January 17 2003
WASHINGTON -- When it comes to judging big policy proposals, the simplest questions are often the best. In the case of President Bush's recently released "jobs and growth" plan, here's one: Can Washington really think of nothing better to do than cut taxes -- again?
After all, taken together with the administration's already approved $2.1-trillion tax package, the new plan makes tax cuts the single biggest public policy initiative the president has pushed since coming to office. Bigger, according to Congressional Budget Office figures, than the likely size of the defense buildup. Bigger than expected new spending on homeland security. Bigger than either Republican or Democratic proposals for a prescription drug benefit for retirees. Vastly bigger than Bush's much-touted education reforms.
And the new plan comes at a time when arguments for tax cuts have weakened since the national tax revolt began with Ronald Reagan's election, if only because the top income tax rate and the tax burden on average families already have been substantially reduced.
The combination is giving even some friends of the latest proposal pause. As Reagan-era Treasury official and respected tax economist C. Eugene Steuerle put it: "The federal government can't possibly exist solely to reduce taxes."
White House officials continue to vigorously defend their plan, arguing that Washington must do something to help the struggling economy and that tax cuts still pack an economic punch. They say the president's call for eliminating the personal tax on stock dividends, in particular, would fix a problem that economists of all political stripes have complained about for years.
"Productive activity is taxed twice, once at the corporate level and once when profits are distributed in the form of dividends," Assistant Treasury Secretary Richard H. Clarida said. "There's a real cost to the economy of this double taxation," he added, one that the president's plan would correct.
But even here, the case for tax cuts is not as strong as it once was. In part, that's because in shrinking income tax rates, presidents from Reagan to the current Bush have automatically shrunk the tax on dividends. In part, that's also because Americans have largely shifted how they own dividend-paying stocks from taxable, direct holdings to tax-protected pensions, 401(k) plans and the like.
Of course, none of this discourages tax-cut advocates. Groups such as the conservative Americans for Tax Reform picture what has happened to taxes over the last two decades as only a first step in a grander agenda. "If your goal is to reduce the size of government, we still have a long way to go," ATR President Grover Norquist said.
But such assessments minimize how much tax-cut advocates already have won. And they miss how their victory shifts the ground under arguments for still more tax cuts. Consider:
* Between Reagan's election in 1980 and today, the top income tax rate has fallen from 70% to 38.6%. The top rate is generally considered a proxy for the burden taxes impose on the economy: It's the bite that Washington takes from the last dollar top earners make and so measures how much they are discouraged from working and saving more.
Although the top rate did creep back up under the president's father, former President Bush, and Bill Clinton, what remains of the decline still erases more than two-thirds of the economically damaging effects of the tax, according to the way experts measure these things.
* By the time Reagan arrived in Washington in 1981, the typical family of four -- one with an income in 2001 dollars of $63,250 -- was paying 11.8% of its income in income taxes, a post-World War II high, according to the Tax Policy Center in Washington. By 2001, a family in the same economic position was paying only 6.7%, a 44-year low.
"The notion we haven't made any progress limiting the distortive effects of taxes on the economy is just bunk," Brookings Institution economist William G. Gale said.
The extent to which taxes already have been reduced may help explain why a public that once clamored for cuts now seems comparatively indifferent to them.
A long-running Gallup poll found that the percentage of Americans who think their federal income taxes are "too high" has dropped from almost 70% in the years before Reagan's election to 47% earlier this month. The same poll found that the fraction that believes its taxes are "about right" has climbed from one quarter to one half.
The size of the additional cuts that would be needed to have anything like the economic effect of those already made may account for much of the doubt about Bush's latest proposal.
For example, analysts estimate that for the nation to enjoy as big a bump as it got from cutting its top tax rate from 70% to 38.6% would require a further reduction to about 20%. That's a level not seen since Calvin Coolidge was president and the income tax system was barely a decade old. And it is one that many think unwise at a time of war and rising security needs.