilding Iraq.
Would voters still hand him the White House in 2004 because he "at least tried?"
Or is the Bush strategy to push for a tax cut they know will never pass, and then to blame Congress for the bad economy in 2004 by claiming that it was exacerbated by the failure to give him everything he demanded in his tax package?
Steven Pearlstein: This repeats some of the earlier back and forth, but I suspect the more likely outcome is that the economy will be better but not exactly robust next spring and the President will take credit for that, no matter what passes. Running against the do-nothing Congress on economic issues may have worked for Harry Truman but I don't think it works now.
Ashburn, Va.: Is it fair to say that the proposed Advance Child Tax Credit is dead with the smaller tax cut?
Steven Pearlstein: No.
Conway, Ark.: If the tax cut is about "winning" and not about policy, isn't this just characteristic Bush gambling? I mean, people don't just crave low taxes, they desire services, and if their states are strapped for cash, their kids' teacher is laid off, they're getting no relief on their parents' medication bills, won't they figure out that a couple hundred bucks a year won't make up the difference? Bush is gambling on perceptions about "tax cutting" but American voters can be pretty smart.
Steven Pearlstein: Indeed they can be pretty smart. And a good Democratic candidate would be relentless in pointing out the connection between tax cuts and service cuts. I stress good, however.
Niceville, Fla.: Hi Steve. You mention that a better strategy would be for the federal government to pump money to the states, who are hurting mightily in this economy. But this still doesn't address the direct concerns of citizens, who feel they are overtaxed and underpaid. Maybe this Bush tax plan is not the answer, but what policy/policies do you suggest might be worth implementing to provide some near-term relief to the pocket books of consumers? Thanks.
Steven Pearlstein: To be quite honest about it, I'm not sure it is a good idea right now to provide some near term relief to the pocket book of consumers. Nor do I agree most citizens fell they are overtaxed, although like anyone they would love to have more money. They do feel, however, that they are underserved.
Falls Church, Va.: Steve, I'm frustrated. Bush II is waging his re-election battle very smartly. He knows that only a small segment of Americans actually vote -- typically, the suburban middle class who have been brainwashed into believing that they get nothing for their taxes. Now, a lot of those folks are hard pressed and could use some tax relief, but they aren't going to get much from the Bush plan.
I'm frustrated because taxes have become one of those topics about which no rational discussion can occur -- you're either for them or against them, and the argument 'for' gets drowned out in moralistic b.s. from the 'anti' side. I'm afraid we're going to be cursed with this atmosphere for awhile. Then, when Medicare and Social Security go bankrupt, maybe voters will wake up.
Steven Pearlstein: You're absolutely right about there being no rational discussion of tax matters.
Carson City, Ariz.: How often to you get to Capitol Hill to hear what the congressional people really think? I ask because some of these people are folks I really respect but I get the impression they are more "on message" than speaking what they really think.
Do you get up there often?
Steven Pearlstein: I don't get up there much, honestly, but I used to work up there and my impression is that you are right: they stay on message rather than speak candidly in public about what they really think.
Washington, DC: Great article today, I totally agree with it. Of course you will be lambasted by some folks as being part of the "liberal media" with a bias against all things Republican. What would you say to those people?
Steven Pearlstein: Let's see. I am against stadium subsidies, convention subsidies, hotel subsidies, energy tax breaks and other forms of government micromanagement of the economy. I'm for balanced budgets. Doesn't sound very liberal to me, even if I am against tax cuts.
Washington, DC: One of the key talking points in the current campaign to sell the tax cut is the claim that it will create 1.4 million jobs (which appears to argue that it would provide a short-term stimulus). Do you know where this figure comes from? Does any reputable analyst with no ties to the administration accept this figure?
Steven Pearlstein: Paul Krugman had a field day with that number Tuesday in that other paper out of New York. It is pure fantasy. It comes from the White House and it is generated out of a computer model of the economy after the tax cuts are plugged in. The truth is, spread over the several years that the job gains are projected, it's just noise. Nobody takes those numbers seriously, nor should they.
Herndon, Va.: Amen, Mr. Pearlstein, on your comment on the home interest deduction. Why should renters be treated differently than home owners when it comes to deducting their housing costs?
Steven Pearlstein: Shh. Don't say it too loudly, or the housing lobby will be flooding both of us with propaganda.
