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Jewish World Review Sept. 9, 2000 / 8 Elul, 5760

Michael Barone

Michael Barone
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Consumer Reports

A fair question



Bush's tax plan keeps the special interests at bay

http://www.jewishworldreview.com --
"TAXES are what we pay for civilized society," said Justice Oliver Wendell Holmes. But their effect is not just economic. Taxes also help determine the character of civilized society–and government and politics. The debate between the two presidential candidates' tax policies has been conducted primarily on economic terms. Which will better stimulate economic growth, preserve the budget surplus, and pay down the national debt? These are sensible questions to ask. But it is also worthwhile asking what kind of government and politics Al Gore's and George W. Bush's very different tax plans will tend to produce.

The first thing to recognize is that the Clinton-Gore administration and Democratic Congresses have put in place a new tax regime. The top income tax rate, set at 28 percent by the bipartisan tax reform act of 1986, by 1993 had been raised to 39.6 percent. Democrats also substantially expanded the Earned Income Tax Credit, which dis- tributes money to low-income workers. The top-rate increase has not prevented the economic growth of the 1990s, as many Republicans predicted it would, and overall the changes have been mildly progressive, producing a small redistribution of income. It has also meant that a larger percentage of voters are paying no income tax and that top earners are providing a bigger share of total revenue.

Gore would keep this tax regime in place and add "targeted tax cuts"–tax credits for child care, after-school programs, and long-term care; deductions for tuition; tax-free savings for education and training, etc. Bush would cut rates for all taxpayers, lowering the top rate to 33 percent and phasing out the high–up to 50 percent–marginal rates on low-income workers for whom the EITC is being phased out and the income tax phased in.

Who wins? Democrats argue that a large percentage of Bush's tax savings would go to top earners. But this is true of any across-the-board cut in a progressive or even in a flat-rate tax. It is an argument for keeping the 39.6 percent rate forever. And as an ever larger share of revenue is paid by an ever smaller percentage of voters, the political incentive grows for raising the top rate higher, especially in hard times. Republican tax cuts in the 1920s exempted three quarters of voters from income tax; when Franklin Roosevelt was pressed by Huey Long on the left, he increased the top rates in 1935. Gore, who has promised a budget surplus even during recessions, could do the same. The result could be like the 1970s, when the top rate was 70 percent, and the "animal spirits"–the competitive juices–of top earners were directed away from productive investment and toward often uneconomic tax shelters. No economist can measure it, but my hunch is that much of the ebullience of the 1990s growth is owed to the fact that the 39.6 percent rate is not quite high enough to make tax avoidance the central preoccupation of rich people.

The other implication of the Gore plan is that it puts the government in the business of doling out favors. Gore's list of targeted tax cuts can be infinitely expanded, as rapidly as a focus group can be assembled. Despite his absurd promise to ban special interests from Washington, they will be trooping in to seek special tax treatment for every kind of argu- ably worthy activity. Why not tax credits for the cost of bringing civil rights suits or suits for sexual harassment (except against Democratic presidents)? In the meantime, where will the lost revenue come from? Maybe higher top tax rates. Once again, this looks like the 1970s, when the congressional tax committees, besieged by lobbyists for special pleaders, auctioned off shelter from the high top rates they made sure to preserve.

The political implications of the Bush plan look quite different. Like Gore's, it takes many people off the income tax rolls altogether by cutting the lowest income tax bracket and raising its threshold so that people moving out of the EITC aren't taxed immediately. But by reducing the difference between the top and other brackets, it reduces the political incentive to soak the rich and increases political incentives to cut rates still further–perhaps in the kind of nibbling small cuts Michigan Gov. John Engler has made almost every year. Citizens will tend to look to themselves rather than to Washington to find money for worthy purposes.

There is some downside to this. Bush argues that under his plan, families that earn under $100,000 will shoulder a lower percentage of the total tax burden and that therefore his plan is not less progressive than the current system. But it would produce less revenue and thus would redistribute smaller amounts of income. For those who wish to see government redistribute money to low-income workers and to those engaging in favored behaviors, Gore's plan will probably be preferable. But for those who are wary of government social engineering and weary of the favor-seeker-encouraging state, Bush's will probably seem better. The candidates and the press have focused on the macroeconomic arguments. But they may want to consider these, too.



JWR contributor Michael Barone is a columnist at U.S. News & World Report and the author of the biennialAlmanac of American Politics. Send your comments to him by clicking here.

Up

08/28/00: Making labor's day
07/11/00: The new Mexico: The 20-year history behind an overnight change
07/06/00: A textbook campaign: Bush makes hay before the convention lights shine
06/23/00: Beat the press
06/06/00: Reining in regulators: Will the Supreme Court clip Washington's wings?
05/25/00: In plain English: Bilingual education flunks out of schools in California
04/28/00: Gore in the balance: His book reveals a fanatical approach to the environment
04/04/00: President-elect Putin offers a basis for hopes–and for fears
03/14/00: Over the long, long haul, the issues may yet favor the Republicans
03/02/00: Will unions rule? Indispensable to Gore, labor may be the campaign's secret winner
02/15/00: A reformers' party
01/03/00: The voters rule: In Manchester, Mexico, and Moscow, an imperfect system works
01/19/00: The era of Big Promises
12/08/99: Welcome to the world of 'good enough'
11/2/99: Just saying no
11/12/99: Money talks, as it should
10/28/99: Mexico votes – for real
10/03/99: Going against type
09/28/99: The unions go public
08/31/99: China's strait flush
08/25/99: The first two contests
08/03/99: Paddling upstream
07/08/99: Taking Hillary seriously
06/22/99: Trying the lawyers
06/07/99: Facts on the ground

©2000, Michael Barone