Sunday, August 01, 2004

Election 2004: Issue #3- Economics (Income Tax Policy)

Income tax policy is an area where Kerry and Bush have substantive differences. Bush had this to say at a stop in Missouri, fresh on the campaign trail after Kerry’s acceptance speech at the Democratic National Convention:

"They're going to raise your taxes, and we're not."

In one way this is a fair characterization of the differences between a potential Kerry administration and a second Bush term, but it is also somewhat disingenuous. Kerry has made it clear on numerous occasions, including during his speech at the Boston Convention Center, that he plans to roll back Bush’s tax cuts only for those making more than $200,000 a year, which is only 2% of the population. Bush wants the general public to think that a Kerry administration would raise everyone’s taxes, but this is not true. Nonetheless, Kerry would raise taxes on the wealthiest Americans and there are legitimate reasons to both support or oppose such a move.

Before analyzing the specifics of Bush and Kerry’s income tax policy, it is important to note that although Kerry would raise taxes for the wealthiest Americans, the tax burden for the rich has decreased dramatically due to substantial decreases in capital gains and corporate dividend taxes. Kerry doesn’t plan to repeal these cuts, and under his administration, the wealthiest Americans would still enjoy much lower tax rates overall than in the years preceding Bush’s first term. Second, it is important to remember that Bush’s tax cuts were initiated during a time of economic surplus less than four years ago. Kerry’s proposed repeal of the tax cuts for the top earners should not be viewed the same as if he was raising tax rates that had been steady for decades. As far as the top earners are concerned, the effect may be the same, but Kerry’s position is that the surplus was used to disproportionately benefit the wealthy and that this should be changed.

This brings us to the essential issue involved in any discussion of tax policy: income redistribution. Kerry proposes to use the hundreds of billions of dollars in additional tax revenue from the wealthiest Americans to pay for expansions in health care and education, and to cut the deficit in half during his term. Kerry’s health care plan calls for insuring the majority of the uninsured and allowing the government to insure those with the most severe risks, which will decrease premiums for the majority of Americans who already have health care, but have experienced rapidly rising costs. His education proposals call for large tax credits for college tuition expenses and increased funding for pre-school programs, such as Head Start. Many critics have pointed out that his numbers don’t add up, and that the additional revenue from the tax increases would only cover his additional spending programs, leaving no room for deficit reduction. My hunch is that if Kerry were to win, he would be forced to scale down his health care proposals in order to leave some revenue for reducing the deficit. Nonetheless, a Kerry presidency would lead to a significant redistribution of wealth from the highest earners to the poor and middle class, likely accompanied by a significant decrease in the national debt as well.

If Bush is elected to a second term he pledges to make all of his tax cuts permanent. He makes his case for this policy based on 3 reasons: a) taxes are simply bad and people should be able to keep more of their money, b) tax cuts provide an economic stimulus for the long-run health of the economy, and c) that the government mismanages tax revenue. The first reason is primarily a value judgment. Under Bush, the wealthiest would keep more of their earned income, and whether one believes this is right or wrong depends largely on one’s views about inequality and fairness. The rich currently pay more taxes in absolute terms, but they pay only a slightly greater percentage relative to their total income than the rest of society. Regarding the tax cuts as economic stimulus, there are few respected economists who believe that tax cuts for the very wealthy provide significant stimulus, and the stimulus from increased education and health spending under Kerry would likely be greater in both the short and long-term. The question as to whether the government is a bad manager of the public’s money is a more difficult issue to address. There is no doubt that many areas of government are exceedingly wasteful and corrupt (I refuse to use a more diplomatic euphemism); notably the Pentagon and the system of corporate subsidies, both of which have seen their budgets expand vastly under Bush. Looking specifically at Kerry’s proposed spending increases, the government has tremendous bargaining power that could be used to minimize health care costs (it is a little known fact that Medicare has one of the lowest bureaucratic overheads of any health care provider in the country). Head Start programs are widely praised by both political parties, and tax credits for education would only channel money from the government to the already existing university system, which is one of the best in the world. Therefore, under Kerry’s tax policy, although government spending no doubt would increase, and bureaucratic inefficiencies might result, overall, his spending is focused on areas where the government has a record of relative success. Nonetheless, those who are opposed to any increases in government programs will find much to dislike about Kerry’s proposals.

When presenting the budget outlook for a potential Bush second term, so far, the Administration has provided deficit projections that are much lower than anyone believes, based mostly on overly-optimistic revenue projections and a host of budget cuts that leaders from neither party believe have any hope of being enacted. If Bush wins a second term, it is unclear what he will do to reduce the deficit. Critics on the Left believe that his policies are part of a larger plan to "starve" the government "beast," by depriving it of so much revenue that massive cuts in entitlement programs are brought to the table. This doesn’t seem plausible since Bush recently signed the largest expansion of the entitlement programs (The Medicare Prescription Drug Plan) since FDR, with a 10-year cost estimated between $500 billion and $1 trillion. In a second term, however, he will be faced with mounting record deficits, which will seriously threaten the health of the economy (due to the upward pressure on interest rates), and he will face significant pressure to act. What he would do remains a mystery, and would likely be a defining element of his presidency.

In summary, on income tax policy, Kerry and Bush offer two very different proposals. Kerry wants to redistribute income from the top 2% of the population to the lower and middle classes and reduce the deficit. Bush wants to maintain all of the tax cuts of the past four years.

If you believe that the 2000 surplus was distributed unequally, and that the rich should help subsidize benefits for the poor and middle class in the areas of health care and education, then Kerry is your man.

If you believe that taxes are inherently bad and that the rich shouldn’t be forced to pay for any additional expenditures on health care or education, then Bush is your man.

If you believe (as you should) that deficits do matter, and matter a lot, then Kerry’s income tax policy holds promise for reducing the deficit, since it would increase the government’s revenue.

It is unclear how Bush would square his resolve to keep all of his tax cuts and reduce the deficit at the same time. Hopefully, in the coming months we will learn specifically what he intends to do, but as of yet, Bush has not offered any reasonable or realistic proposals regarding this matter.



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