Behind candidates' 'fuzzy math' on taxes

Some viewers of the presidential debates complain that too many incomprehensible numbers were tossed out.

But "you ain't seen nothin' yet," as the saying goes.

When top economic advisers of Vice President Al Gore and George W. Bush face off - as they have at several less prominent debates around the country - it sounds like a mathematician's meeting.

They come armed with handouts and slides of charts and tables outlining their candidate's tax cut and Social Security proposals in detail.

Their aim is to make the case, often in an academic setting, that their candidate's plans are sound and wise.

It all has a theoretical flavor to it. Especially if the White House and Congress are not under one party next year, as seems likely, no plan will sail through the legislature unscathed.

"You are going to have to compromise," admits Alan Blinder, an adviser to Mr. Gore and former Federal Reserve vice chairman. "But who is in the White House will matter."

Lawrence Lindsey, economic strategist for Mr. Bush, acknowledged the same factor at a recent Boston College breakfast debate with Professor Blinder. Mr. Lindsey, also a former Fed governor, argued that Bush would do a better job than Gore in working with the other party.

Here's a stab at sorting out the tax proposals - perhaps the starting point for negotiations:

Gore says 42.6 percent of the $1.32 trillion Bush tax cut would go to the richest 1 percent of taxpayers, those making more than $319,000 per year.

The Bush people say only 21 percent goes to the richest.

How come the difference?

Gore's percentage comes from Citizens for Tax Justice (CTJ), a liberal-leaning tax research group in Washington. Its numbers generally agree with Treasury tax-burden analyses.

CTJ includes not only the Bush income-tax-rate cuts, but also elimination of the estate tax. Another difference: CTJ analyzes the Bush plan - which phases in the tax cuts - as if fully implemented in 2010.

Bush economists extrapolated their 21 percent from a Joint Committee on Taxation analysis. It shows those making $200,000 or more paying $510 billion in federal taxes in 2005. This group, which represents the 2.4 percent richest taxpayers, would save $32.2 billion in taxes out of a total of $120 billion in tax cuts that year.

The calculation does not include estate-tax abolition. Nor is it for the year 2010 when the tax cuts are at their largest and fully in effect.

Should the calculations include the estate tax?

Democrats say yes.

Those leaving a taxable estate - less than 2 percent of all estates - already benefit from a major tax loophole. The value of their estate is advanced to the year of death. So various assets in an estate escape the capital-gains tax. It would be due Uncle Sam if the assets were sold a day before death or earlier.

But it is the heirs who pay the estate tax. And the bulk of estate-tax revenue comes from the richest 1 percent of heirs.

Blinder says the Bush plan is "extremely skewed to upper-income taxpayers."

Noting that the estate tax rises to a maximum 55 percent rate, Lindsey calls that "insane ... demoralizing ... and bad economic policy."

And he calls the Bush tax cuts "mildly progressive" - in other words, doing a bit more for middle-income and low-income taxpayers than the well-to-do.

This claim is based on a Joint Committee analysis finding that $200,000-plus taxpayers would pay 40.9 percent of all income taxes when the Bush plan was fully phased-in, more than the 39.1 percent now. The numbers for the $100,000 to $200,000 bracket would be 23.2 percent, up from the current 22.8 percent. Lower brackets would pay less of the total tax burden.

This analysis ignores the estate tax. By talking percentages, Bush also avoids speaking of the huge amounts in dollar terms saved by individual well-to-do taxpayers compared with the savings of individual lower-income taxpayers.

"Upper-income people like the Bush plan," says Blinder. "They aren't fools."

The Joint Committee study also notes that the effective average tax rate paid in all federal taxes (including the Social Security and Medicare payroll tax and excise taxes, for instance) on all income would be 27.1 percent in 2005 for those making more than $200,000 under the Bush plan. It is less than the 28.9 percent under current law. (Note that both figures are quite less than the 39.6 percent marginal tax rate the wealthy face.)

For comparison, the effective tax rate for 2005 for those in the $40,000 to $50,000 range would become 16.2 percent, instead of 17.3 percent today.

One element of the Bush plan its advocates don't talk about is that by 2010 some 13.6 million extra taxpayers would have to pay the "alternate minimum tax" - a tax device intended to make sure higher-income people don't escape paying a fair tax share by using tax-exempt income and large deductions. These new AMT payers would be prosperous, but mostly not super-rich.

The Gore tax plan, according to Blinder, "is extremely skewed to the middle class - and not by accident." He admits, though, that it adds to the complexity of the tax code through numerous tax credits and other devices.

Is either tax plan likely to be realized in full in legislation?

Almost certainly not.

But perhaps the explanation will make the campaign debate more understandable.

(c) Copyright 2000. The Christian Science Publishing Society