The Democrats Go Flat Tax
The Democrats want to give Bill Gates a three hundred dollars tax rebate. Why? They're hoping he'll run out and spend it and that will help stimulate the sluggish economy. This is not the entirety of their tax plan, but the party that (for the most part) argues against Bush's super-sized tax breaks for the rich has embraced a flat-tax idea that draws no distinction between those in need and those in caviar.
To be fair, George W. Bush started the sloppy thinking about tax cuts. At the beginning of his presidential campaign, when the country was experiencing rip-roaring economic growth, he declared the United States needed a large across-the-board $1.6 trillion tax cut to insure good times ahead. Once he became president, when the economy was slowing, he declared the United States needed a large across-the-board $1.6 trillion tax cut to insure good times ahead. For Bush, tax cuts that zap $800 billion or more to the top 1 percent are the right remedy in rain or shine -- whether or not the projected budget surpluses materialize. And when the Dow Jones took a dive, Bush pitched his tax plan as an appropriate boost for a sputtering economy. He used -- exploited? -- the bad news to build support for his tax proposal.
That gave the Democrats an opening, for Bush's tax cuts were, as they say in the tax-writing committees, back-loaded. The biggest cuts kick in years down the road -- when those surpluses (and, Bush, too) may or may not be there. Under the Bush plan, about $20 billion in tax cuts would go into action this year. That would hardly provide a nudge for a $10 trillion economy.
But what were the Dems to do? Despite the manner in which Bush obtained the keys to the White House, he did seem in the early weeks of his presidency to have gathered momentum. His poll numbers were decent. He was wining and dining his foes and coming across as a good egg. He delivered a well-received speech before Congress. And he effectively mouthed the right platitudes about bipartisanship, though he stuck to his conservative positions.
There were moderate Republicans in the Senate who voiced reluctance about his tax cuts (too tilted to the wealthy, too liable to bust the budget), but it did appear Bush had a shot at rolling the Democrats on tax cuts. The Democrats were negotiating on the size of the tax cuts, proposing $900 billion or so in cuts and, thus, accepting the notion that a good portion of the projected surpluses ought to be reserved for tax cuts rather than other matters. Bush was controlling the agenda.
Then the Democrats got smart -- sort of. They realized Bush was pulling a fast one by suggesting his back-loaded tax cuts could rev up the economy in the short term, and they decided to outbid him. They proposed tapping this year's budget surplus to pump $60 billion in tax rebates into the economy. Trying to hijack the Bush rhetoric that "everybody deserves tax relief," they called for cutting $300 checks to all taxpayers. A couple would get $600. (In the House of Representatives, the Progressive Caucus, which first suggested this sort of course, advocated $300 per person; a family of four would receive $1200.)
And the Democrats craftily snatched one element of the Bush proposal by urging that the bottom income tax rate of 15 percent be dropped to 10 percent right away -- a move that would benefit low-income Americans more than well-heeled citizens. As for the other rate cuts -- the heart of Bush's plan -- well they could be discussed later.
To their credit, the Democrats were able to change the discourse. Bush was placed on the defensive and forced to argue that an immediate tax rebate is fine as long as it does not get in the way of his long-term tax cuts. His phony bipartisanship was exposed; he could not accept the Democrats' deal for fear of undercutting his own plan. With the tax rebate notion, the Democrats clawed their way back into the game.
But this has come at a cost of credibility. First, is it reasonable for Democrats to assert a $60 billion stimulus will have a significant effect on the economy? The Economic Policy Institute, a liberal-leaning outfit, released a report in February noting that a $140 billion shot-in-the-arm would increase consumer spending by about 2 percent, and that would stimulate the economy. (To do so, EPI suggested sending $500 tax-free checks to every US resident.) The EPI paper also noted that $90 billion -- a $300 check to every resident -- would boost consumption by 1.3 percent, a noticeable amount. (This is what the House Progressive Caucus has urged.)
Yet leading Democratic initiatives -- such as one being pushed by Senator Joe Lieberman -- have called for a smaller stimulus. A $60 billion rebate (refunds to taxpayers, not residents) would increase consumer spending less than 1 percent. That's not likely to make much of a difference.
More importantly, let's return to Bill Gates. (Boy, does he get picked on. A side note: his father is part of a coalition of rich folks who oppose Bush's effort to repeal the estate tax.) If the goal is to to bolster consumer spending in order to pump up the economy, why send checks to gazillionnaires or people making over $100,000 a year? Will the receipt of this money prompt them to rush out to buy a new DVD player? Wouldn't it make more sense to dispatch all the stimulus to those who truly need it? Limit it to the under-$50,000 crowd, say. Or pick another cut-off point.
Indeed, the tax-rebates-for-all approach is much more progressive than the Bush plan. With a one-size rebate, the well-to-do only pocket a few hundred dollars, rather than thousands of dollars, and low- and middle-income Americans score more than they would with Bush's tax cuts.
But in an effort to steal Bush's thunder, the Democrats are validating his contention that tax "relief" should go to all, even those who will have no trouble surviving a downturn. The incomes of richest one percent have risen by 114 percent in the past fifteen years. Why do they need _any_ "relief"? And why spend money on checks to millionaires, when that money could be used to fund drug treatment, Head Start, or better food and environmental monitoring?
Democrats argue this is the price to be paid for outfoxing Bush. As one progressive Democratic strategist says, "In a perfect world...we should only give the tax rebate to those who need it. The problem was, and continues to be, that we need a counter to [Bush's] across-the-board' mantra....You have to take into account the political realities of trying to go up against a president who is using the full force of his bully pulpit."
That may be true. Yet there is a risk to seconding Bush's idea that the rich, like the rest, deserve "relief." Though the tax-cut battle is far from over, the Democrats, with their stimulus-now plan, may outmaneuver Bush in this round.
Nevertheless, Bush still is set on redefining the budget debate with his contention that so-called surpluses should be returned to the people (in reality, mostly rich people) and not used for social initiatives. This is the essence of Bushonomics. The Democrats ought to be careful that they don't buttress Bush's high concept with their advocacy of surplus-funded rebates for all. If we have rebates for all, why not rate-cuts for all?
In a recent speech, Jeff Faux, the president of the Economic Policy Institute, sounded what ought to be the call of the opposition: "Today, we have some 75 million Americans with major health care insurance risks -- 45 million without health care insurance and another 30 with health insurance that is not worth much....is this the kind of America we want? Let us get our language straight. Tell me we have a surplus -- something left over -- after we have provided every American with access to affordable health care. After we have made sure that very school child has access to computers, to textbooks and to world-class teachers. After we have drug treatment centers [for] all that need them, cities that are not strangling in traffic, safe day care for every working parent, and clear air and water for the next generation." Once all that is accomplished, perhaps there will be money for Bill Gates.