Debate Over Tax Cut Centers on Fairness Issue
By Clay Chandler
By Clay Chandler
No wonder the tax cut shouting match in Washington has the rest of America baffled.
Congressional Republicans say that 75 percent of the value of the tax cuts they advocate would go to households earning less than $75,000. President Clinton's plan, they say, would squander tax cuts on "welfare recipients" who "don't pay taxes."
Clinton insists that the Republican tax plans would yield as much in benefits for the most affluent 1 percent of taxpayers as for the bottom 60 percent, while his tax proposals are carefully "targeted" to the middle class.
Each side makes its case with reams of studies, charts and figures and claims that the other has cooked the books.
What's a taxpayer to think?
It helps to remember that this statistical cat fight is part of a larger struggle for the hearts and minds of middle-income voters. Clinton and Congress agreed months ago to a net tax cut of $250 billion over the next 10 years.
But because Democrats and Republicans know voters have strong opinions about who does and doesn't deserve a tax break, the battle over how to divvy up that money rages on.
What follows is an attempt to decode some of the rhetoric used in the tax fairness debate and understand how each side seems able to cite data supporting divergent claims.
Benefits after five years or 10 years?
Timing is everything when it comes to sorting out assertions of who would benefit from this year's tax proposals. Forecasters at both the Treasury Department's Office of Tax Analysis and Congress's Joint Committee on Taxation (JCT) estimate how much the various proposals would reduce federal revenue from 1998 to 2007, in keeping with a budget agreement signed by Clinton and GOP leaders in May.
But the JCT only considers a five-year period in assessing how the costs and benefits of tax cuts would be allocated by income group, while the Treasury calculates the effects in a hypothetical single year in which all tax provisions are fully implemented.
JCT staff director Kenneth Kies argues that 10-year distribution estimates are notoriously unreliable. But most economists dispute that claim.
Economists affiliated with both political parties generally concur that the JCT's five-year numbers mask the extent to which the size of GOP tax proposals favoring higher income households would mushroom over time. House and Senate tax plans propose a number of tax cuts primarily benefiting upper-income families that are designed to start small and grow more generous over time. These include reductions in taxes paid by investors selling stock or other assets, participants in tax-favored individual retirement accounts, and heirs of large estates. By the administration's reckoning, those GOP provisions would cost the Treasury at least six times as much in the second five years as in the initial five years.
The Treasury method also has detractors. Many experts say the Treasury formula is overly abstract, and needlessly exaggerates the impact of provisions that would be implemented only gradually.
What counts as a tax cut?
The Treasury and the JCT make different assumptions about what counts as a tax cut when calculating who would benefit from tax proposals. Both assume, for example, that proposed reductions in the tax rate on capital gains would trigger a sharp sell-off in stocks and bonds and that profits from those transactions would prompt a short-term rise in federal tax receipts. But the JCT classifies those expected payments as a "tax increase" on investors while the Treasury does not.
House Ways and Means Committee Chairman Bill Archer (R-Tex.) argues that a tax is no less a tax because those who pay it tend to have high incomes. But many economists, including a number of prominent conservatives, contend it makes little sense to classify receipts from lowering the capital gains rate as a tax increase when such payments would be made voluntarily by investors in response to a tax change that left them better off.
Similarly, the JCT makes no attempt to estimate how proposed reductions in the taxes paid by corporations would benefit individuals holding stock. Treasury analysts factor in the effects of many types of corporate tax cuts, arguing that there is an extensive body of academic research showing that such cuts yield measurable payoffs to individuals.
Robert McIntyre of Citizens for Tax Justice, a liberal tax policy research group, argues that the Treasury doesn't go far enough in assessing the effect of tax changes for the well-to-do. He notes that the Treasury doesn't measure the impact of proposed reduction in inheritance taxes on large estates. Those changes would primarily benefit upper-income families. Under current law, estate taxes affect only the richest 2 percent of estates.
Working with fiscal analysts at the Urban Institute and the Center on Budget and Policy Priorities, Citizens for Tax Justice has attempted to construct a more complete estimate of how tax benefits would be distributed by Republican and Democratic tax plans. The model developed by those three groups takes into account the effect of estate tax provisions, as well as proposed changes in excise taxes on airline tickets and cigarettes and other goods and services. Its conclusion: Households in the top 20 percent of the income scale would reap 87 percent of the benefits under the House tax program, and 47 percent under the Clinton plan.
