Commentary

Tax Cuts for Taxpayers

President George W. Bush is pushing his tax cut, and the usual suspects, ranging from Democratic hacks to liberal pundits, have reacted in horror. Imagine! Giving tax cuts to those who actually pay taxes.

The presidential centerpiece is an across-the-board rate reduction. No more social engineering. Rather than dribbling cash to people who, like laboratory rats, push one lever or another, the administration would let taxpayers decide how to use their own money.

This is reason enough for critics to yelp. Even worse, though, is the fact that wealthier people receive back more money. The class warriors are in full battle cry.

William Gale of the Brookings Institution complains: “The president’s plan is huge, back-loaded and tilted dramatically toward the highest-income households.”

Senate Minority Leader Tom Daschle, D-S.D., says with their return, the rich would be able to buy a Lexus, while the poor could purchase only a muffler for a used car.

Well, now. There’s a reason across-the-board cuts “favor” the rich. The rich pay more in taxes. A lot more.

The top 1 percent of taxpayers pay about one-third of all income taxes. The top 5 percent pay more than half. The top 10 percent pay nearly two-thirds. The top 25 percent pay more than $4 of every $5.

Occasionally, the purveyors of envy acknowledge this inconvenient fact. Yes, admits Washington Post columnist E.J. Dionne Jr., “the wealthy pay the most taxes,” but “they have also made the greatest gains in the past decade.”

Eh? Let’s run through this one more time. Tax cuts should go to people who pay taxes. It doesn’t matter whether their incomes have gone up or down.

Indeed, the fact that some higher-income people made great gains in the 1990s means that they are paying even more in taxes. So, they should receive more back.

They should, that is, unless one believes that Uncle Sam is the great benefactor who generously allowed them to earn more. And, that all money really belongs to the government, so increased earnings are the equivalent of a tax cut.

The best argument wheeled out by critics is: “What about the payroll tax?” This regressive levy falls most heavily on lower-income people.

Good point, but few of these born-again tax-cutters previously evinced the slightest interest in reducing the tax burden on anyone. They wanted to spend all of the loot collected by Uncle Sam.

Only now, worried that some cash might be returned to those who earned it, have tax cut critics discovered the plight of wage-earners. Which they cite only as a reason not to cut income levies.

The payroll tax is an awful burden, a regressive disincentive to employment. But, it should be addressed while reforming Social Security.

The system is heading toward bankruptcy, set to run out of money in little more than a decade. Many new workers will actually receive a negative return. Payroll taxes should be reduced by allowing people to shift money into personal retirement accounts.

Income tax cuts are a moral imperative. Americans bear the highest peacetime tax burden in history. In the face of a possible economic slowdown, Uncle Sam continues to grossly overcharge taxpayers.

Moreover, the looming surplus provides an irresistible honey pot for irresponsible legislators. Including the Republicans who control Congress.

As Cato Institute scholars Stephen Moore and Stephen Slivinski point out, the last Congress was “the largest-spending Congress on domestic social programs since the late 1970s when Jimmy Carter sat in the Oval Office and Thomas ‘Tip’ O’Neill was speaker of the House.” For three years, the budget of every Cabinet department has grown up to five times the rate of inflation. No wonder Mitch Daniels, director of the Office of Management and Budget, speaks of the need for spending restraint.

Huge and unjustified tax hikes were the hallmark of both the original Bush and the Clinton presidencies. This President Bush seems determined to create a different record.

Indeed, his proposal for a 10-year, $1.6 trillion tax cut is too modest. It is just half of the estimated surplus over the same period, which doesn’t include savings from even modest spending restraint.

Moreover, as a percentage of GDP, the Bush plan is only half the size of John F. Kennedy’s rate reduction and one-third the size of Ronald Reagan’s tax cut. Bush would provide less relief than was pushed by congressional Democrats in 1981, according to Eric Schlecht of the National Taxpayers Union.

Thus, Congress should slash taxes even more, deepening the proposed rate reductions and eliminating the hikes imposed by the elder Bush and Clinton.

Taxes have been going up for a decade. It is time to lower them. For people who actually pay taxes.

Doug Bandow is a senior fellow at the Cato Institute.