A phony argument on income taxes

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President Bush caused a stir in liberal circles when, earlier this month, he admitted that income inequality in the United States has been rising for 25 years – a trend starting before his White House years.

So what will he do about it?

According to Robert Greenstein, director of the Center on Budget and Policy Priorities, a nonpartisan Washington think tank, Mr. Bush will act by decisively widening the "yawning gap" between rich and poor. The president's budget for fiscal 2008 "puts extremely large tax cuts for the most affluent Americans ahead of the needs of low- and middle-income families as well as future generations," Mr. Greenstein says.

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People with incomes of more than $1 million would get tax cuts averaging $162,000 a year (in 2012 dollars) in perpetuity. The top 1 percent of households will receive more than $1 trillion in tax benefits over the next decade, if the Bush tax cuts are made permanent.

Asked about this charge on PBS's "The NewsHour With Jim Lehrer" last week, Budget Director Rob Portman said that the tax burden borne by the top 10 percent of taxpayers has paradoxically risen from about 64 percent to 66 percent as a result of the tax cuts passed by a Republican Congress.

Apparently, a staffer at the Office of Management and Budget indicated Mr. Portman was referring to a Treasury study projecting the share of individual federal income tax revenues paid by the richest 10 percent in 2005 to be 65.8 percent, compared with 63.6 percent without the Bush tax breaks. Their share of gross income was calculated at 42.1 percent.

It is true that the well-to-do pay a big chunk of the individual income tax burden and that the federal income tax is progressive – the rich pay more of their income in taxes because they can afford it more easily than the middle class can. The poor pay scant income taxes.

But the fact that the share paid by the rich is rising "is a bad thing, not a good thing," says Robert McIntyre, director of Citizens for Tax Justice, a liberal Washington think tank.

That's because it reflects the increasing share of total income flowing to the prosperous, and not that they are being harder hit proportionately by taxes. In other words, if you have more of the money, you pay more of the taxes. To take the argument to an extreme, if one person got all the income, he or she would pay all the income taxes, too.

So in Mr. McIntyre's view, Portman's argument is phony, a statistical trick to obscure issues arising from the concentration of income and wealth at the top.

Bush told Wall Street: "[T]he question is whether we respond to the income inequality we see with policies that help lift people up, or tear others down."

The president was probably suggesting that his tax cuts, which he wants to extend, will so stimulate individual and business enterprise that all Americans will become more prosperous, not just the well-to-do.

But many liberal Democrats are skeptical. They see the workings of today's capitalism as imperfect, even stacked in favor of the already rich. So they will press for measures to remedy what they see as the inequities of free enterprise – for example, they want to boost the federal minimum wage, toughen US trade policy to counter the impact of globalization on lower-income people, and make it easier for trade unions to organize and provide a stronger "countervailing power" to the clout of businesses and corporations.

In a speech last week, Federal Reserve Chairman Ben Bernanke said disparities in education and training were "likely the single greatest source of the long-term increase in inequality." So he advocated greater national investment in education and training to help reduce inequality.

That probably gets an "amen" from both liberals and conservatives.

But the Bush budget, which Greenstein says would "weaken" child care, food assistance, and other federal support for middle- and lower-income Americans, will face a rough reception in the Democratic-controlled Congress.

With the rising cost of the Iraq and Afghanistan conflicts, however, Democrats will find it difficult to find the money to expand social-welfare measures without enlarging the budget deficit.

To keep budget costs down in a bookkeeping sense, most of the Bush tax cuts were given expiry dates – but dates too late to help this Congress. Absent congressional renewal, the tax code reverts essentially to its pre-2001 provisions by the start of 2011. That would lift annual tax revenues by $236 billion, says the Congressional Budget Office.

In the meantime, Democrats hope that measures to close what is politely called the "tax gap" will raise tens of billions in revenues. The Internal Revenue Service estimates that Americans pay $300 billion less than they owe in taxes. In testimony to Congress on Jan. 23, McIntyre of Citizens for Tax Justice listed a host of measures to shrink the tax gap. If such measures pass the legislature, Bush "might find it difficult to defend tax cheating" and not veto them, he says.

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