Who qualifies as middle class?
To hear congressional Republicans tell it, Clinton and his advisers are trying to hoodwink middle-class Americans into thinking they don't make enough money to benefit from the tax cuts. By employing "fanciful arithmetic," the president has "set the stage for denying tax relief to millions of middle-income families," warned Senate Majority Leader Trent Lott in radio address this month. House Speaker Newt Gingrich (R-Ga.) accuses the Treasury of "deliberately rigging the numbers."
The complaints are in response to Treasury Department income distribution tables showing that Americans in the highest fifth on the income scale are households with total earnings above $93,222 a year. Tables used by the JCT put the cutoff at $63,941 a year.
GOP leaders are vexed by the Treasury breakdown because it seems to push too many taxpayers beyond the $75,000-and-less threshold invoked by Republicans as a rhetorical equivalent for "middle class." Treasury figures, Republicans protest, suggest that a larger share of tax benefits go to high-income families than actually is the case.
Veteran tax analysts dismiss such objections as a red herring. The Treasury, the JCT, the Census Bureau and the Congressional Budget Office all measure income differently. The Treasury's higher income brackets reflect a broader definition of earning power embraced by Reagan administration economists in 1984. But when taxpayers are ranked from highest to lowest incomes and divided into fifths, an oft-used method for gauging income distribution economic equality, virtually the same earners wind up in the same categories no matter which income measures series analysts choose.
This makes perfect sense to economists, but Republicans worry that the Treasury method makes it appear that only households with very high incomes will benefit from GOP tax proposals.
Should "welfare recipients" get a tax cut?
As Clinton hammers Republicans for attempting to shift middle class tax cuts to the rich, so Republicans slam Clinton for robbing the middle class to pay the poor. Thus, GOP lawmakers have denounced Clinton's demand that families claiming the earned-income tax credit for low-wage workers also benefit from a proposed $500 per-child tax credit. Republicans refer to this as a call for "welfare spending" on families who don't pay taxes.
Archer argues that "it's unfair to ask middle-income taxpayers to shoulder a higher tax burden so public assistance can be increased for those who already pay little or no taxes." Democrats counter that, by definition, the earned-income tax credit is only available to those who work and pay payroll taxes. They also note that most recipients pay a substantial portion of their income in sales taxes. Clinton aides say they are delighted that Republicans seem so willing to risk antagonizing the blue collar voters who supported Ronald Reagan in the 1980s.
What happens to the relative tax burden?
For all the debate over who would benefit, none of the tax plans under discussion would have much impact on how the total federal tax burden is distributed by income class. That's true even for the House tax package, which critics claim tilts furthest in favor of the rich, when analyzed using the distributive model favored by Citizens for Tax Justice, which goes furthest in showing the effect of tax changes benefiting the well-to-do.
Under current law, families in the top fifth of the income scale pay about 52 percent of federal taxes, while those in the middle three-fifths pay about 43 percent and those in the lowest fifth pay less than 5 percent. The Center for Tax Justice model suggests that ratio would remain virtually the same after 10 years under the House, Senate or administration tax proposals.
Treasury Secretary Robert E. Rubin has said repeatedly that any tax cut adopted in this year's budget negotiations must help reverse two decades of widening income inequality. But the Clinton tax cut Rubin helped design wouldn't do much to achieve that aim. The Citizens for Tax Justice model indicates Clinton's tax plan would allow middle-income families to claim a slightly larger share of total after-tax earnings at the expense of families at the top and bottom.
However, the House plan would widen income gaps noticeably, the model found, producing a 3.5 percent share increase for the best-off one percent, while reducing the income share of low- and lower-middle income families by about 2 percent.
If these changes seem modest relative to the decibel level of the Washington tax debate, one reason is that the size of tax cut dollars at stake this year is comparatively small. When adjusted for inflation, the tax cut called for in the bipartisan budget agreement is barely a tenth the size of the 1981 Reagan tax cut, a statistic neither side seems anxious to acknowledge.
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