Presidential Issues: Taxes

Tax Proposals Get Complex. Bush, Kerry Differ on Cuts

Author: Jim Balow

Published: October 17, 2003

People watching the second presidential debate Oct. 11 in St. Louis probably thought President Bush scored big points near the end when he jumped to his feet and asked, "I own a timber company? That's news to me."

Bush, responding to John Kerry's statement that Bush earned $84 from a timber company he owned, drew chuckles from an audience that was supposed to remain silent.

Kerry's point, a subtle one to be sure, was in answer to a Bush-Cheney '04 ad that claims Kerry's tax proposals would raise taxes on 900,000 small businesses and "hurt jobs." By that definition, both Bush and Cheney have qualified as small-businessmen while serving in the White House.

Bush, in fact, did earn $84 in 2001 from his share in ownership in a limited liability company called Lone Star Trust, as FactCheck.org has pointed out. Lone Star is in the oil and gas business, but recently bought 50 percent of a tree-growing business.

Confused yet? Tax policy is never easy to understand. That's why candidates don't spend much time talking about it. It doesn't translate easily into one-liners or 30-second campaign ads.

Both Bush and Kerry discuss tax issues in lengthy platform papers published on their campaign Web sites. But how many voters take the time to read them?

Fortunately some Washington-based think tanks employ economists who have not only read those position papers, but have also analyzed them to see whether they are practical.

The Sunday Gazette-Mail checked with a few of these sources and talked with some of the economists.

We'll focus mainly on tax policies aimed at personal income tax, since they affect your pocketbook most directly.

Both Bush and Kerry say they would like to make permanent the tax cuts enacted in 2001 and 2003 by Congress and the Bush administration. Kerry, however, says he would repeal the Bush tax cuts for the two highest income brackets - roughly those who earn $200,000 or more a year.

"Both [candidates] are on the same page," said Bob McIntyre, director of the Citizens for Tax Justice in Washington. "Neither has much of a plan to pay for this. It's looking like either one would be in a substantial budget deficit.

"In comparing the two, it's a pretty sharp divide in who should be paying taxes, especially wealthy people. In the rest, it's not such a sharp divide."

Kerry also proposes to roll back two other recent tax cuts - those on dividends and capital gains - but only for those in the two top tax brackets, said Clint Stretch of Deloitte Tax LLP in Washington. Dividends, which used to be taxed as ordinary income, are now taxed at 15 percent; capital gains went from 20 percent to 15 percent.

Deloitte, a branch of the accounting firm Deloitte & Touche LLP, analyzed the effect of Kerry's proposals.

"In concrete terms, Senator Kerry says [it will affect] people over $200,000," Stretch said. "We say married couples with incomes over $225,000 and singles with incomes over $185,000."

Few West Virginians need worry, according to Internal Revenue Service figures. In 2001, the most recent year for which data are available, just 6,157 individuals and/or families reported an adjusted gross income of $200,000 or more. That's a mere 0.8 percent of the 750,456 who filed returns and about half the national rate of 2 percent of the population.

At the other end of the income curve, 333,000 West Virginians reported income of $20,000 or less - almost 45 percent of tax filers.

When a tax cut is not a tax cut

Just about everyone benefited from the Bush tax cuts, right? More money in your pocket will stimulate the economy. Some just benefit more than others. Simple.

Not really.

William Gale and Peter Orszag of the nonpartisan Tax Policy Center in Washington evaluated those tax cuts in a study published Sept. 27. The first question they tackled is who benefits the most.

Perhaps not surprisingly, they found the rich get even richer. Low-income folks got little, if anything.

Gale and Orszag divided taxpayers into five groups by income level, then compared how the tax cuts affect each group. Just one in six taxpayers of the lowest-income group received a tax cut, they found. The average cut for this group was $26.

In the next-highest group, 70 percent received some sort of tax cut; the average was $387. People in the highest-income group got a $6,826 tax break.

In all, Bush and his supporters can say nearly 73 percent of taxpayers received some sort of tax cut, Gale and Orszag found.

But they say that would be misleading. It ignores the fact that someone has to pay for those tax cuts - most likely you and me.

The tax cuts are already regressive, they say - that is, they benefit the rich at the expense of the poor. If you factor in the cost of financing the tax cuts and the cuts become even more regressive.

