17 Mar 2004 Economic Policy: Are Tax Cuts for the Rich Bush’s Top Priority?

The Left Says:

“Tax cuts for the wealthy come first — before jobs, before schools, before health care, before poverty, before the war on Iraq, before dealing with the deficits.”

Source: Jesse Jackson, “Bush Cuts Rich In, Leaves Rest Out,” Chicago Sun Times, February 3, 2004

What Conservatives Think:

Who needs a job more, a rich man or a poor man?

The poor man, of course.

President Bush realizes what many on the left apparently don’t: Spur the economy through tax cuts and America’s working families will benefit most. But the benefits of tax cuts aren’t all indirect: Lower- and middle-income Americans benefit directly as well.

The most recent federal tax cuts (the Jobs and Growth Tax Relief Reconciliation Act of 2003, signed into law by President Bush on May 28, 2003) increased the child tax credit and expanded marriage penalty relief, among other provisions, while dramatically reducing taxes on capital investment for business.

Specifically, the legislation increased the child tax credit from $600 to $1,000 per child in 2003 and 2004; increased the alternative minimum tax exemption for married taxpayers filing joint returns and surviving spouses from $49,000 to $58,000 and for unmarried taxpayers from $35,750 to $40,250; and increased the taxable income levels for the 10-percent tax bracket for single individuals from $6,000 to $7,000, and for married taxpayers filing joint returns from $12,000 to $14,000, among other reductions.1

According to the President, the legislation provided “substantial tax relief to 136 million American taxpayers.”

Said Bush when he signed the bill: “This combination of income tax rate reductions, a higher child credit and a reduction in the marriage penalty will make a difference for families in every part of this country. A family of four with a total income of $75,000 will receive a 19 percent reduction in federal income taxes, saving $1,122 per year, per family. A family of four with an income of $40,000 will see their income taxes drop from $1,178 to $45, a 96 percent tax cut. And under this new law, 3 million individuals and families will have their federal income tax liability completely eliminated. Altogether, 34 million families with children, including 6 million single moms, will receive an average tax cut of $1,549 per year.”2

Regarding the impact of the business tax reduction, Rea S. Hederman, Jr. later reported for the Heritage Foundation: “Advocates of [reducing taxes on business capital investment] argued at the time that passing the President’s bill would significantly boost business investment and raise the economy’s overall growth rate… Did the Act produce these investment results? The answer appears to be yes. Non-residential fixed investment responded strongly to the reductions in taxation. Business investment increased by 7 percent in the second quarter of 2003 and 12.8 percent and 6.9 percent, respectively, in the third and fourth quarters. This reversed the trend of the earlier three quarters when investment declined by 1.1 percent, 0.1 percent, and 0.6 percent, respectively.”3

Bush’s 2001 tax relief program (approved by Congress as the Assessing the Economic Growth and Tax Relief Reconciliation Act of 2001) was targeted toward the middle class, but also benefited the poor. The package included across-the-board tax cuts for every income class, coupled with increases in the per-child tax credit, marriage penalty relief, increases in the caps for IRA contributions, death tax reductions, reductions in the number of Americans qualifying for the alternative minimum tax, and increases in the caps on education savings accounts.4

Because of the 2001 and 2003 tax cuts, 4 million people on the lower end of the income spectrum no longer pay any income taxes and a single parent of two making $20,000 a year now has $750 a year more to spend.5

Tax cuts, therefore, were not designed to benefit the wealthy exclusively, nor have they.

Liberal critics stand on equally weak ground when they claim Bush has failed to spend money on social problems, including health care and education. Overall spending is up nearly 16 percent since Bush took office. During his first three years, Bush increased outlays for the Department of Education by 60 percent, for Health and Human services by 21.6 percent, for Housing and Urban Development by 6 percent, for Veterans Affairs by 29.4 percent, for the Department of the Interior by 23.4 percent, for the Department of Labor by 56 percent, for Agriculture, by 8.5 percent, for Defense, 27.6 percent.6 Federal spending increased from 18.4 percent of GDP in 2000 to over 20 percent of GDP in 2004. Spending for non-defense programs now equals a whopping 16 percent of GDP.7

Bush’s “No Child Left Behind” education bill was the biggest education spending bill in history, as his farm bill was for agriculture. Bush also shoehorned through Congress a massive expansion of Medicare, including a prescription drug benefit long sought by liberals, that is expected to cost taxpayers an additional $535 billion over ten years.

Jesse Jackson may not like it that 136 million Americans received tax relief from President Bush and the Congress over the last three years, but he can’t reasonably complain that Bush is underspending on social concerns. Quite the reverse.

Sources:

(1) “Jobs & Growth Tax Relief Reconciliation Act of 2003,” Internal Revenue Service, June 20, 2003, http://www.irs.gov/businesses/small/article/0,,id=110431,00.html

(2) “Remarks by the President in signing the Jobs & Growth Tax Relief Reconciliation Act of 2003,” The White House, May 28, 2003, at http://www.whitehouse.gov/news/releases/2003/05/20030528-9.html

(3) Rea S. Hederman, Jr., “Tax Cuts Boost Business Investment,” Heritage Foundation WebMemo #412, February 3, 2004, at http://www.heritage.org/Research/Taxes/wm412.cfm

(4) For more details on the provisions of the 2001 tax relief plan as approved by Congress, see: The Heritage Foundation, “Assessing the Economic Growth and Tax Relief Reconciliation Act of 2001,” WebMemo #TaxTable1, June 1, 2001, at http://www.heritage.org/Research/Taxes/taxcuttable.cfm

(5) Stephen Dinan, “Bush’s Tax Cuts Add Up to Zero,” Washington Times, June 19, 2003, at http://www.washtimes.com/national/20030619-120558-9253r.htm

(6) Veronique de Rugy and Tad DeHaven, “On Spending, Bush is No Reagan,” Tax & Budget Bulletin #16, Cato Institute, August 2003

(7) Daniel J. Mitchell, Ph.D., “Spending Growth — Not Tax Cuts — Is the Reason for Fiscal Imbalance,” Executive Memorandum #913, Heritage Foundation, February 12, 2004, at http://www.heritage.org/Research/Taxes/em913.cfm