Bush's Tax Proposal
With Joel Friedman
Economic Expert, Center on Budget and Policy Priorities
Thursday, Feb. 8, 2001; 11 a.m. EST
President Bush plans to send his 1.6 trillion dollar tax plan to Congress on Thursday -- a proposal that has garnered a lot of support and some definite criticism. While the plan has some Democratic support and the thumbs up from Federal Reserve Chairman Alan Greenspan as a means to boost the economy, others worry that the plan -- scheduled to take place over ten years -- will cause an 80s style deficit.
How will the tax cut affect the U.S. economy? What are the pros and cons?
Joel Friedman is a senior fellow at the Center on Budget and Policy Priorities. He has worked as the U.S. Treasury's resident budget advisor in South Africa and was the the Director of Budget Analysis for the Democratic Staff of the House Budget Committee. Friedman was also a financial economist in the Budget Review Division of OMB. He will be live online, Thursday, Feb. 8.
The transcript follows.
Editor's Note: Washingtonpost.com moderators retain editorial control over Live Online discussions and choose the most relevant questions for guests and hosts; guests and hosts can decline to answer questions.
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washingtonpost.com: Good afternoon Mr. Friedman and welcome. President Bush's tax proposal heads to Congress today? If it goes through, how do you believe it will affect the U.S. economy.
Joel Friedman: Hi. Thanks for having me today. There are at least two parts to the answer to this question: what's the impact of the President's plan in the short run, and what's the impact in the long run. Some have talked about the tax cut as necessary to address the recent slowdown in the economy, but most economists agree that it will have little if any impact in that regard. This is particularly true given that most of the proposed tax cuts are phased in slowly over the next several years. Even if the proposed rate reductions are made retroactive, an idea that the President appears to support, the tax cut would still have little impact on turning the economy around in the short run.
The bigger concern, however, is over the long run. Our estimates show that that the President's tax package, particularly if the rate reductions are accelerated, is larger than the realistically available non-Social Security surplus. By using up the available surplus, the tax cut not only leaves the country with less flexibility to address unmet and unanticipated needs over the next decade, but also leaves us in a weaker position to address the problem of the retiring baby boomer generation beyond the next decade.
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Laurel, Md.: Much has been made of the $1.6T estimated cost of Bush's planned tax cut over 10 years. But what will it cost in 2001?
Joel Friedman: Based on news reports, the President seems to be sending to Congress his campaign tax plan. That plan did not take effect until 2002, so there would be no impact in 2001. Because the plan is phased in, the majority of the cost is in the last half of the 10-year period. If the rate reductions are made retroactive, however, there would be a cost in 2001 -- probably about $90 billion.
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Washington, D.C.: I read an analysis by the Center on Budget and Policy Priorities, and it noted that families pay gobs of money in payroll taxes, which affects middle income workers more than higher wage earners: "The plan does not reduce taxes for everyone who pays taxes. Many low-income working families that do not owe income tax pay significant payroll taxes, even when the effects of the Earned Income Tax Credit are considered; these families are not aided by the plan."
Correct me if I'm wrong, but I would think that even the thought of cutting the payroll tax or altering its funding in anyway would have Democrats rioting, because the payroll tax funds Social Security. And isn't pretty logical that a family which is not required to pay any income tax would not benefit under an income tax cut because there is no payment to cut for them?
Joel Friedman: I agree with you that any proposal to cut the payroll tax would have "Democrats rioting," as well it should. Our analyses note the payroll taxes that low- and moderate-income workers pay to highlight that, even though they may pay little or no income taxes, they still pay taxes -- something that is often forgotten. Large percentage reductions in their income tax bill will do little to reduce their overall tax burden.
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Washington, D.C.: Bush has said that his plan would cut taxes by $1600 for the average family. How did the Bush Administration come up with that number?
Joel Friedman: I believe it is an average figure. But as a recent analysis by the Citizens for Tax Justice noted, 88 percent of all tax filers would not receive this "average" $1,600 tax cut.
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Washington, D.C.: You say that President Bush's proposal is for more than the "realistically available" surplus. How does your measure of "realistically available" differ from, say, the projection made by CBO?
Joel Friedman: CBO is reqiured to make certain assumptions when calculating its figures, and some of these are not particularly realistic. For instance, it assumes that a variety of popular tax provisions will expire even though they are routinely extended on a bipartisan basis. Similarly CBO assumes that discretionary spending (as opposed to entitlements like Social Security and Medicare) will only grow at the rate of inflation. Historically, it has grown faster than this. Making adjustments to take these factors into account, by our estimates, would reduce the available surplus by about $700 billion over the next 10 years.
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Arnold, Md.: On Tuesday, the General Accounting Office issued a report (to the Senate Budget Committee) saying the cost of the baby boom's retirement benefits will overwhelm projected budget surpluses. Has this report had any dampening effect, in Congress or the White House, on the push for deep tax cuts? Should it?
Joel Friedman: I think that it will strengthen the hand of those advocating a more cautious approach to using the entire surplus to pay for tax cuts. Unfortunately his statement did not receive the same type of coverage as Fed Chairman Greenspan's comments. Even though he also urged caution, the press emphasized his statements regarding tax cuts.
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Bowie, Md.: Does Bush's Tax plan include any Roth IRA changes such as raising the annual contribution amounts or the income eligibility limits?
Joel Friedman: It was not part of his tax package during the campaign, and as far as I know it has not been added.
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Washington, D.C.: I'm so glad to see a discussion on this topic. At first, I was thrilled by the idea of a so-called across-the-board tax cut, but when a friend and I calculated how much it would save us (both single, earning $40,000 and $30,000 respectively), we realized it would save each each less than $100 per year! It seems like if you're single without kids, and you're not making big bucks, the tax cut really won't do anything for you. Your thoughts?
Joel Friedman: The Bush plan certainly benefits the top of the income spectrum more than those with low and moderate incomes. The one percent of the population with the highest income would receive about 40 percent of the tax cut (even though they only pay about 20 percent of all federal taxes), while the bottom 80 percent of the population would receive only 29 percent.
Even many families with kids would not benefit from the Bush tax package. Our estimates show that about 12 million (or nearly one in three) families would not receive a tax cut. These families include 24 million children.
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Frederick, Md.: Would you expect the unchanged tax burden for the middle class ($12-45,000 married, 6K - 27K single) to be a rallying cry for Hill Democrats? What is Bush's rationale behind the percentage staying at 15%?
Joel Friedman: As far as I know, the Hill Democrats have not yet released an alternative tax plan. But when they do, I am certain that it will focus much more tax relief on low- and moderate-income working families than the Bush plan.
I assume that Bush did not touch the 15% bracket because it would be too expensive. Three-quarters of all taxpayers are in the 15% bracket. As an alternative, he carved out the new 10% bracket, which would apply to the first $6,000 for singles and $12,000 for couples. This limits the size of the rate cut for people in the 15% bracket to $300 for a single and $600 for couples.
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Joel Friedman: Thanks for the questions. Please check out the Center's website at www.cbpp.com for our analyses of the Bush tax plan. |
