During thе 1990s, bеcausе thе fеdеral budgеt dеficit cоntinuеd tо bе a prоblеm fоr thе Clintоn Administratiоn, many traditiоnally sacrоsanct fеdеral prоgrams wеrе put undеr thе micrоscоpе. Hоwеvеr, thе currеnt administratiоn and thеir figurеhеad, Prеsidеnt Gеоrgе W. Bush, havе tо undеrgо an еntirеly diffеrеnt kind оf scrutiny. Prеsеntly, facеd with a fеdеral budgеt surplus prоvidеd by thеir prеdеcеssоrs, thе Bush Administratiоn is prоpоsing tо fund a tax cut, which has dеmоcrats up in arms. Whilе Prеsidеnt Bush triеs tо gain bi-partisan suppоrt оn Capitоl Hill fоr his prоpоsеd tax cut, hе cоntinuеs tо fоrmulatе his agеnda by vоicing his administratiоn’s viеw in a public fоrum.
The recent nature of the tax cut has also had an effect on the conflicting views, since all the sources are mere predictions and therefore cannot base their analyses on concrete information and experience. These differing economic forecasts will be identified and explained in order to make some sense out of the effects of the tax cut. However, the Bush tax relief plan must first be described and enumerated.
The Bush tax plan, although the motive behind it remains sketchy at best, reduces the amount of money every American has to pay to the federal government from their income. Although the tax cut seems broad and encompassing, federal income tax is only part of what every worker loses off his paycheck. But more on that later. According to the official Bush tax relief website, the typical household of four will be able to save at least $1,600 of their own money after the tax cut goes into effect. These savings are derived from a plan that can be divided into six components: altering the marginal rate structure, increasing the child tax credit amount, reducing the marriage penalty, eliminated the death tax, expanding charity tax refunds and providing a permanent tax credit for companies for research and development.
The first part of the plan is to “simplify” the marginal tax rate structure by reducing the number of brackets from 5 to 4. The original brackets were at 15, 28, 31 36, and 39.6 percent as compared to the new tax brackets are established as 10, 15, 25 and 33. This reduction and reorganization results in an overall tax reduction for every taxpayer in America. The new marginal tax rates are designed to supply incentive to the common worker and reduce the diminishing marginal benefit of working. For example, if one was earning a certain amount of money, but would be taxed more on additional wages due to increases in productivity or time at work, then that person would not work in order to avoid paying the higher tax rate that the new earnings put him in. If these employees do not work, then productivity as a whole economy will decrease as a result of non-incentive marginal tax rates.
Bush has also altered the tax system to accommodate for the family structure, as the next two components illustrate. First, the tax credit on children is doubled to $1,000 per child, to update the growing cost of sustaining raising a child in today’s society. Also, the third component of the tax plan reduces the marriage penalty, which occurs when spouses file a joint return by reinstating the 10 percent reduction. These benefits are targeted at one-parent households that are struggling to make ends meet by attempting to work as well as raise children. The fourth component of the plan is to gradually reduce the tax on inherited estates until 2010 when it will be completely eliminated. This plan will increase the amount of money that children receive from their relatives and friends.
Bush’s claims are that the fact that estates are taxed again upon inheritance is unfair and that it discourages savings and private investment. The fifth part of the tax cut plan is the expanding of the realm of charitable deductions. Prior to the tax cut, all donations and charities needed to be itemized in order to receive a refund from the IRS. Now even un-itemized contributions to charity will be acceptable for refund. Bush estimates that 70 percent of charitable donations are those, which are un-itemized, and that if these kinds of contributions are offered tax deductions, then philanthropy as a whole will increase. The last part of the reductions is targeted at businesses and corporations to stimulate growth and innovation.
This tax credit program allows companies to receive credit based on their expenditures for research and development. This will be reinstated permanently, as gaps in this reduction, originated in 1981 with the Reagan tax cuts, failed to benefit corporations consistently. From an economic point of view, taxes as a whole put a negative influence on the economy. However, taxes are inevitable because citizens expect the government to provide various goods and services that are for public use. Government expenditures for the overall good of the people must come at a cost to the people they benefit; they are covered by the taxes paid on goods and incomes.
