Bush, Kerry tax plans differ

Author: Jim Bebbington

Published: September 18, 2004

Out on the stump, when President Bush wants to get a laugh from an audience, he brings up taxes.

In speeches in Troy and Portsmouth and elsewhere, Bush was somber when talking about the war on terrorism, the battles in Iraq and the struggling Ohio economy.

Then his mood lightened as he talked about John Kerry's plan to raise taxes on the wealthy.

Bush mocked the plan, saying the rich won't be the ones paying those taxes. "That's why they have accountants and lawyers," he said. "They duck and you get stuck."

Taxes may be getting played for laughs on the campaign trail, but it is the issue that will be around long after many others being discussed are gone.

This election President Bush and Massachusetts Sen. John Kerry have both been talking about how to keep more money in the pockets of Americans. Although Kerry often campaigns against tax cuts for the rich, he wants to keep in place tax cuts for everybody else. Both candidates also have tax credit proposals to help people pay for health care or education.

They differ on whether the tax cuts of the past four years have helped ease the country out of the recession (Bush), or whether they've created a drag on the economy by bringing the federal deficit to record levels (Kerry).

Bush and the Republicans say the deficit - an estimated $422 billion for the fiscal year that ends this month - is an unfortunate by-product of tough choices that had to be made since 2000: wage war in Iraq and against the sluggish economy simultaneously.

Indeed, the normally deficit-averse GOP faithful has learned to live with big deficits.

"In light of 9/11, that's the way it is," said Carl Wick, the Montgomery County chairman for Bush/Cheney '04.

Kerry has said the cuts and war should never have been waged at the same time.

"When the economy faced some rough waters, and we could have put tax cuts into the pockets of families most likely to need the money and spend it, George Bush chose massive tax giveaways for the wealthiest individuals that blew the surplus and did next to nothing to get our economy moving," Kerry told an audience this week at the Detroit Economic Club.

Calls for tax cuts are nothing new during presidential campaigns. In simple terms, Bush is calling for a continuation of the tax cuts he started early in his term, while Kerry's proposals are for more targeted cuts offset by increases for the wealthiest Americans.

After taking office in 2001, President Bush pushed through Congress three rounds of tax cuts.

The cuts reduced rates across the board on individuals, cut rates on dividends and capital gains and lowered the tax rates on large estates each year through 2010. Under current law estate taxes will be abolished for one year, 2010, then resume.

Several of the other cuts are timed to expire around 2010, and Bush says his main goal of his second term would be to get Congress to make them permanent.

Bush also hasn't discounted the possibility of pursuing a flat tax or a national sales tax.

A flat tax would charge the same rate to nearly everyone and abolish most exemptions and credits. Tax rates now vary from 10 percent at the lowest end to 35 percent at the top.

A national sales tax would replace income taxes altogether, but estimates are it would need to be as high as 25 percent to raise as much revenue as the income taxes.

Some economists support the idea of a national sales tax because it is more efficient to collect and could lead to the elimination of the Internal Revenue Service. However, a Treasury Department review of tax proposals in 2002 warned of dire political costs to any party that pursues a national sales tax.

"Any reform is likely to have vocal losers and largely silent winners," Pamela F. lson, assistant secretary of the Treasury, wrote in a memo acquired and posted on the Internet by journalist Ronald Suskind. "In other countries, adoption of a consumption tax has led to election losses for the incumbent party."

Massachusetts's Sen. John Kerry's presidential campaign has rolled up its own set of tax cuts. The main difference between his and Bush's is that he is recommending higher taxes for the richest Americans as a way of offsetting the costs of some of the other programs.

And while Bush is proposing to do away with the estate taxes completely, Kerry wants them reduced but retained.

Economists watching the tax debate play out have had to act a little like Kremlinologists. Neither campaign puts up position papers on taxes that include the level of detail that U.S. tax policy contains. So, they guess.

Making permanent the tax reductions of recent years would be a disaster, according to Wright State University Economics Professor Jim Swaney. The growing federal deficit forces the United States to become even more dependent on foreign investments, drives down the value of the dollar, and increases pressure for inflation and higher interest rates, Swaney said.

"His first term has established that Bush has no penchant for fiscal responsibility, and I don't see another Ross Perot making this an issue until inflation and interest rates go crazy," he said.

Leonard E. Burman and Jeffrey Rohaly, two economists who pored over the presidential tax policies for the Urban Institute and Tax Policy Center, estimated that Kerry's proposals will reduce federal revenues by $425 billion over 10 years.

"Senator Kerry's tax proposals would increase the deficit by less than the president's," they wrote, adding, "Senator Kerry's proposed tax cuts are much more progressive than the president's, providing little or no tax cuts for very high-income taxpayers but larger tax cuts for lower- and middle-income households."

The University of Dayton's Marc Poitras, an assistant professor of economics, is hoping a proposal for a national sales tax is not quickly dismissed.

"I'm actually surprised that is something that is taking off to some extent," he said. "It's a very radical idea and like most radical ideas it's either very good or very bad and in this case it happens to be very good."

If a sales tax could replace entirely the income tax system, Poitras said, it could greatly improve the efficiency in the way taxes are collected.

"I agree with Jimmy Carter when he said the tax code is a disgrace to the human race," he said.