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Bush tax cut: too big, too small, too what?

As I See It

President George W. Bush has been true to his campaign pledge to cut taxes. He pursued his $1.3-trillion tax cut doggedly until Congress passed it. To fully enjoy the fruits of the tax cut, patience will be required. Due to the lengthy phase-in period, the tax cut will be almost old enough to attend middle school by the time it takes full effect.

Critics say the cut is too big and overly benefits the wealthy. Supporters say that it is miniscule compared with the total federal budget and that any tax cut must, of necessity, favor the wealthy since they pay the lions’ share of the taxes.

Who’s right? Who’s wrong? Let’s compare the Bush tax cut with other tax cuts from our recent past.

Actually, the Bush cut looks pretty modest when compared with the Kennedy tax cut of 1963. Kennedy cut income taxes the equivalent of 2% of the Gross Domestic Product (GDP) while Bush’s is a puny 1.1% of GDP. Speaking of large tax cuts, Reagan’s 1981 tax cut amounted to 3.3% of GDP, dwarfing both the Kennedy and Bush cuts.

So, here’s the truth about the size of the Bush tax cut: It is relatively small when compared to other tax cuts enacted over the last 40 years. Naturally, if the GDP should decrease, the tax cut percentage would increase and it might not look so small.

Well, if the tax cut isn’t too big, then it’s targeted toward the wealthiest taxpayers instead of benefiting the average taxpayer and so it was bad.

Right?

If everybody made the same amount of money, our tax rates would all be the same and the tax savings would be evenly divided among everyone who paid taxes. It just doesn’t work that way. Our system of income taxation is said to be progressive because the more money you make the higher the tax rate. Thus, the more taxes you paid, the higher the tax savings should be.

Let’s look at who pays the taxes in this country.

According to the Heritage Foundation, a conservative think-tank, the top 1% of income earners pay nearly 35% of the income tax. The top 10% pays 65%, and the top 25% pays nearly 83%. Hold onto your hat for a startling revelation — the bottom 50% of income earners pay about 4% of the income taxes. Dwell on that for a moment. The lowest paid half of our population pay only 4% of all income taxes!

Well, maybe it wasn’t too big and maybe it isn’t being unfairly distributed, but did we need a tax rebate?

According to the National Center for Policy Analysis, the average federal income tax rate hit 15.9% of household income in 1999, well above the prior record of 15.3% set in 1980. The high tax rate we are currently enjoying results from the booming economy of the 1990s which automatically catapulted more of us into higher tax brackets.

Rather than unfairly depriving the government of our tax dollars, the Bush tax cut really just evens the score a little. The aforementioned National Center for Policy Analysis found that between 1995 and 1998 individual income taxes rose by $141 billion more than they would have if taxes had grown at the same rate as the overall economy. Thus, the government got a bonus as a result of the economic prosperity of the 1990s.

The tax we pay is not the only cost of our income tax system. According to the Heartland Institute, Americans spend around 2.4 billion hours on tax return paperwork. If you add in the time businesses spend, the tab comes to over 4.3 billion hours spent each year complying with the federal income tax law. Perhaps the government should reimburse us for the time we spend complying with an incomprehensible tax code! Even at minimum wage, that would add up to a tidy sum.

In summary, the Bush tax cut leaves money with the people who earned it to choose whether they wish to spend, save or invest rather than consigning it to the public treasury to be “porked” away by Congress. Be ever mindful of P. J. O’Rourke’s maxim that “giving money and power to government is like giving whiskey and car keys to teenage boys.”

Thought for the Moment — Of all the means which wisdom uses to ensure happiness throughout the whole of life, by far the most important is the acquisition of friends.

— Greek philosopher Epicurus (341-270 B.C.)

Joe D. Jones, CPA, is publisher of the Mississippi Business Journal. Contact him at cpajones@msbusiness.com.

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