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Tax Cut Debate's Division Problem Issue of Fairness Splits Two Parties
The Post By Glenn Kessler Washington Post Staff Writer Thursday, May 17, 2001; Page A04
Sen. Phil Gramm (R-Tex.) sees the tax cut bill racing through Congress in stark terms. Sure, he acknowledges, most of the tax savings will go to the wealthiest Americans. That's not only fair, Gramm says, it is in the national interest.
Like many congressional Republicans, Gramm said the increasing burden of taxation on the rich is tearing at the social fabric of the nation. "We are approaching the point when society is becoming unstable," he said.
Democratic opponents of the tax bill see the issue through a vastly different lens, arguing that the plan will widen an income gap between rich and poor that is already too large.
"The people who are paying more in taxes are dramatically better off than they were 10 years ago. The effect of the tax bill would be to exacerbate this trend," said Isaac Shapiro, an expert on income trends at the Center on Budget and Policy Priorities.
By any objective measure, most of the tax cut dollars in President Bush's tax plan would go to the wealthiest Americans. But that fact means dissimilar things to Democrats and Republicans -- differences that will become apparent when the Senate today begins floor debate on the tax plan.
With congressional approval of a huge tax cut this year a foregone conclusion, the debate has shifted to a new phase -- how should the tax cut spoils be divided? -- that has begun to raise fundamental differences between the parties over the impact of wealth on society and the government's role in redistributing incomes.
The Senate bill would give 20 percent of the income tax cuts to the top 1 percent of taxpayers, a figure Republicans generally do not dispute. That rises to as much as 35 percent when the estate tax repeal is included. The top 1 percent currently pay 36 percent of income taxes, and 23 percent of all federal taxes.
Democrats say that a tax cut that rewards such a small sliver of society is unfair to the millions of Americans who will receive little or nothing under the bill. Republicans argue that the wealthy pay most of the income taxes, and so it is only fair that they should reap most of the benefits of a tax cut.
These notions of fairness are so different that they appear impossible to reconcile, which is one reason why only a handful of Democrats have agreed to support even a modified version of the Bush plan -- and only after significant benefits were added to the bill in the Senate for the working poor to offset the money flowing to the rich.
The heart of the tax plan would cut the top tax rates, paid by about 25 percent of taxpayers, while also carving out a new 10 percent bracket at the bottom end. The 15 percent rate paid by the vast majority of taxpayers would be unchanged.
The subtext of the debate is whether to adjust the level of redistribution of income from the richest members of society to the poorest, though few lawmakers are bold enough to say that out loud. Many of the programs that would need to be trimmed in the coming years to accommodate the tax cut are aimed mostly at helping the least fortunate in society.
The question of fairness is also politically explosive. That's why the Bush administration generally has emphasized the tax cuts average families might expect to receive. The White House and Treasury Department also have countered Democratic claims of unfairness by releasing analyses that, upon closer inspection, minimized the benefits to the wealthy.
Indeed, in the tax debate, numbers can be easily manipulated to make a rhetorical point, so cutting through the maze of facts and statistics is difficult. Democrats, for instance, talk in terms of dollars, while Republicans prefer percentages. Democrats focus on the average tax rate paid by Americans, while Republicans stress the top tax rates. Democrats add in the impact of repealing the estate tax and the burden of payroll taxes, while Republicans focus mostly on federal income taxes.
But, beyond the numbers, the philosophical and political divide is very clear. Here is how many Republicans and Democrats frame the issue of fairness. Republicans
The main economic argument offered by Republicans for cutting tax rates is that it will spur investment and entrepreneurship. But, in response to Democratic attacks that the tax bill favors the rich, the GOP has also made the case for fairness.
In 1993, President Bill Clinton passed a deficit-reduction plan that lowered taxes on the working poor but boosted tax rates significantly for upper-income Americans. The top rate went from 31 percent to as high as 39.6 percent.
Republicans say that if the Clinton tax increase was designed to eliminate the deficit, then the bulk of the tax cuts should go first to the people who bore the greatest burden, now that the budget is in surplus. In fact, administration officials have noted, the Bush proposal to lower the top rate to 33 percent would still be higher than the 31 percent rate in effect when Clinton proposed his tax increase.
Treasury Secretary Paul H. O'Neill, who paid $24 million in taxes this year, said that he doesn't understand why the tax cuts shouldn't flow back mostly to the people who mailed in their tax checks.
"There is an assumption that as soon as the money crosses the D.C. border it belongs to this floating entity called the government," O'Neill said. "I thought the government belonged to us and therefore the notion somehow that once my resources cross the border I'm dispossessed doesn't strike me as fair."
So, when Democrats say that more than 30 percent of the tax cuts go to the top 1 percent, Republicans counter that sounds right, because the top 1 percent pay more than 30 percent of the taxes. In fact, Republicans have begun to question whether various reforms and tax credits in recent years have turned too many Americans into freeloaders, leaving them exempt from taxes while an ever smaller group pays an ever greater share of taxes.
New data from the Internal Revenue Service, for instance, suggest that the 400 wealthiest taxpayers pay as much in taxes -- $9.7 billion in 1998 -- as the bottom 40 million.
"The burden is too great on a small portion of the population," said Sen. Frank H. Murkowski (R-Alaska).
D. Mark Wilson, a Heritage Foundation scholar, has calculated that Americans who receive 50 percent of means-tested benefits such as food stamps or Medicaid pay about 5 percent of all federal taxes, while those who pay most of the taxes receive relatively little in return.
Some Republicans, in fact, have begun to argue that not only is this potentially destabilizing for society but that it also raises serious political problems for the party in the future. "Every day more people receive benefits from the government and fewer people are paying for it," said Rep. Jim DeMint (R-S.C.). "You think about it politically. When almost half the voters pay little or no taxes, their vested interest in government is different.
"The political power has shifted from those who pay the taxes to those who receive the benefits," he asserted. Democrats
Democrats look at the wealthiest 1 percent and see not a beleaguered minority but a select group of Americans who were enriched tremendously in the past decade. Not only did incomes rise during an unprecedented economic expansion, but Congress in 1997 cut the tax on capital gains from investments, an important source of income for upper-income Americans.
Peter Orszag, a former economic aide to Clinton and president of Sebago Associates, a California consulting firm, said there has been a dramatic increase in income inequality in recent decades. "The progressive tax code is one of the few tools we have in attenuating income inequality," he said.
Moreover, he said, the passage of welfare reform and the modest growth in government spending, as a percentage of the economy, in the past decade suggest that Republicans greatly overstate the potential political clout of those who receive benefits.
Shapiro said that the primary reason the tax burden of the wealthiest 1 percent has risen sharply -- from 25 percent of income taxes in 1989 to 36 percent today -- is not an increase in tax rates but a dramatic increase in before-tax incomes. Even after taxes, the incomes of the wealthiest Americans have soared, he said.
>From 1992 to 1998, he said, the bottom 95 percent of Americans experienced
an 8 percent rise in after-tax incomes, compared to a 47 percent jump for
the top 1 percent.
In fact, average tax rates for the top 1 percent have fallen in recent years. Joel Slemrod of the University of Michigan said the average tax rates of the wealthiest 400 Americans jumped slightly after the Clinton tax increase, but have plunged from 29 percent in 1993 to 22 percent in 1998, largely because of the cut in capital gains rates.
The tax bill "pits the extraordinarily wealthy against the merely wealthy," said Senate Minority Leader Thomas A. Daschle (D-S.D.)
© 2001 The Washington Post Company