Buzzsaw Haircut

Bush, Congress Cross Swords Over Tax Cuts

By Jen Chamberlain

The new fiscal year begins Oct. 1, and we all know what that means: Halloween candy goes on sale, and Congress will have approved a budget.

In an attempt to accomplish that goal, George W. Bush sent a $2.2 trillion budget plan (resolution) to the House for approval two months ago, which included a $726 billion tax cut as part of an economic stimulus package. The House approved the full tax cut, but the Senate only approved a $350 billion tax cut.

According to the Center for Budget and Policy Priorities (CBPP), the Senate and House budgets now in conference each would increase deficits by nearly $2 trillion through 2013.
While the battle in Iraq rages, so does the battle for the budget, along with the future of needed social programs that may face significant funding losses if the Bush budget passes. Most Americans have been vigilantly tuned in to their favorite 24-hour news source, absorbed in the war and little else, and are unaware of the budget decision reached on Apr. 10.

According to David Rosenbaum of the New York Times, “Congress's final budget plan would permit the Senate to write a tax cut of $350 billion over 10 years, while the House would be allowed to pass a larger cut-at least $550 billion but less than…President Bush
requested.”

The House and Senate passing resolutions with different numbers almost never happens, and has left many in Congress angered that no real decision was made regarding the size of the tax cuts.

One of the many reasons no consensus could be reached over the tax cut figures is because there is much skepticism that cuts are helping boost the economy. In 2001, Bush signed a $1.35 trillion tax cut into law as a way to boost investment and consumer confidence. There is not much debate over whether this worked. It didn't.

According to the CBPP, “The 2001 tax cut - which is scheduled to expire by the end of 2010 - is aimed primarily at upper-income households. For example, when the tax cut is fully in effect, the total benefits it provides just to the top 1 percent of taxpayers will be 1½ times the size of the Department of Education budget and nearly nine times the size of the Environmental Protection Agency budget.”

Economists are divided about the wisdom of slashing taxes again, without attempting to balance the books. Last month, about 450 economists, including 10 noble Nobel laureates, openly criticized Bush's plan. In response, the White House rounded up its own economists who spoke in support of the plan. But even Alan Greenspan has agreed it is too soon to be sure that more economic stimulus is needed, and in essence advised Bush to wait it out. The country now faces a serious deficit, a multi-pronged war effort, and Treasury demands for increased credit limits to continue borrowing money; according to Reuters, the federal government's credit limit was just raised in June 2002 to $6.4 trillion.

So by definition, a tax cut means that some taxes are going to be, well, cut. Which ones, you ask? Well first, Bush proposes to cut the dividend tax, which some say is “double taxation” because the dividends from shares as well as corporate profits are taxed. The plan, according to an article by Susan Milligan of the Boston Globe, would cost $396 billion over 10 years, and would almost exclusively benefit people with big stock portfolios. While many middle-class Americans own stock they will not benefit because most of this is in 401(K) retirement plans, which are tax exempt anyway, Milligan wrote.

The argument is that people with big stock portfolios are also the ones who invest the most, and who would then reinvest the money into the stock market, boosting the economy.
However, one of the major problems with the dividend tax cut is that in its present form, it would mean a virtual end to the low-income housing tax credit, one of the major sources of funding for affordable housing projects nationwide.

“Under current law, corporations receive a tax break by contributing to the low-income tax credit program. Affordable housing proponents fear that if the Bush dividend tax cut prevails, companies will instead return that money to their shareholders,” according to Joe Baird of the Salt Lake City Tribune.

Another aspect of Bush's plan is to switch the Section 8 housing voucher program from government to state control. Section 8, which began in 1976, allows families who make less than 50 percent of an area's median income eligible for vouchers. The vouchers are used to pay rent on private housing. Typically, program participants pay no more than 30 percent of their monthly income in rent, and the vouchers cover the rest.

But the lack of affordable housing nationwide means the waiting lists are long, and critics of Bush's plan fear that because of this, states would raise the requirements for attaining vouchers, making less available for the poorest people. This would violate the federal rule now in existence requiring three-fourths of voucher recipients be from the lowest income brackets.

Between 1997 and 1999, the amount of available rental units for voucher recipients dropped by 9 percent, according to Habitat for Humanity.

Also on the table is elimination of the estate tax (Republicans call this the death tax), which is paid on inheritances and estates.

Critics of these particular tax cuts are questioning why Bush has not proposed cuts to the payroll taxes, the state and federal taxes that are taken out of employee paychecks for Social Security and Medicare. Employers are required to withhold state and federal income taxes as well as Social Security and Medicare taxes. They are also required to pay a matching amount of Social Security and Medicare taxes for their employees and to pay State and Federal unemployment tax.

The federal government relies on payroll taxes to fund these programs, which comprise 30 percent of the total federal budget. The Social Security tax is the biggest of the payroll taxes, and it applies only to the first $87,000 of earned income, according to Milligan. This means people with large salaries pay a lower percentage of their incomes in payroll taxes than lower-wage workers do. “Three-fourths of Americans pay more in payroll taxes each year than income tax,” Milligan wrote.

“It seems to me morally wrong to say money you work for should be taxed at a higher rate than money you don't work for,” said Richard Kogan, an analyst with the CBPP, in the Boston Globe.

There have been attempts at reducing the payroll tax, but the idea never seems to draw strong support. Senator John Kerry (D-M.A.) has tried twice this year to cut the payroll tax on the first $10,000 of income, which would help the neediest Americans, but his proposals were defeated both times, Milligan wrote.

Almost 62 percent of the tax cuts in the proposed budget come from programs for families, children, and elderly and disabled people with low incomes, according to the CBPP. The budget the House passed suggests cuts to entitlement programs, which are low-income programs like Medicaid, Supplemental Security Insurance benefits for the elderly and disabled, food stamps, child-care, school lunches and foster care and adoption assistance services.

The CBPP also said the proposed cuts in child nutrition programs may eliminate school lunches for 2.4 million low-income children.

The Senate's version of the budget does not include these entitlement cuts, but critics fear this does not mean they are not coming.

In a New York Times editorial, Bob Herbert wrote, “the budget passed by the House is particularly gruesome. It mugs the poor and the helpless while giving unstintingly to the rich. This blueprint for domestic disaster has even moderate Republicans running for cover.”

Jen Chamberlain has a plan to balance the budget, but she refuses to share it. Email her at Jchambe2@ithaca.edu