The slowing US economy could use some temporary fiscal stimulus to get things going again, but the Bush Administration’s tax cut proposal is not right for the job. Bush’s proposed cuts are a permanent, back-loaded gift to the wealthiest Americans at the expense of everyone else. Even if made retroactive, it will do little to revive the economy. The true size of the tax cut is also larger than whatever federal budget surplus might be available, and does long-term fiscal damage to the state budget in Oregon.
If a federal tax cut is to spur consumption and restore confidence in the economy it must put money into the hands of the majority of people that will spend it: low- and middle-income families. Bush’s plan fails here, leaving an average of just $227 for the bottom 60 percent of taxpayers. These families, which saw little income gain during the 1990s’ boom, get just 13 percent of the total tax cut. About12 million families, with incomes too low to owe federal income tax, will get nothing from Bush’s proposal, despite the fact that many of them they pay other federal taxes. The majority of consumers, with their confidence sagging, get little from Bush’s proposal.
The real targets of the Bush plan are the wealthy Americans that reaped the lion’s share of benefits from the 1990s’ boom. The top one-percent of taxpayers saw their after-tax incomes grow more than $100,000 between 1989 and 1997, and will receive an average of $39,000 each from Bush’s plan. The wealthiest one-percent will receive 40 percent of the tax cut, double their share of total federal tax payments.
The proposed cuts are so large that they threaten to consume all of the projected available surplus. Currently billed as $1.6 trillion over ten years, the Bush plan will actually cost almost 50 percent more than that. After accounting for the cost of making the cuts retroactive, additional interest payments on the debt, and required adjustments to the “Alternative Minimum Tax,” the Bush’s tax cut will weigh in at $2.5 trillion, much larger than the currently projected available budget surplus. These surpluses are far from certain, however, and will likely not exist if the economy does take a turn for the worse.
What is certain? By eliminating the federal estate (or wealth) tax, the Bush tax cut eventually puts a big hole in Oregon’s budget. Eliminating the estate tax doesn’t just give an unneeded gift to the 400 wealthiest (and perhaps poorly planned) estates in Oregon, it also eliminates a funding source that currently provides $48 million a year to support popular and vital state services. By the time the estate tax repeal is fully implemented, the impact will be twice as large. Already facing tight budgets, the elimination of the estate tax will make it even more difficult for Oregon to address the public’s needs for better health care, education, child care, and environmental protection.
The nation has a similar list of needs that will not be addressed if Bush’s massive tax cut becomes law. To the degree that the U.S. economy needs fiscal stimulus, the federal government should consider measured temporary tax cuts that will not cause ballooning deficits and deep program cuts in later years. Also, any tax cuts should be devised to get money to the majority of Americans who did not prosper in the 1990s, but whose buoyed consumption can help keep the economy going. Proposals for improving the Earned Income Credit and providing other refundable credits against federal income taxes for payroll taxes should be pursued before huge giveaways like those in Bush’s proposal.