Can Kerry really pay for those promises?

Author: Kathlyeen Pender

Published: October 17, 2004

Occasionally, my husband will get a check for his birthday, and instead of cashing it right away, he'll carry it around in his wallet. Every time he buys a CD or something else for himself, he'll say, "That was my birthday present," until he has spent the amount of the check several times over.

I am reminded of this every time I hear Sen. John Kerry say he will pay for this program or that program by rolling back President Bush's tax cuts for people making more than $200,000.

Given that less than 2 percent of households make more than $200,000, can they really foot the bill for all the ambitious initiatives Kerry would have them pay for?

According to the Bush campaign, Kerry has promised to finance 15 health and education programs -- ranging from "near universal" health care coverage to increased funding for tribal colleges -- by putting the top two tax rates back up where they were when Bill Clinton was president.

Bush says Kerry's health programs would cost $1.5 trillion, and his education proposals would cost $270 billion over 10 years, or nearly $1.8 trillion total.

The Kerry campaign says it can finance all of its health and education programs by taxing the rich, but puts the 10-year cost at just $653 billion for health and $207 billion for education, or $860 billion total.

Kerry says he can raise $860 billion by:

-- Raising the top two marginal tax rates to 36 and 39.6 percent. Today they are 33 and 35 percent, respectively.

-- Repealing Bush's tax cut on capital gains and dividends for people in those top two brackets.

-- Maintaining the phaseout of itemized deductions and personal exemptions for higher-income taxpayers.

Currently, higher-income taxpayers lose some of their deductions and exemptions. The more they make, the more they lose. This phaseout has been called a stealth tax, but it is scheduled to shrink between 2006 and 2009 and disappear in 2010, at which point all taxpayers would get 100 percent of their deductions and exemptions. Kerry would maintain the phaseout.

-- Restoring estate taxes on larger estates.

The Bush campaign says these tax increases would generate only $612 billion and possibly less over 10 years, compared with Kerry's estimate of $860 billion.

The Tax Policy Center, which calls itself nonpartisan, says they would bring in $772 billion over a decade.

Who would pay?

For 2004, the top two marginal tax rates that Kerry would raise apply to singles with taxable income of more than $146,750 and married couples making more than $178,650.

So why does Kerry say he would raise taxes only on people making more than $200,000?

Because most people making around $200,000 have enough deductions and exemptions to keep them out of the top two brackets.

If someone made less than $200,000 and fell into the top two brackets, Kerry would find a way to make sure that person did not face a tax increase, says Jason Furman, Kerry's economic policy director.

In 2001, the latest year for which figures are available, about 2.56 million tax returns, or almost 2 percent of all returns filed, reported adjusted gross income exceeding $200,000, according to the Internal Revenue Service.

(Adjusted gross income is income from all sources after some deductions but before personal exemptions and the standard or itemized deductions have been subtracted. It is larger than taxable income, which determines the tax rate. As a result, Furman says, only 1.4 percent of U.S. households would be affected by Kerry's proposed tax increases.)

Not surprisingly, a disproportionately large number of high-income taxpayers live in California.

Based on numbers from the state Franchise Tax Board, Californians accounted for 10 percent of all tax returns in 2001, but 14.5 percent of those with adjusted gross incomes exceeding $200,000.

Within California, 2.7 percent of all returns filed reported incomes of more than $200,000.

Kerry says the rich should pay up because they got most of the benefits of the Bush-era tax cuts.

The Tax Policy Center estimates that the top 10 percent of taxpayers got 53 percent of the tax cuts and the top 1 percent got 24 percent of the benefits.

The Bush people argue that high-income people deserve tax cuts because they pay the most tax.

For 2001, individuals with an adjusted gross income of $200,000 or more paid almost 42 percent of all personal federal income taxes, according to the

IRS.

Will it be enough?

If Kerry wins and can persuade what will likely be a Republican-dominated Congress to go along with his tax increases on the rich, would that be enough to pay for his health and education plans?

"If you take his assumptions at face value and assume he can stick to his plan, he can pay for them," says Mark Zandi, chief economist at Economy.com.

But those are big ifs. "The change in one or two assumptions can result in a big change in cost," Zandi says.

Kerry's health care cost estimates come from Ken Thorpe, a professor in Emory University's school of public health.

Bush's estimates come from the American Enterprise Institute, a think tank.

In a recent paper, Thorpe explains the differences between his $653 billion cost estimate and the institute's $1.5 trillion price tag.

He says the institute used a slightly different time period than he did and "did not model the Kerry plan correctly."

Among other things, Kerry's plan would expand Medicaid and the Children's Health Insurance Program to cover 27 million uninsured and have the government pick up 75 percent of the expense of catastrophic illnesses, which potentially could lower premiums if insurers passed the savings along to businesses and consumers.

Kerry's estimate "assumes there are some cost savings as a result of some proposals. Bush assumes there are none," Zandi says.

Bush favors a more market-oriented approach to health care that he says would cost only $90 billion over 10 years.

Health and education are only part of Kerry's plans, albeit big ones.

Instead of raising taxes on the rich, Bush has proposed making virtually all of the tax cuts enacted during his administration permanent. Most of those tax cuts -- including cuts in marginal rates and for dividends, capital gains and estate taxes -- are scheduled to expire between now and 2010.

Kerry would extend the cuts for middle- and lower-income people only.

In a nutshell, Bush would cut taxes across the board, but spend less than Kerry. Kerry would raise taxes on the rich, but spend more than Bush.

Although both candidates say they can cut the nation's deficit in half by 2009, the Concord Coalition, a deficit watchdog group, estimates that Kerry's plan would increase it by $1.27 trillion by 2014, while Bush's would raise it by $1.33 trillion over 10 years.

That troubles economists like Zandi.

"I would allow all the tax cuts to expire and use every dollar to pay down what will be very large and debilitating budget deficits," he says. "While it is laudable to expand health care for everyone who doesn't have it .. . ultimately it will erode our ability to provide health care for future generations."