President Bush used his annual economic report to Congress yesterday to strongly defend a new round of tax cuts to stimulate the economy and to hint at more fundamental tax reforms to come.
The 404-page Economic Report of the President tries to bolster the White House's arguments for its $674 billion economic stimulus package, saying its proposal to speed up tax cuts passed in 2001 would result in more consumer spending. The proposal to slash taxes on corporate dividends could pump up the economy by "as much as $52 billion each year forever," the report said.
The document also departs from the staid, academic tone of past reports to detail what amounts to an endorsement of a simpler tax system aimed at taxing consumption while leaving savings and investment to accrue interest tax-free.
R. Glenn Hubbard, the chairman of the White House Council of Economic Advisers, which prepared the report, said it is not designed to signal a push for fundamental tax reform, or even start a debate on the subject.
But the report is likely to do just that. In separate chapters on labor market fluidity and tax policy, the document lays the intellectual groundwork for policies that would greatly simplify the tax system, but would likely be attacked for raising the tax burden of lower-income workers while reducing taxes on the affluent.
"This one is more daring" than past reports, said Daniel J. Mitchell, an economist at the conservative Heritage Foundation. "But that's because the president's agenda is really rather bold in terms of tax reform."
The report says current methods of measuring the impact of tax-policy changes on different income groups unfairly tars such tax reforms as harmful to the poor and helpful to the affluent. That is because the government examines how tax changes affect taxpayers at various income levels in a given period of time.
Instead, the report says, such "distributional analyses" should consider that a poor person one year could be middle-class or even rich in subsequent years, and a rich person could drop down the income ladder. Given that fluidity, it would be folly to make social and tax policies to address the body of poor people at any particular point in time, it says.
"The use of annual income in analyzing the distributional effects of the current tax system and proposed changes overstates the extent of inequality among taxpayers," the report says.
Instead, tax policy should consider how much a person will earn over his lifetime, the report says. It also suggests that an individual's wealth and ability to pay taxes might be better assessed by examining how much he consumes in a year rather than how much he earns.
"Annual consumption rather than annual income might be a better proxy for economic well-being," it says.
Cloaked in dispassionate academic language, such ideas might not seem dramatic, but proponents and opponents of broad-based tax reform say they are significant. If new measurements of relative tax burdens can show tax reform proposals to be less punitive to the poor, they would deprive opponents of a key argument against them, Mitchell said.
If wealth or the ability to pay taxes is measured by an individual's purchases instead of his income, then affluent individuals' savings would no longer be considered, and those individuals would appear a lot less affluent.
And if the poor can be shown to be only temporarily poor, then tax policies would not have to be geared directly at propping up their income in the short run.
"It's politically necessary," Mitchell said. "They have to point out that people in the bottom 20 percent are not going to be there in 10 years."
The report's labor-mobility chapter draws on Hubbard's experience as a Treasury Department economist. In 1992, he studied 14,351 tax returns and concluded that there was great income mobility in the country, and that the rich could not expect to stay rich and the poor could not expect to stay poor. That conclusion suggests that tax policies that favor the affluent favor everyone.
But critics insisted that the study found just the opposite, and that Hubbard was downplaying the intractable poverty of a core underclass.
Besides, said Isabel V. Sawhill, a poverty expert at the Brookings Institution, income mobility should not be an excuse for policies that benefit the rich and do nothing for the poor.
"There is a lot of income mobility. A lot of people are just temporarily poor," she said. "That said, this is all a matter of values, and I think that helping people who are down on their luck, even temporarily, is not necessarily a bad thing to do."
Hubbard said the report should not be seen as an indicator of future White House tax proposals. The president's fiscal 2004 budget includes a tax-free savings proposal that would let families deposit tens of thousands of dollars in savings plans that would shield those deposits from all capital gains, interest and dividend taxes. In effect, the proposal would eliminate taxes on investment for the vast majority of Americans. House Republican leaders have said the plan stands little chance of passing Congress.
Although Bush "remains committed" to all the tax policies in his budget, Hubbard made it clear that the economic growth package the president announced last month is the White House's top legislative priority.