Atlanta: The government should stop "helping" me tax wise because it doesn't help...it's an insult. On this years taxes I learned that my 17 year old is no longer a child as far as the child's tax credit is concerned. That credit only last until the kid reaches 16! What kind of crap is this?
The government is always making it sound like their giving you a break, but when you read the fine print it's all about some politician being able to act like he's doing a good dead while dumping on you when your not looking.
The only think that's gonna come out of this tax debate is a tax cut that looks like a tax cut until you read all the directions ... by then it's too late.
Steven Pearlstein: Well, I'm not sure I agree with all of that but it sure is a good rant. Have you thought of becoming a columnist?
Long Beach: You mention "falling oil prices" as a sign of economic recovery. When the stock market falls 40% and then gains 1/3 of that back, the papers talk of great gains. When gas prices get jacked up, and then settle at 105 to 20% more than when the Iraq "crisis" started, how can one point that out as "falling prices"?
Steven Pearlstein: Good point. I only meant falling from the high levels that were crimping economic growth. Going forward, that has got to be a positive for the economy.
Tax cut reality in FFX County: OK, so the Feds cut taxes, which in turn means less for States, which in turn means less for Counties. So what happens? The State's increase DMV fees (majorly) and the Counties up the real estate taxes and try to add additional fees for things like 911 and ambulance services. Okay, so can you tell me where my savings are? It's not like the amount out of pocket is less, it's just going to different people.
Steven Pearlstein: It's probably not a one for one tradeoff, but there is no doubt that state tax, fee increases would undo some of the effect of additional tax cuts.
Long Beach: The Reagan tax cuts were billed as an investment in R+D to create new jobs, wealth and trickling benefits for the lowest rungs on the ladder, like jobs as caddies and tips for parking valets. What evidence is there that those cuts did anything other than put a lot of BMWs on the roads? What will the new tax cuts provide in terms of incentive for growth and research?
Steven Pearlstein: Let's not overstate the case. The Reagan tax cuts were fiscally irresponsible, but there was probably some truth to the fact that top marginal rates were so high back then that they were a real drag on economic growth. We've improved the tax code since then (although not as much as we should have). So the marginal gains from further reductions in rates is going to be less -- particularly if financed through long-term structural deficits and raising university tuitions and cutting educational spending.
Bethesda, Md: If Bush really wanted to stimulate the economy, why isn't he proposing a Jobs Tax Credit, like the one back in the early 80's? I used to do the the calculation for one of our clients; Georgia Job Service documented affected new hires, so the company could claim up to something like $7000 of the first year's wages as a tax credit. That would 1. create jobs and 2. put money into the economy, since these people had something to spend, and also pay taxes, and 3. give small businesses a break. Why won't Bush do this? There is no guarantee that a dividends tax cut will be put back into the economy, and it will take YEARS for his plan to create any jobs.
Steven Pearlstein: Put me down as a skeptic on job tax credits as well as tax cuts. Sorry.
San Antonio, Texas: While you have stated that you believe the White House proposal for tax cuts will win votes, do you thing younger voters will see the plan as "leaving them with the bill"?
Steven Pearlstein: Not sure younger voters are paying attention, unfortunately.
VA: How will you fare under his tax cut? Washington Post personnel are well-paid.
Steven Pearlstein: Yes, we are well paid. Don't have any idea how we'll be affected.
Council Bluffs, Iowa: Our school system is seriously considering charging students to ride the bus, starting the next school year. We estimate about $200 per child. We just can't afford it otherwise. This will be devastating to our low income parents. Comments?
Steven Pearlstein: This is outrageous and is one of many reasons why tax cutting is a bad idea, socially as well as economically. To judge the wisdom of a tax cut, you have to know what services are foregone by losing the revenue. That's the part of it we never hear from the White House. They simply assume in their analysis that whatever activity is cut was useless.
Springfield, Va.: Dear Mr. Pearlstine: To answer an earlier question you wrote: the home mortgage deduction represents a transfer of income from renters to homebuyers, and from big homebuyers to small ones. I can see that the deduction increases the income of a home owner, but how does it transfer income from renters to homebuyers, and from big homebuyers to small ones?
Steven Pearlstein: If the mortgage deduction saves homeowners, say, $200 billion a year, that's $200 billion the government has to raise in taxes from everyone else. The everyone else includes renters, so it is fair to say that under the tax code, renters are subsidizing homeowners.