The result: "If the eventual financing is proportional to income, about 80 percent of households, including a large majority of households in every [group], will end up worse off after the tax cuts plus financing than before," their report says.

That's right, four out of five taxpayers, in every income level, end up worse off. Small businesses suffer, too, despite what the president may claim, they say.

"Likewise, although advocates routinely describe the tax cuts as pro-family and pro-small-business, we show that most families [that is, with children] and most taxpayers with small-business income will be worse off once the financing is included."

That's not the kind of information Bush, or Kerry for that matter, are likely to discuss on the campaign trail. Neither candidate, however, offers much of a plan to pay for the tax cuts they would like to make permanent.

A second Tax Policy Institute study tries to estimate the total cost of the Bush and Kerry tax cut plans. Len Burman, the institute's co-director, updated his figures Oct. 13 to take into account the recent tax bill Bush signed into law.

"The president's going to make all the tax cuts permanent," Burman said. "He would make the middle-class and upper-class cuts permanent. The cost [over 10 years] would be about $1.2 trillion.

"Kerry doesn't do as much in reducing taxes. Relative to the president, he'll actually be improving the budget by $518 billion. Relative to the current budget, he's cutting taxes by about $500 billion.

"To some extent, talk about tax cuts is kind of unreal because it has to be paid back at some point. They both would increase the deficit over the decade.

"The president is saying Kerry would increase taxes. It's a good point. But the fact is the president would also have to increase taxes. The money is just not there."

Poor report cards

"As to who pays for the deficit, that's a footnote to be filled in later, or not," said McIntyre at Citizens for Tax Justice. "Kerry wants to raise taxes on the rich, but that doesn't raise enough money.

"I'd say Kerry is not as irresponsible as Bush, but not totally responsible. Neither has a plan to balance the budget.

"Grading them, I'd call one of them awful and the other pretty daggone bad."

A study by the Tax Foundation would reverse those grades, but for different reasons.

In a report this summer, the Washington-based group notes that in addition to reversing some of Bush's tax cuts for the wealthy, Kerry also proposes: reversing Bush's plan to phase out the estate tax; a tax credit for higher education expenses; a 1.75 percent cut in the corporate tax rate; a tax credit for small businesses that buy health insurance for employees; an end to a tax incentive for outsourcing; other specialized tax credits.

The Tax Foundation graded Bush and Kerry policies in five areas - simplicity; transparency (easy to understand); stability and non-retroactivity (don't keep changing the tax code); neutrality (fair to everyone); and growth-promotion.

Neither Bush nor Kerry would simplify the tax code, the group says. Kerry's plan is murkier than Bush's. Most of Bush's plan is permanent; Kerry's is not. Neither Kerry nor Bush have a neutral plan. Some parts of both plans are growth oriented, with the nod to Bush.

There are important differences in the plans, the report says. "Unfortunately, like most election-year tax plans they have much in common.

"The bottom line is that both the Kerry and Bush plans fall far short of the fundamental tax reform America needs today."

Same old same old

If you think these tax plans sound familiar, there may be a good reason.

"They are not too different from Ronald Reagan on one side and Bill Clinton on the other side," said Clint Stretch at Deloitte Tax. "This is a replay of what we've been hearing for the last 20 years."

That's not to say the candidates don't have any new ideas.

"Senator Kerry has a higher education credit than Bush has," Stretch said. "Right now you can get up to $1,500 for college. He would push that up to $2,500 and applicable for all four years. If you have a kid in college, that's a big help."

[Note: the Kerry-Edwards Web site mentions a College Opportunity Tax Credit of up to $4,000 of tuition.]

"The other thing - they both have health-care initiatives. Senator Kerry has his as a tax credit for employers. The president says why don't we have instead a medical savings account-type incentive."

Beyond that, Bush has mentioned - but not formally proposed - far more radical tax changes - things like a flat tax or eliminating income taxes entirely in favor of a national sales tax.

Both proposals are regressive, economists agree. Poorer people would end up paying more, while the rich would pay less, which is why Bush only hints at such ideas, Stretch said.

"There's a reason: Fundamental tax change as part of a platform draws flies pretty quickly," he said.