Tax-cut ruse

September 28, 2004

ON THE face of it, the popular tax cuts that Congress voted to extend last week are hard to argue against. That was, of course, a big part of timing them to expire in a presidential election year. Who could vote against the Working Families Relief Act of 2004?

But this so-called middle-class tax-cut bill -- extending the $1,000 child tax credit, marriage penalty relief, expansion of the 10-percent tax bracket, and relief from the alternative minimum tax -- has a lot in common with the Bush administration's three prior tax cuts: It benefits well-off taxpayers more than middle-class households out of proportion to the greater tax burdens on high-income earners.

In keeping these expiring tax cuts alive, the Republican-led Congress also refused to make a simple change to avoid reducing refunds of the child tax credit to millions of poor working families.

And not least, despite some Senate talk of offsetting tax cuts with spending cuts or new revenue, this $146 billion in tax cuts sailed through Congress without much of a nod to the nation's rapidly mounting debt.

First, let's strip the "middle-class" adjective from this tax bill.

An analysis by the Tax Policy Center (run by the Urban Institute and Brookings Institution) shows that as household income rises -- from $10,000 a year to $500,000 -- so does the percentage gain in after-tax income from these tax cuts.

Families making $10,000 to $20,000 a year, end up keeping 0.2 percent more of their money. Those making $40,000 to $50,000 a year, keep 0.6 percent more. Those making $100,000 to $200,000, keep 1.3 percent more.

Or to measure this bill's impact another way, its reductions in average federal tax rates more than double in size as one moves up the income scale.

The overall result is that the middle 20 percent of the income scale will receive only 9 percent of the bill's tax cuts ($162 per household), while the top 20 percent of earners will get 70 percent of the tax cut ($1,317 per household). Top-earners -- who as a group pay about seven times more taxes -- are getting more than their share of this tax cut.

Part of this skewing is because 4.4 million of 11 million poor working families -- who pay little or no taxes but receive refunds from a component of the child tax credits -- will now pay higher taxes.

That results from Republicans maintaining a provision that raises the income threshold for this refund with inflation. To qualify, you now have to make $10,750 -- up from $10,000 in 2001, even though income growth for the working poor has been flat.

Cutting the threshold for this refund back to $10,000 would have cost about $4 billion -- or just a third of the $13 billion cost of about 20 corporate tax breaks included in this "middle-class" tax relief bill.

Which brings us to our last point: The failure to find tax offsets to cover the estimated 10-year, $350 billlion cost of this bill.

The time for closing corporate tax loopholes is certainly ripe.

Corporate tax revenues as a share of the economy are at their second-lowest level since World War II. The effective corporate tax rate has fallen from 21.7 percent in 1996-98 to 17.2 percent in 2001-03, says Citizens for Tax Justice.

Meanwhile, Bush's four tax cuts have been offset by trillions of dollars of new debt -- debt likely to fall heavily on the children of all of today's taxpayers.

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