If Republican George W. Bush has his way, virtually all future surpluses outside of Social Security would go for huge tax cuts. The Texas governor would slash income tax rates from top to bottom, provide additional relief to married couples and wipe out estate taxes even for the wealthiest billionaires.
By contrast Arizona Sen. John McCain, Bush's toughest GOP rival in the presidential sweepstakes, favors only half as much in tax relief and wants most of it targeted to the middle class. Only a sliver of the future surplus would be used for tax relief under McCain's approach, with the rest earmarked for shoring up Social Security and Medicare and paying down the national debt.
The tax debate escalated into a bitter war of words yesterday, with McCain launching new television ads charging that his proposal had been distorted by Bush TV ads and Bush aides blasting McCain for floating an ill-conceived plan. But the wrangling obscured a more fundamental split within the party over tax policy--one that could hamper Republican unity going into the fall elections and complicate the fiscal debate on Capitol Hill.
"It's clear that if McCain were to pull out a victory, it would really be a setback for the tax-cutting wing of the Republican Party," said economist Stephen Moore of the libertarian Cato Institute. "Bush ironically is running as the modern Reaganite candidate, whereas McCain is running as the old-style Eisenhower Republican who is more concerned about debts and deficits than cutting taxes."
Bush has argued that deep tax cuts are vital to sustaining the nation's record economic growth and discouraging Washington from squandering the surplus on more government spending. In the face of an unexpectedly strong challenge from McCain in tax-averse New Hampshire, Bush has made his five-year, $485 billion tax cut plan the centerpiece of his primary campaign.
But McCain is challenging a conservative Republican dogma, that a Reaganesque across-the-board tax cut plan is essential to galvanizing the GOP core. Instead he is promoting a far more modest tax cut package, totaling $237 billion over five years. This would leave most of the projected surplus for paying down the debt and creating new tax incentives for family savings and investment as a precursor to privatizing Social Security.
Bush and his allies have denounced the McCain proposal as "Clinton Lite," insisting that his proposed tax cuts are too small to make any appreciable difference. McCain and his advisers fired back that by pushing the limits of tax cuts, Bush is risking a return to an era of budget deficits and high interest rates.
"Tax policy doesn't exist in a vacuum," said Kevin Hassett of the American Enterprise Institute, an economic adviser to McCain. "By being cautious about the tax cut, you leave yourself a lot of room for dealing with possible bad news" down the road.
Instead of dipping deeply into future surpluses to finance tax cuts, as Bush has proposed, McCain would offset more than 60 percent of his tax cut by closing scores of long-standing tax loopholes--from the tax credit for ethanol fuel and tax-exempt stadium bonds to subsidies for U.S. companies that export to developing nations.
McCain and others on Capitol Hill have had little success in going after these politically resilient special tax provisions, and by proposing to wipe out many of them as part of his tax plan, the Arizona Republican has left himself vulnerable to attack.
Bush, for instance, has gone after McCain for proposing to repeal tax exemptions for certain employer-provided fringe benefits--a plan, he said, that would effectively raise taxes by $40 billion and hurt working people.
In response, the McCain campaign produced an analysis by an Arlington economic research firm that says the plan would only affect employers, not employees, and that its cost would be less than $4 billion.
McCain aides conceded this week that they may have erred by "shorthanding" the description of their proposal for eliminating employers' deductions for employee parking, meals, transportation and health spas. But they said they never intended to tax workers' child care and health care benefits, adoption benefits, and education and training benefits, as the Bush camp suggested.
For all the political fireworks, there are some important similarities in the competing Republican plans. To some extent, both Republicans would move closer to a flat tax, favored by many conservatives, including GOP candidate Steve Forbes, as a simpler and fairer approach: Bush has proposed trimming and consolidating the five income tax rates, while McCain would expand the lowest, 15 percent tax rate to include 25 million Americans who currently pay a higher tax rate.
Bush's tax cut puts the greatest emphasis on the high and low ends of the income ladder, while McCain's plan focuses most on the middle. Viewed broadly, the Bush plan cuts taxes more and for more people.
"The tax cut that's three times bigger not surprisingly gives a bigger tax cut" to most people, said Clint Stretch of the accounting firm Deloitte & Touche.
Both plans touch on a number of top Republican concerns, including ending the so-called marriage penalty, dropping the earnings limit on Social Security recipients and eliminating the estate tax. Under McCain's approach, estates valued at up to $5 million would be exempt from the federal estate levy, or "death tax," but Bush would totally eliminate the tax, meaning that even Microsoft Corp. Chairman Bill Gates's estate would escape taxation.
The key element of Bush's plan is an across-the-board reduction in tax rates, coupled with a rearrangement of the tax brackets, so that more of a taxpayer's income would be taxed at the new, lower rates.
For example, the first $43,050 of a married couple's taxable income is now taxed at 15 percent. Under the Bush plan, the first $12,000 would be taxed at 10 percent and the next $31,050 at 15 percent. The result for a couple with a taxable income of $35,000 would be savings of about $600.
The Bush plan would also eliminate the current top rate of 39.6 percent, which begins for a couple at $283,150 of taxable income, and the second-highest rate of 36 percent, which begins for a couple at a taxable income of $158,550.
Instead, all taxable income above $158,550 would be taxed at 33 percent--an enormous potential saving for upper-income taxpayers, especially those whose income is primarily from salary, interest and dividends.
McCain, by contrast, would leave tax rates alone, and adjust only the lowest, 15 percent bracket. Currently, the 15 percent bracket ends at $25,750 for a single person and at $43,050 for a couple. McCain's plan would extend the bracket to $35,000 of taxable income for single taxpayers and to $70,000 for married couples.
Singles with a taxable income between $25,750 and $35,000 as well as married couples with an income between $43,050 and $70,000 would benefit the most from McCain's plan.
"Both plans are very generous to families with kids," said Deloitte & Touche's Stretch. "Bush is more generous to families with a lot of money."
Comparing the Tax-Cut Plans
This chart shows how leading GOP candidates' tax cut plans would affect various categories of taxpayers compared with what they pay now, according to an analysis by Deloitte & Touche.
TAXPAYER THE TAX
Marital Total Capital Present Bush McCain
status Income gains
single $35,000 $0 $4,500 $4,100 $4,200
single 50,000 0 6,400 5,800 5,200
single 110,000 3,300 21,500 18,000 20,300
married 35,000 0 1,500 0 300
married 50,000 0 3,000 1,100 2,000
married 75,000 2,250 6,700 4,100 5,100
married 110,000 3,300 15,300 11,100 10,800
married 125,000 3,750 19,500 14,200 15,700
married 140,000 4,200 23,200 17,300 19,700
married 500,000 15,000 137,000 117,500 133,500
married 500,000 200,000 103,000 94,500 99,500
THE WASHINGTON POST