Taxing the public's trust
The Bush administration is stretching the truth again to sell its latest tax cut
On Tuesday, President Bush announced a package of tax cuts that immediately drew harsh criticism from Democrats. The package, which the White House estimates will cost $674 billion over the next ten years (or approximately $925 billion counting increased interest costs, as calculated by the left-leaning Center on Budget and Policy Priorities), accelerates income tax reductions passed in 2001 and exempts corporate dividends from personal income taxes. Unfortunately, the administration is once again using a number of misleading arguments to rally support for its proposals.
Perhaps the most deceptive talking point is that, as Bush put it in a speech announcing the proposal on Tuesday, "Ninety-two million Americans will keep an average of $1,083 more of their own money." This is repeated in an official White House fact sheet about the proposal.
This figure is misleading, implying that most families will see their taxes cut by $1,083 in 2003. This number actually represents the total savings divided by the number of taxpayers, which is not representative of what middle-income families could expect to receive. In fact, taxpayers in the middle of the income distribution would generally receive significantly less than $1,083. The center-left Urban-Brookings Tax Policy Center calculates that a family in the middle 20 percent of the income distribution would see, on average, a cut of only $256 in 2003 [8K PDF]. Citizens for Tax Justice, a left-leaning economic policy group, calculates that the benefit to those taxpayers would average $289 [52K PDF]. Even taxpayers in the next quintile of income earners (the 60th to 80th percentiles) would average a savings of only $574 according to the Tax Policy Center (CTJ estimates the savings at $657 for this group). This is because many of the benefits of Bush's proposal come from reducing taxation on corporate dividends, which flow predominantly to those with higher incomes.
To reinforce this misleading impression of how the benefits of his plan are distributed, Bush claimed yesterday that "under this plan, a family of four with an income of $40,000 will receive a 96 percent reduction in federal income taxes. . . . The income taxes would drop from $1,178 a year to $45 a year." The White House fact sheet similarly claims that "A typical family of four with two earners making a combined $39,000 in income would receive a total of $1,100 in tax relief under the President's plan."
Both claims are misleading in that they carefully select a household which would benefit disproportionately for its income level. As noted above, according to calculations by CTJ, the middle 20 percent of earners, who make an average of $36,600 per year, would receive an average benefit of just $289. The White House's theoretical family does better than this by virtue of having two children, allowing it to take advantage of the additional child tax credit. It also benefits from the accelarated marriage penalty phaseout.
The administration's fact sheet also suggests that beneficiaries of the tax cuts will include "Everyone who pays taxes, especially middle-income Americans, as tax rate reductions passed by Congress in 2001 are made effective immediately." Bush, referencing the 2001 tax cut that he is proposing to accelerate, made a similar assertion yesterday, claiming that "it was tax relief for all citizens. We've reduced the tax rates for everybody who pays taxes."
Both of these claims, while appearing to be expansive, depend on narrowing the definition of "taxpayer" to include only those paying federal income taxes. Many workers in lower income brackets pay no federal income taxes, but do have Social Security and Medicare taxes deducted from their paychecks, pay sales and excise taxes, and sometimes pay state income taxes. Because they will not benefit from the proposed federal tax rate reductions, only those few with dividend income would realize any benefit from the current proposal.
Finally, Bush and others have implied that the tax cut will actually increase revenues for the federal government over the long term - a highly controversial theory with few adherents. On Tuesday, in announcing his tax package, Bush claimed that "[These proposals] are essential for the long run, as well -- to lay the groundwork for future growth and future prosperity. That growth will bring the added benefit of higher revenues for the government -- revenues that will keep tax rates low, while fulfilling key obligations and protecting programs such as Medicare and Social Security." White House Press Secretary Ari Fleischer echoed Bush in a press briefing Wednesday in which he claimed that "The entire package the President does believe will lead to growth, which will over time grow the economy, create additional revenues for the federal government and pay for itself."
In a speech today, Vice President Dick Cheney presented the most sophisticated version of this line, emphasizing the size of the tax cut while at the same time suggesting that it will increase revenues over the long term. "The President's growth package will reduce the tax burden on the American people by $98 billion this year and $670 billion over the next ten years," Cheney told the US Chamber of Commerce. "But the actual impact on the deficit will be considerably smaller than the static projections because the President's package will generate new growth, it will expand the tax base and thus increase tax revenue to the federal government ultimately."
Cheney is trying to have it both ways, suggesting that the tax cut will not only reduce payments by taxpayers, but that those reductions will actually result in growth that will reduce the deficit. Cheney's assertions, like those of Bush and Fleischer, draw on the theory of supply-side economics. This theory, first introduced in the 1980s and widely disputed by most economists, focuses on the stimulative effects of tax cuts. Yet, as the New Republic's Jonathan Chait has pointed out, even some of the most vociferous supply-siders, such as the Wall Street Journal's Robert Bartley, have backed away from the contention that tax cuts can increase government revenues (also see syndicated columnist and Republican economist Bruce Bartlett's recent piece making the same point). For the Bush administration to blithely make such claims stretches the bounds of credibility to the breaking point.
The Bush administration has a history of being less than honest about the way it sells its tax and budget initiatives. Certainly, the administration should campaign hard for its proposals. But this should not include disinformation campaigns pushing misleading statistics and overly rosy predictions.
Update 1/10 3:50 PM EST: A sentence above has been changed to more accurately reflect how Bush's theoretical family may gain from the proposed tax cut.
Update 2/3/03: The above estimates of the benefits of the tax cut to middle-income taxpayers have been changed to reflect the Urban-Brookings Tax Policy Center's revised estimates. An earlier version of this article relied on the Center's preliminary estimates, which were released January 7, 2003.