A Troubled Tax Cut

On Feb. 8, President George W. Bush sent a $1.6 trillion tax plan to Capitol Hill. Unfortunately, the proposed tax cut ignores the economic lessons of the Reagan, Bush and Clinton years. Because it is fiscally irresponsible and provides little relief to the families who need it most, we urge Congress to reject it.

Bush's tax cut will benefit relatively few Americans. Its main components, the elimination of the estate tax and a cut in marginal income tax rates, send the vast majority of the savings to the wealthy. Only the wealthiest 2 percent of estates pay the estate tax, meaning that most Americans will see no benefit at all from this reduction.

On the income tax, Bush's statements have been a masterpiece of misleading rhetoric. The statistics he offers--that the top 1 percent of households earn 18 percent of national income, yet pay 33.5 percent of income taxes--may seem compelling, as is his mantra that lower-income families will receive a greater proportional reduction in their income taxes. But Bush ignores that the income tax has become primarily a tax of the rich. Three out of four families now pay more in payroll taxes, the 15-percent tax that funds Social Security, than they do in income taxes. Yet Bush's plan gives no relief from the payroll tax. In other words, Bush focuses his plan away from lower- and middle-income individuals and towards the wealthiest 1 percent of Americans, as former Vice President Al Gore '69 noted during the campaign.

Despite the fact that its benefits for most Americans will be minor, Bush's proposal requires so much money as to raise a strong possibility of blowing the budget. Once one factors in the roughly $400 billion in interest on the national debt that would otherwise have been retired, the cuts will cost the Treasury $2 trillion. A cut of this magnitude represents a profound threat to the successful fiscal discipline of the Clinton era. After securing the Social Security and Medicare surpluses, which many in Congress rightly feel should be reinvested in their respective programs, and after allowing for adjustments in current spending to keep up with inflation and population, the $5.6 trillion estimated surplus drops to $2.1 trillion. A tax cut that costs $2 trillion--and even more if, as Bush has suggested, it is made retroactive--could eliminate the entire surplus, with nothing left over for debt reduction. The country may even be forced into deficits, which would drive up interest rates and harm business confidence. Moreover, there would be no money for new programs that already have strong bipartisan support, like a federal prescription drug program.

Bush's latest marketing technique has been to portray the cut as a necessary antidote to recession. Yet if we are on the brink of a recession, then the surplus estimates are incorrect, meaning that in a few years we may not have any money to spend on tax cuts. Additionally, gradually phasing in a long-term tax cut plan will not have any immediate effect on a recession--Bush's top economic advisor, Lawrence B. Lindsey, has written that tax cuts have too slow an effect to be useful in fighting recessions. Fighting a short-term recession is better left to the Federal Reserve and its chair Alan Greenspan--Clinton's experience with the 1993 tax hike makes clear that over the long haul, debt reduction is more important to growth. In contrast, the experience of the Reagan administration shows the difficulty of climbing out of deficits caused by overly large tax cuts.

Unfortunately, Bush's plan seems to have benefited from the confusing words of Greenspan's recent testimony and the lack of unified Democratic opposition and support of a clear alternative. The Democrats must hasten to expose the flaws in Bush's proposal.

We urge Congress to use the surplus for debt reduction, for necessary investments in education and other programs and for a moderate tax cut that focuses on the lower- and middle-income families who need relief the most.