Commentary

Kennedy’s Plan to Renege on Tax Cuts

This article was first published in the Washington Times, January 31, 2002.

Washington Post columnist David Broder bemoans the lack of an “honest debate” on the recent proposal by Sen. Edward Kennedy, Massachusetts Democrat, to “save” $350 billion over 10 years by “postponing” tax cuts that “overwhelmingly benefit the wealthiest taxpayers.”

To have an honest debate, however, there must first be an honest proposal. Talking about “postponing” tax cuts, or putting them “on hold,” was a particularly devious way to begin an honest debate. Mr. Kennedy could not possibly raise anything remotely approaching $350 billion by merely “postponing” tax cuts; those cuts would have to be completely repealed. In a more candid moment, in fact, the senator spoke more honestly about “avoiding these future reductions in tax rates.”

What Mr. Kennedy neglected to mention, however, was that all reductions in tax rates would have to be “avoided,” not merely those in the “highest brackets” as he claimed. In fact, reneging on the 2004 and 2006 reductions in the 27, 30, 35 and 38.5 percent brackets would still not be nearly enough to generate $350 billion in “savings” for the Treasury (meaning losses for taxpayers). This is a matter of simple arithmetic.

The Joint Committee on Taxation figured that reducing all four of the tax brackets above 15 percent — including this year’s 27 and 30 percent rates — would cost $420.6 billion from 2001 to 2011. But that figure includes this year’s reductions, which the senator says he would not touch.

Tax rates are to drop by another percentage point in 2004 and one more in 2006. Yet all scheduled rate reductions from 2004 to 2011 add up to only $367 billion. That $367 billion is not available to be “saved “by repealing all tax rate reductions of 2004-2006, however, because at least a fourth of the total reflects this year’s tax cuts. Extending the 10 years from 2002 to 2012 cannot boost the “savings” number either, because the tax cuts are scheduled to disappear into the sunset on Dec. 31, 2010.

Ending repeal of the estate tax does not salvage the math. That tax is scheduled to vanish in 2010, only to reappear again the following year because of the sunset provision. Before that, the highest estate tax rate drops to 45 percent from 55 percent, but Mr. Kennedy has not openly opposed that. The added cost of estate tax repeal itself is only about $25 billion in 2010 — far too little to begin to explain the senator’s inexplicable $350 billion figure.

In short, Mr. Kennedy could not add even $300 billion over the next 10 years even if he repealed all future reductions in tax rates and kept the estate tax, even if (as the figures assume) higher tax rates had literally no effect on economic growth. Most of the promised “savings” would have to come from “avoiding” any further cuts in the middle-class 27 percent and 30 percent rates. In 1997, the 28 and 31 percent brackets raised $219 billion, compared with $163 billion in the top two brackets. The rich pay much higher average tax rates, but there are just aren’t enough of them.

Mr. Kennedy’s claim that last spring’s tax cuts “overwhelmingly benefit the wealthiest taxpayers” is also false. The JCT estimated that taxpayers with a broadly defined income above $200,000 paid 27.4 percent in federal income tax last year and will still pay 27.4 percent in 2005. Democratic staffers on the Joint Economic Committee went further in a report last June, arguing that “by 2005, the AMT [alternative minimum tax] will completely eliminate the tax cut for certain families with incomes of around $200,000” (specifically, from $170,000 to $380,000). Statistical wizards sometimes assign any savings in the estate tax to those with high incomes, but cutting or eliminating the estate tax benefits heirs not deceased donors. Our grandchildren rarely have high incomes.

The top 5 percent of taxpayers, those earning more than $120,846, paid 55.5 percent of all income taxes in 1999 — up from 43 percent in 1989. These “rich” taxpayers are to be the sacrificial victims of Mr. Kennedy’s scheme, despite having suffered the “overwhelmingly benefit” of nasty tax increases in 1991 and 1993. The scheduled rate reductions to 33 percent and 35 percent in 2006 will still leave both tax brackets much higher than the very highest tax rates of 1988-1992.

It is axiomatic in public finance that the highest tax rates do the most damage to the economy in exchange for the least revenue, if any. The Organization for Economic Cooperation and Development recently chided the U.S. for our increasingly uncompetitive tax rates:

“There are a number of areas where statutory [U.S. tax] rates were quite high. The top rates for income tax and estate tax stand out. High tax rates may introduce economic distortions by changing individuals’ behavior. Moreover, high-income taxpayers appear to be more responsive to movements in taxation than others — raising the possibility that yields from this group might rise if their tax rates fell.”

Mr. Kennedy is not leveling with us. His tax plans are far more ambitious than he lets on. There is no $350 billion pot of gold to be had from simply keeping U.S. tax rates too high on relatively large incomes and estates. By grossly exaggerating how much revenue is due to be lost by shaving a couple of points off the highest two tax brackets, Mr. Kennedy artfully concealed the unavoidable conclusion that he must really intend to thwart middle-class tax relief as well.

Politicians may not grasp the economics, but they should be able to recall the politics. When Walter Mondale came out for raising taxes, he soon won the admiration of the mainstream press and the ire of the voters. When the elder President Bush put the highest tax rate up by only 3 percentage points in 1991, that policy reversal was widely thought to have cost him the presidency. When Democrats put the highest tax rate up by nearly 8 points in 1993, they promptly lost both houses of Congress. Bogus revenue estimates and stale lies about who pays most taxes will not be enough to save any party foolish enough to advocate “avoiding” welcome tax cuts they had a hand in enacting.

Alan Reynolds is a senior fellow with the Cato Institute.