Top 10 Lies about the Tax Cut

On May 10 the Senate passed the Bush budget plan by a vote of 53 to 47. The New York Daily News, hardly a paragon of liberalism, declared "Politically President Bush won big ... Economically the country may not be so lucky. ... the nation can't afford what' been negotiated."
Economist Paul Krugman writing in The New Republic stated, "The fiscal predictions that enable Bush to pay for his tax cut and contingency fund are not mere errors but deliberate efforts to deceive the public. The administration understands better than anyone that if its math were honest, the tax cut would never pass." What follows are our suggestions for the ten most egregious misrepresentations by the administration and its supporters concerning the tax cut and budget proposals.

10. The tax cut will only cost $1.6 trillion.
A dollar in tax cuts is more than a dollar reduction of projected surpluses, because if the dollar is not used to pay off debt, future interest payments will be higher. A $1.35 trillion tax cut will actually cost $1.8 trillion. Factoring
in the likely adjustment to the alternative minimum tax (AMT), the cost is more like $2 trillion.

9. There will be a $5.6 trillion surplus over the next ten years, so we can easily afford a tax cut.
Actually, the $5.6 trillion surplus estimated by the Congressional Budget Office is based on completely unrealistic assumptions. The key error is that "current policy" under which the surplus is calculated, assumes no increase in government discretionary spending over current levels. Thus, for instance, as the population increases, no new per capita spending is taken into consideration. As the Gross Domestic Product (GDP) increases no proportional increase in spending is anticipated. And the estimate includes no new spending -- even items like the missile defense system or increased spending for education allegedly
advocated by the administration. Moreover, the CBO projection assumes the alternative minimum tax will remain at the same rate. The AMT is not adjusted for inflation like other tax brackets, and it is likely Congress will take action to change that as more and more tax payers are required to pay the AMT as their incomes increase over time due to inflation. The Brookings
Institution estimates the ten-year surplus as $4.9 trillion, and others estimate it as low as $4 trillion.

8. Even with the tax cut we still have a "trillion dollar" contingency fund. Actually the trillion dollars touted by the administration was only $842 billion. But according to the Concord Coalition,
a nonpartisan organization advocating fiscal responsibility, the tax cut in fact consumes the surplus. Other estimates suggest it may put the
government $1 trillion in the red.

7. Social Security and Medicare will be protected.
Medicare hospital insurance is funded from the Medicare portion of payroll taxes. Medicare supplementary medical insurance, on the other hand, is currently funded by a combination of general tax revenue and fees from Medicare recipients. The Bush plan calls for a diversion of the medicare-specific payroll taxes to fund the supplementary medical insurance, freeing general tax revenue to pay for the tax cut. Technically Medicare funds will still be used for Medicare, but in reality money that should be building up the Medicare hospital insurance trust fund for retiring baby boomers is being diverted to the tax cut.

6. The Bush tax plan treats everybody fairly. "If you pay taxes, you get relief."
Nearly 80% of the work force pays more in payroll taxes than in income taxes. Democratic tax cut plans offer tax credits for workers who owe payroll taxes but not income taxes. The Bush proposals affect only income taxes, thus disproportionately benefiting higher-income workers. In a related misrepresentation, the administration likes to say that cutting the lowest tax rate (as some Democratic proposals do) affects only low-income workers. Actually everyone pays the lowest tax
rate on some of their income. Taxpayers in the top bracket pay the top rate only on the portion of their income above $300,000.

5. Under the Bush plan a single waitress with two kids earning $20,000 per year will pay no taxes.
She pays no taxes now, unless she has no child care expenses, and even then owes $120.

4. We need the Bush tax cut to stimulate the economy.
To stimulate the economy a tax cut should take effect immediately and be targeted at people in income brackets where it will be spent.
The Bush plan by contrast phases in slowly, and affects mostly the rich who are likely to simply accrue more savings, rather than spend it.

3. The wealthy will pay more tax under the Bush plan.
While they will pay a slightly higher percentage of income taxes than currently, they will pay a much lower percentage of total taxes. Most workers pay most of their taxes in payroll FICA taxes, and the Bush plan
doesn't touch these.

2. The Bush tax plan won't give 40% of its benefits to the richest 1 percent of the population, as calculated by the Citizens for Tax Justice in 1999, but only 22%, as calculated by the Joint Tax Committee of Congress.
The JTC's calculation only went through 2005, before many of the upper income tax cuts are completely phased in. And it ignored the feature that most benefits the wealthiest -- the repeal of the estate tax.

1. The budget suplus shouldn't be used for government programs because it belongs to the people.
The government belongs to the people, too (despite the fact that this administration belongs to big business). Efficiency in government is desirable, but there are plenty of government programs that benefit everyone (national parks, air traffic control, clean air and water...). The real danger in the Bush plan is that it does not budget for even normal growth in spending, which could force government borrowing since some of the spending increases -- such as those related to population growth -- will be nearly impossible to control.

References:

"GOP Budget Off Balance" Editorials, New York Daily News 13 May 2001.

Krugman, Paul. "Going for Broke" The New Republic 10 May 2001.

Chait, Jonathan. "Going for Gold" The New Republic 10 May 2001.

Chait, Jonathan. "Read No Evil" The New Republic 8 March 2001.