The negative consequence of taxes is revealed by the deadweight losses that create an inefficient marketplace. A deadweight loss is the fall in total surplus that results from a market distortion, such as tax. A deadweight loss can be more clearly understood if examined in the supply and demand model of any market. The tax can be measured as a rectangle with a certain height from the price axis, wedged between the diagonals of supply and demand. The rectangle represents the tax revenue while the triangle, which is created by the rectangle’s intersection of the diagonals, is equal to the deadweight loss. With government intervention, the tax, the market can no longer allocate resources efficiently and resources are unused, accounting for the fall in total surplus. This is a direct result of the tax distorting consumer incentives and disrupting the equilibrium. Producers sell less and consumers purchase less.
This deadweight loss is to the economy as a whole and cannot be redeemed. Furthermore, the deadweight loss is directly proportionally to the amount of taxes that are imposed. (Other determinants change this, such as the elasticity of the market) This may have been one of the many motives behind the Bush tax cut; although it is highly unlikely. Conservatives often use this argument to justify why government should stay out of the public’s business as much as possible. An obvious reason for the cut is a political one, based on the fact that people will vote for someone who gives them money back. Bush has claimed that the surplus should be given back to the people who created it by paying high taxes. So the tax would be like a refund for someone who was overcharged on an item. Deducing from this, if people deserve a refund when there is a surplus, what of the many times that the economy has run deficits? Do people need an increase every time the government is in debt?
A more economic reason for the Bush tax plan is the belief that by decreasing tax rates, the revenue will actually increase. This was the major motive behind the Reagan tax cuts in 1981, which, unfortunately, failed. This theory, works, on paper, however. Called the Laffer curve, this theory insists that when people are taxed less, there is a general increase in productivity and people actually pay more in taxes. This works, again, on paper, because it claims that the tax discourages people to work by decreasing incentives. If your hard work is going to go to the government, why not spend your time enjoying yourself, and gain that value instead of working harder to pay high taxes. The Laffer curve states that lower taxes will increase people’s desire to work and the economy as a whole will become more productive and people will end up paying more money because they are paying a lot at a smaller rate, rather than a little on a high rate. The difficult part of this whole tax situation, is whether or not it is going to work. For it to work, there must be enough money for everybody.
Currently the debate is that conservatives and liberals have different kinds of numbers to represent different kinds of surpluses. Paul Krugman, an influential economist and lobbyist shows how Bush’s new accounting methods distort the common view of the social security surpluses. He points out that figures “migrate on and off the balance sheet” in order to serve the president’s current need. This is backed by the belief by most that the surplus that Bush is working with is 5.6 trillion dollars. However, this is total budget of the government; tax revenue subtracted from government expenditures. The budget Bush promised not to raid to support his tax cut was social security, which runs an estimated 838 billion dollar surplus. It is important here to examine the numbers. This figure was derived by the Citizens for Tax Justice, in February of 2000. This figure did not include the economic slowdown as of late nor did it include a possible increase in expenditures in other areas of the government spending. Bush has already proposed an increase of at least 25.7 million dollars (Shostak TNA). By combining the total budget surplus into one lump sum, he hides the fact that he needs to use the social security funds to support his tax cut. Also, considering the events of September 11, the country will be spending more on defense and corporate bail-outs. When
Bush proposed the plan in 1999, it would have been more ideal, with the economy rising and unemployment low. Now the economy is in recession and he wants to propose an identical plan for the country? Now, conservatives claim that this figure does not include the extra taxes that the government will receive on the created by lower taxes increasing the economic productivity and employment. This is the Laffer curve argument again. There is, however, a serious problem with it.
Bush’s tax system was not designed as a fiscal measure to combat the weak economy that will further detriment the ability to raise new revenues. The tax does not put the amount of money needed into the hands of those who will spend it, the lower-middle class and working poor. These people need to spend what they make for subsistence alone. The wealthy, who are getting the most benefit from the tax cut money back (says Bush, because they pay the most) will hold the money and not spend it. The lowering of the top tax bracket by 6.6 percent will give the wealthiest 1 percent of taxpayers 37.6 percent of the revenue. This, along with the abolishment of the death estate tax, will allow the rich to become rich and the poor to fall by the wayside.