Washington, D.C.: The issue that the federal tax code is so complex, and the issue that tax rates are structured progressively are completely different. If today we moved to a flat tax (pick your rate), taxpayers would have exactly the same amount of paperwork to complete and exactly as many forms to fill out. The flat tax, in and of itself, does nothing to simplify the tax code--it just means you'd pay one rate of tax after calculating all your exemptions, deductions, and definitions of income.
On the other hand, a progressive rate structure can be applied to any tax code, simple or complex. As most taxpayers find their tax from a rate table anyway, there is no additional calculation to figure out a progressive tax compared to a flat tax. If taxpayers earn more than the highest table amount, tax is just the marginal rate times income minus a credit for the lower rate brackets.
The confusion of progressivity with complexity, encouraged by many conservative promoters of the flat tax, is one of the greatest misunderstandings of the tax debate.
Steven Pearlstein: I'm for simple and moderately progressive. But you're right, those are separate issues. Simplicity has to do with what economists call horizontal equity or fairness, which means treating all people with similar incomes in a similar fashion. It is another form of fairness from vertical equity, which has to do with whether the tax burden should fall heaviest on people with more money to spare after all the basics are paid for.
Arlington, Va: This is my favorite way to think of a tax cut: you don't have to use it, but it's right on right?
Let's put tax cuts in terms everyone can understand. Suppose that every day, ten men go out for dinner. The bill for all ten comes to $100. If they paid their bill the way we pay our taxes, it would go something like this: The first four men -- the poorest -- would pay nothing; the fifth would pay $1, the sixth would pay $3, the seventh $7, the eighth $12, the ninth $18, and the tenth man -- the richest -- would pay $59. That's what they decided to do. The ten men ate dinner in the restaurant every day and seemed quite happy with the arrangement -- until one day, the owner threw them a curve (in tax language a tax cut).
"Since you are all such good customers," he said, "I'm going to reduce the cost of your daily meal by $20." So now dinner for the ten only cost $80.00. The group still wanted to pay their bill the way we pay our taxes. So the first four men were unaffected. They would still eat for free. But what about the other six -- the paying customers? How could they divvy up the $20 windfall so that everyone would get his "fair share?" The six men realized that $20 divided by six is $3.33. But if they subtracted that from everybody's share, then the fifth man and the sixth man would end up being PAID to eat their meal. So the restaurant owner suggested that it would be fair to reduce each man's bill by roughly the same amount, and he proceeded to work out the amounts each should pay. And so the fifth man paid nothing, the sixth pitched in $2, the seventh paid $5, the eighth paid $9, the ninth paid $12, leaving he tenth man with a bill of $52 instead of his earlier $59.
Each of the six was better off than before. And the first four continued to eat for free. But once outside the restaurant, the men began to compare their savings. "I only got a dollar out of the $20," declared the sixth man, but he, (pointing to the tenth) got $7!". "Yeah, that's right," exclaimed the fifth man, "I only saved a dollar, too. It's unfair that he got seven times more than me!". That's true!" shouted the seventh man, "Why should he get $7 back when I got only $2?" The wealthy get all the breaks!".
Wait a minute," yelled the first four men in unison, "We didn't get anything at all. The system exploits the poor!"
The nine men surrounded the tenth and beat him up. The next night he didn't show up for dinner, so the nine sat down and ate without him. But when it came time to pay the bill, they discovered, a little late what was very important. They were FIFTY-TWO DOLLARS short of paying the bill!
The people who pay the highest taxes get the most Benefit from a tax reduction. Tax them too much, attack them for being wealthy, and they just may not show up at the table anymore. Where would that leave the rest?
Steven Pearlstein: Well, you've done much better what I tried to do in an earlier answer. Bravo.
Canton, Ohio : What about the connection between tax cuts and job creation? With all the layoffs reported, that seems to be a key aspect.
Steven Pearlstein: It would be a key aspect if there were any connection. There is very little connection between tax cuts and job creation, just as there is little connection between weather and job creation, or the price of lettuce and job creation. We should all remember one important thing here: government does not control the economy, no matter how much voters or politicians sometimes want to believe it. The market creates jobs in response to investment and overall demand. Government can have some impact on investment and perhaps a bit on demand through tax and other policies, but it is small. The economy is not a machine with the control panel in Washington.
Steven Pearlstein: Thanks folks. There are many more questions but no more time. Keep reading. Cheers.
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