The GOP tax agenda

August 20, 2004

SIMPLIFY THE TAX CODE! End taxation of savings! Cut taxes!

What handy buttons to push for election-year supporters of President Bush, like House Speaker Dennis Hastert. After all, who warms to the IRS, the complexity of filing taxes, paying taxes on savings or higher tax bills?

And if you don't ponder the facts too deeply, the GOP almost succeeds in wrapping its tax "reform" agenda in a populist cloak. Let folks keep more of the fruits of their labor! It's their hard-earned money, not the government's!

But under these appealing banners, the president and his party continue to press for changes in the federal tax structure that are very much directly against the interests of the vast majority of Americans.

Who benefited from Mr. Bush's record income tax cuts since 2001? In a recent study, the Congressional Budget Office found that the top 1 percent of all taxpayers have reaped a third of the benefits from the tax cuts. Overall, the share of taxes paid by the top 20 percent dropped, while that of everyone else -- the lower 80 percent -- rose.

You could argue that the high costs of those heavily skewed tax cuts -- more than half the projected federal budget deficit of $445 billion this year -- might be worth it if the cuts had delivered the economic recovery promised by Mr. Bush. But of course, as all but a few economists predicted, giving big tax breaks to the well-off and much smaller ones to everyone else has not trickled down. Instead, the result increasingly looks like "stagflation," rising inflation and debt with anemic job and income growth.

Still, the Republicans press on -- with their drive to make permanent these temporary tax cuts (adding a projected $1.7 trillion in federal debt over the next decade) and last week with public daydreaming about replacing income taxes with a national sales tax. This latter idea was voiced by Mr. Hastert, and then quickly called "interesting" by Mr. Bush before he backed away.

It's hard to think of a more regressive system. Brookings Institution economist William G. Gale figures that, to replace income taxes, a federal sales tax would have to be as high as 26 percent. That's 26 cents added to every dollar spent by the rich or poor. Naturally, because the poor spend a higher percentage of their income than the rich, they'd pay a higher share of their income in taxes.

But of course, when the Bush team vows that tax reform would be a key part of its second-term agenda, they are, in fact, talking about proposals -- such as new tax-exempt savings plans -- that would further shift the national tax burden to low- and middle-income workers. Already, with the capital gains tax rate at its lowest since the early 1930s, workers' earnings are being effectively taxed at a higher average rate (10.7 percent) than investment income (9.6 percent). Add on Social Security and Medicare taxes and the average rate on wages is more than twice that on investments.

Most troubling, Mr. Bush's tilting of the tax code to favor the well-off continues one of the more pervasively damaging trends in American society over recent decades: the growing gulf between the richest 20 percent, whose aggregate incomes have grown to now account for half the nation's income, and everyone else, who are losing ground as a group. Extend that trend; does it take us to a better society? Keep that in mind the next time the president and GOP leaders launch into their siren song of tax reform.

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