Tax cuts? For whom?

A report from Congressional Budget Office shows how lower taxes mostly benefit the wrong people

Published: August 17, 2004

Bring it on. Let's revive the great tax cut argument, that is, armed with all the facts.

It's one thing for us to write that the $1.6 billion in tax cuts that President Bush has steered through Congress go disproportionately to the very rich. Or for Sen. John Kerry to make a campaign issue of that. Here comes the Congressional Budget Office, nonpartisan and all but unimpeachable, with its own analysis of where the tax cuts have gone.

A third of the windfall has gone back into the wallets and bank accounts of the top 1 percent of wage earners. Forget, for a moment, all that talk about tax cuts for people with six-figure incomes. The people who are really cashing in are those with seven-figure incomes. The average yearly earnings for those in the top 1 percent bracket is $1.2 million.

Another third went to people not quite rich enough to qualify for the top 1 percent, but with incomes still in the top 20 percent. Their average income is $204,000.

Where's the economic stimulus in making the rich even richer? These are people already quite capable of spending money, even without the benefit of a tax cut that reflects how much they pay in the first place. The point of Mr. Bush's tax cuts is supposed to be to revive the economy, not improve American's otherwise low savings rate.

To follow the money in this case is to see how tax cuts that disproportionately benefit the wrong people have helped increase the federal budget deficit. The government was actually showing a $100 billion surplus before these tax cuts set in, along with a host of other economic troubles. Three years later, the deficit is bigger than it's ever been -- closing in on upwards of $445 billion by Bush administration estimates and $422 billion, according to the CBO. Of course, that will have to be fixed eventually. And then, most likely, will come the real impact of the tax cuts.

William Gale of the Brookings Institution, a staid think tank adverse to class-war politics, predicts this scenario. The tax increases, or spending cuts, that will be necessary won't be targeted at the top 1 percent. Most likely they 'll be spared. Instead, Mr. Gale suggests, the same lower-income earners who missed out on so much of the tax cuts will bear their share, and then some, of the corrective action.

A more moderate, but more immediate, solution is the one proposed by Mr. Kerry, among others. He says ending the tax cuts for households with incomes in excess of $200,000 would save $860 million over 10 years.

None of this means tax cuts can't help the economy, and can't benefit the recipients. Rather than arguing for discarding the tax cuts entirely, a position that helped sink Howard Dean's presidential candidacy, by the way, the numbers from the Congressional Budget Office reinforce the case for directing them more sensibly toward the middle class and the working poor.

The tax cuts for the middle 20 percent of wage earners average only $1,090. They're nonetheless of much more help to an economy in need of a boost. The evidence suggests that's money they otherwise wouldn't have to spend. Mr. Bush could salvage his tax cut crusade by looking at the CBO report and revising his strategy appropriately.