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Buttering the Upper Crust
Tim Francis-Wright

Remember the middle-class tax cut that George Bush promised? Many middle-class taxpayers have already received substantially all of the tax cuts that they will get from the ten-year plan. Over the next several years, more and more of the provisions of the Bush tax cut plan will kick in, and the rich will benefit the most from them. The federal government will spend well over $1 trillion on tax cuts for the people who need them the least.

The Bush administration has shouldered criticism for running a deficit this fiscal year, so soon after the budget surpluses at the end of the Clinton administration. Some of this criticism is undeserved, because part of the deficit stems directly from lower income and corporate tax receipts. In times of recession, the federal government can and should risk running deficits to help prop up the economy. But the Bush administration has endangered the federal government's long-term financial health. Its long-term actions are ripe for criticism.

During the 2000 presidential campaign, both Al Gore and George W. Bush proclaimed the need for tax relief for the middle-class. At the time, the federal government was generating record surpluses. The end of a stock market boom generated huge amounts of capital gains taxes. A booming economy generated healthy income tax receipts from corporations and individuals. After assuming office in January 2001, Bush wasted little time garnering support for his tax cut plan. The eventual law, signed in June 2001, passed by wide margins in both the House and Senate. It enjoyed substantial Democratic support. The time is ripe for Democrats to identify the Bush tax cut for what it is: a huge giveaway to the rich.

Tax rates by year under the Bush tax plan
2000 2002 2004 2006 2011
15% 15%* 15%* 15%* 15%
28% 27% 26% 25% 28%
31% 30% 29% 28% 31%
36% 35% 34% 33% 36%
39.6% 38.6% 37.6% 35% 39.6%
*A 10% rate applies to the first $6,000 to $12,000, depending on filing status, saving taxpayers up to $300 to $600.

As the table shows, taxpayers in the 15% tax bracket have no tax relief yet to come from changes in the tax rates, but more affluent taxpayers have further tax cuts coming in 2004 and 2006. A few other provisions in the tax bill will indeed benefit lower-income taxpayers, most notably a series of increases in the child tax credit from its current $600 per child to $1,000.

The Bush tax plan did provide some real tax relief for the middle class. The dependent care credit becomes more valuable. The 28% marginal tax rate that many middle-class taxpayers pay drops to 25% over time. But the tax plan does much, much more for the rich. As the table above shows, it lowers the top tax rate over four percentage points, from 39.6% to 35%, and the rich also benefit from the lowering of the 28% and 31% rates, to boot.

The plan steadily reduces the estate tax over time, so that by 2010, it goes away entirely. Middle-class families don't have the $1 million in assets required to make the estate tax even meaningful. But the richest Americans benefit greatly from the elimination of the estate tax.

The plan provides another huge windfall to rich taxpayers by eliminating the phase-out of itemized deductions and personal exemptions. Currently, the richest taxpayers cannot use either their personal exemptions or much of their itemized deductions. In 2006, the excluded portion goes down by one-third. In 2008, it goes down by yet another third. In 2010, it goes away altogether. These provisions in no way benefit anything approaching the middle class: in 2001, a married couple needed almost $200,000 of income to lose any portion of their personal exemptions, and almost $133,000 of income to lose any of their itemized deductions.

Some invaluable work by Citizens for Tax Justice has spelled out the major beneficiaries of the tax cuts. In May 2001, it released an analysis showing the disparity in tax cuts by income. The poorest 60% of taxpayers would receive an average tax cut of $347, and would share 14.7% of the overall tax cuts. The richest 10% of taxpayers, by contrast, would receive an average tax cut of $7,981, and would share 56.5% of the tax cuts. The disparity is worse for the provisions that take effect after 2002. The poorest 60% of taxpayers get 6.6% of the benefits from those provisions, but the richest 10% of taxpayers get 68/9% of those benefits.

Even more disingenuous than the claim by the Bush administration that its tax cuts represent relief for the middle class is the way that it justified the long-term costs of the tax cut. All of the tax cuts are set to expire in 2011. So, the estate tax will jump from 0% to 55% at the end of 2010. The tax rate for the richest Americans will go from 35% to 39.6%, and their exemptions and personal deductions will become greatly impaired.

The Republican Party knows full well who its masters are, and it acts accordingly. Congressional Republicans are already trying to make these cuts permanent, even though they would cost the federal government some $4 trillion between 2012 and 2021. Because the 2001 tax cut left capital gains taxes untouched, they are trying to cut those, too. A capital gains tax cut sounds harmless enough, but official IRS statistics make clear who benefits from it. In 1999, Americans filed 127 million income tax returns, and 27.7 million of them had some capital gains. But just over half of the total capital gains came from the 277,000 returns with over $1,000,000 of income in that year. Any general capital gains tax has to be seen for what it is: a tax cut aimed at Americans who would still be rich without it.

Democrats in Washington need to recognize the upcoming tax cut provisions as an opportunity to differentiate themselves from Republicans. You do not need to be a fiscal conservative—just someone who remembers the aftermath of the Reagan tax cuts— to realize that huge tax cuts for the rich are a recipe for huge budget deficits. Concentrating on the current budget deficit could prevent Democrats from the real ignominy of the Bush tax plan, the cuts yet to come.

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