US administration alters its tax-cut pitch

Saturday was "Tax Freedom Day." Americans had to work from Jan. 1 to April 19 just to pay their 2003 taxes due to all levels of government - federal, state, local. At least that's what the conservative Tax Foundation in Washington calculates.

Middle-income Americans, getting this reading from the foundation's "tax barometer" - and perhaps having just sent a check to the Internal Revenue Service - may see themselves as terribly burdened by taxes.

But it's really not that bad.

For most Americans, the foundation's number is "a substantial exaggeration," says Isaac Shapiro, an economist at the liberal Center on Budget and Policy Priorities (CBPP) in Washington.

In fact, the federal-income-tax burden for a median-income family of four is at its lowest level since 1966, he says. The foundation's estimate in this regard is too high by about 28 percent. The overall federal-tax rate for the middle fifth of taxpayers is at its lowest level on record, with data going back to 1979.

It's notable that President Bush and administration officials, currently campaigning for a second large tax cut, aren't emphasizing the heaviness of the tax load. They instead talk about how a tax cut would stimulate the economy.

Even the Tax Foundation sees the tax burden becoming "lighter" with the tax acts of 2001 and 2002. In 2000, it took 120 days to earn enough to pay all taxes. This year it takes 109 days.

For administration officials to sell a tax cut on grounds of a severe tax burden, when taxes as a proportion of total income are already declining, would "undercut their case at a time of war, at a time of growing budget deficits, at a time of other demands on government," says Mr. Shapiro.

Victory in Iraq has enhanced President Bush's popularity. Still, his tax-cut proposal gets a much lower rating in polls than does the president himself.

In its calculation, the Tax Foundation estimates the entire tax burden as a percentage of all income. It comes up with an average for all taxpayers.

This technique has a statistical problem. Because the federal tax system taxes the rich more than the poor, and because higher-income taxpayers have been receiving a larger proportion of total US income in the past decade or so, this "inflates" the amount paid by middle-income taxpayers.

The foundation finds that federal taxes on average will equal 20.3 percent of income this year. Yet the Joint Committee on Taxation of Congress estimates middle-income families will pay only 14.8 percent.

Federal Reserve Chairman Alan Greenspan indirectly criticized the foundation's methodology in a congressional hearing last year. "You can't use" this measure, he said, because the tax burden includes taxes on capital gains, but the income measure doesn't include the capital gains themselves.

Last week, newspaper headlines noted that President Bush, facing stiff opposition from a few moderate Republican senators, would compromise and accept a smaller tax cut than the one he proposed three months ago.

To Harald Malmgren, a veteran economic consultant in Washington, the "compromise" was the partly successful outcome of a White House political tactic. Bush proposed a "big" $726 billion package of tax cuts over 10 years that could be passed easily by the Republican majority in the House. He assumed the Senate would approve a counterproposal of about $350 billion. Then a compromise of more than $350 billion would be achieved in House-Senate bargaining.

That's what happened. House-Senate negotiators agreed on a budget resolution setting a maximum of $550 billion in tax cuts. Any amount within that total would not be subject to a filibuster. So it would need only a majority vote in the narrowly divided Senate to pass.

In the process, though, two key Republican senators, Olympia Snowe of Maine, and George Voinovich of Ohio, won a promise from Iowa Sen. Charles Grassley, Senate Finance Committee chairman, that the package won't exceed $350 billion. The two are concerned about the size of the deficit, already $400 billion or so.

Budget experts at the CBPP, however, note that this deal could be circumvented. Popular tax measures, such as easing the marriage penalty or a tax break for small businesses, could be passed separately from the budget-reconciliation package. These would likely get enough Democratic votes in the Senate to reach the filibuster-proof level of 60 votes.

The reconciliation package would be left at $350 billion. Or some of the tax cuts would be set to expire early, bringing the 10-year cost below $350 billion. "There is a significant possibility of these different kinds of maneuvers and gimmicks being employed," says Robert Greenstein, director of CBPP.

President Bush stated, "We need tax relief totaling at least $550 billion to make sure our economy grows." The White House wants the economy sufficiently vigorous in 2004 to boost the president's prospects for reelection.

But Peter Orszag of the Brookings Institution notes that four-fifths of the president's tax-break infusions would not occur until after the election. And only 6 percent in fiscal 2003, ending Sept. 30.

He, like many economists, assert that a different package of tax cuts would have a more stimulative impact, a package that gives fewer tax benefits to the well-to-do and more to families with smaller incomes, those more likely to spend any tax savings right away and lift the economy.

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