Reducing high marginal tax rates will boost incentives to work harder and invest in things with a positive economic return. Probably most importantly, reducing dividend tax rates will boost the stock market, which will then stimulate both consumer and capital spending. The little people and small businesses are going to get the help they need. Tax cuts include the reduced taxes for married couples, the expansion of the lowest tax bracket, and the measures that will prevent more taxpayers from paying the alternative minimum tax.
Many of the tax breaks earmarked for individuals will significantly impact the personal tax bills of specialty foods and house wares business owners as well. On the business front, two new temporary tax breaks were designed to encourage investment in the specialty foods and house wares business. Small businesses can expense up to $100,000 in new equipment investments through 2005, as well as depreciate more of their assets through 2004. Today, however, is the time to let this new tax law help stimulate the economy of you and your business. 10 Reduced tax on dividend income will benefit both sides of the fence.
Another boost could come from the $350 billion federal tax cut that President George Bush signed into law on May 28. The measure reduces the tax on dividend income to 15 percent from ordinary income tax rates as high as 35 percent. Companies such as Bank of America and Microsoft Corp. already are responding to these developments by hiking or instituting dividends on their common shares. Issuers are expected to take the next step in tapping renewed demand for dividends by selling new preferred stock and retiring debt, which would benefit both themselves and investors. Preferred buyers get fixed dividends that typically can’t be reduced by the company, are higher than common dividends and are paid first if earnings are insufficient to cover both. More broadly, preferred holders can reap equity like capital gains and enjoy bond like downside protection, with about half the tax burden. 11 US Tank Truck carriers among 23 million small businesses will benefit. Charles (E. Wilson has spent 20 years covering the tank truck, tank container, and storage terminal industries throughout North, South, and Central America.)
A review of this year’s Gross Revenue Report shows that up to half of US tank truck carriers could reap hefty benefits from the tax cut legislation signed into law by President George W Bush on May 28. These carriers are defined as small businesses, according to Small Business Administration (SBA) criteria. Also meeting the small business definition are many of the wash racks, tank repair shops, owner-operators, and others that support the tank truck industry. These companies are among 23 million small businesses eligible for tax cuts under the Jobs and Growth Tax Relief Reconciliation Act. Most importantly, the act enables small businesses to depreciate $100,000 in new capital expenditures annually through 2005. SBA has estimated that more than 500,000 companies will directly benefit from this provision. Moreover, the threshold for phasing out expensing is raised to $400,000 – twice the old amount.
Although the marginal rate cuts are progressive, they do not follow utilitarian principle because the structure of the American society is such that the working class will continually be overlooked and screwed over. And Mr. Bush certainly is not helping matters by overlooking the fact that when social security starts becoming a permanent deficit in 2015 because of the massive retiree population and the shortage of people to support them, as well as the fact that they will be living longer, the government will need a massive amount of money to save the program. Instead of just increasing taxes and decreasing benefits, the government will likely go to a privatized system, where instead of payroll tax, the employee will contribute to his own subsidized account. This reform is estimated to require billions of dollars to work. Despite the apparent surplus of funds from the government, it would not be prudent for the tax cut to use 1.6 trillion dollars of it, especially considering that it will probably not stimulate the economy; George W. Bush has already figured this out since he has tried to introduce a corporate stimulus package. Also, the fact that he promised not to raid the already constricting social security surplus and then tried to hide it by encompassing the total surplus instead of individualizing it. Although many numbers are unclear and prediction can not be accurate, it is clear that the tax cut plan is not suited for the country at the current time, namely because of the current economic slowdown and the precarious position of social security.
- Bernstein, Jared. 1998. QWES (Quarterly Wage and Employment Series). Washington, D.C.: Economic Policy Institute, Vol. 1, No. 1.
- Mishel, Lawrence, Jared Bernstein, and John Schmitt. 1999. The State of Working America 1998-99. Economic Policy Institute Series. Ithaca, N.Y.: Cornell University Press.
- Jaeger, David A. 1997. “Reconciling the Old and New Census Bureau Education Questions: Recommendations for Researchers.” Journal of Business and Economic Statistics, Vol. 15, No. 3.
- Year-by-Year Analysis of the Bush Tax Cuts. Available at: http://www.ctj.org/html/gwb0602.htm
- “The Bush Tax: How Much Is It Costing You?”. Available at: http://www.bushtax.com/