Part 1 of a 2-part Series:
Despite what the presidential candidates claim, there is no multi-trillion-dollar surplus in the national budget. There is a shaky projection at best, that, if the economy maintains its torrid pace and if Congress does not increase expenditures, then over the next ten years, there could be a surplus of $4.56 trillion, as estimated by the Office of Management and Budget.
Even so, Bush and Gore are debating how to spend this projected surplus. Both would shore up social security and Medicare, but as to the projected uses of the balance of the surplus, the candidates vehemently disagree: Bush advocates paying off the national debt in 16 years, but wants to return most of it to the taxpayers in the form of reduced tax rates. Gore emphasizes paying down the national debt in 12 years, while providing some tax relief to such taxpayers as poverty-level families with three or more dependents and middle-income families (in general, those with adjusted gross incomes of less than $100,000) for education and child care.
Cutting tax rates does not benefit all taxpayers equally., Determined by pre-tax income, the lowest 60% of taxpayers pay just 7% of income taxes, while the remaining 93% is paid by the top 40% of taxpayers. Of that 40%, the top 20% pays 77%, and within the top 20%, the top 1% pays about 30% of income taxes. Thus, the bulk of the Bush tax breaks goes to the richest Americans because they pay the most taxes.
Although a large tax cut could be popular politically, economists, including Alan Greenspan, chairman of the Federal Reserve (Fed), believe this is the wrong time to stimulate an overheated economy with tax cuts. He is worried that tax cuts will produce inflation and the Fed would be forced to counter with interest rate increases. Higher interest payments for homes, automobiles and other consumer and business debt could more than offset any decrease in taxes.
Additionally, although tax cuts are supposed to translate into increased investment and jobs, there is nothing that specifically ties such economic benefits to the United States. Thus, the tax cuts may be reinvested in foreign companies that compete against U.S. businesses and workers.
The Texas governors proposal could be misleading on several counts. Despite his claim that all Americans will share in the tax cuts, his plan disproportionately benefits taxpayers with the highest incomes. Even so, the tax cuts are largely illusionary. Bush wants to reduce tax rates to a maximum of 33% on taxable incomes over $288,350, down from 39.6%. This will amount to a $6,500 savings for each $100,000 over $288,350.
However, we have two systems of taxing income, the regular tax rates that Bush talks about cutting and the Alternative Minimum Tax (AMT) that the Bush proposal fails to address. In general, the AMT is calculated on a flat 26% of the first $175,000 of AMT income (a complex calculation) and 28% on AMT income in excess of $175,000. Americans enjoying a tax cut that falls below the AMT will wind up paying the AMT amount, rendering the Bush tax cut proposal meaningless for them.
In conclusion, on paper the Bush tax reduction favors the 1% of taxpayers earning more than $200,000 a year, but if there is not a corresponding reduction in the AMT, those cuts could be illusionary. Taxpayers might wind up paying about the same federal income tax as they do under the current system.
Recommendation: Bush should cut tax rates less drastically and revamp the AMT so it applies in fewer situations. An AMT exemption should be raised to $50,000 for individuals and $100,000 for married couples, and the tax rate should be a flat 20%.
Opposite to Bush, Vice-President Gores proposal specifically targets certain economically disadvantaged groups and provides selective tax breaks for those taxpayers. For instance, Gore wants to provide poverty-level families with three or more children a $500 tax break. He also suggests tax breaks for education and life-long learning.
Central to the Gore proposal is paying off the national debt in 12 years. Tax cuts proposed by Gore are analogous to government incentives to induce certain socially-desirable behavior. His proposals are confusing and aimed at families with AGI's of $100,000 or less. Those who meet Gores requirements should receive a bigger break than with the Bush plan; however, those taxpayers who are paying the bulk of the taxes today will not receive any tax reduction.
Paying down the national debt is laudable because it benefits all Americans by keeping interest rates low and eliminating the debt burden for future generations. However, Gores use of targeted tax benefits aimed at those earning less than $100,000, makes his proposal complicated and problematic. Note: Approximately 6% of all taxpayers earn more than $100,000, but this group pays about 55% of the entire tax burden.
As a practical matter, around parts of the San Francisco Bay Area it often requires an annual income of $150,000 to $300,000 for a family of four to pay the costs of housing, private education, daycare, healthcare, real estate taxes, sales taxes and California income taxes, let alone obligations to care for their parents, and save for retirement. Using $100,000 as a government-dictated cutoff could strike those who are struggling to meet expenses as unfair and discriminatory against hard work.
Recommendation: Gore should simplify his plan by reducing the 15% and 28% tax brackets, rather than targeting tax breaks for certain taxpayers. He should moderate his tax package to include those who are paying the bulk of the taxes, as well as those at the lower end of the economic spectrum.
Next Column: Crunching the numbers under the Bush proposal and explaining the myriad of tax breaks offered by Gore.
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