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Going for Gold

The Bush tax cut is a lie, Part II.

The debate over the Bush tax cut has been shrouded in a fog of cant and untruth. But every so often the fog clears, just for a moment. One such moment occurred in early March, when the Republican leadership in Congress held a rally in support of the president’s tax cut. As is often the case with such events, the rally organizers needed bodies as a backdrop, a visual cue indicating the support of the populace. And so they contacted Washington’s business lobbies, many of whom have pledged themselves to the tax cut effort. But the congressional leadership understood that a visual backdrop of Armani-clad corporate lobbyists was not exactly the message it wanted to send. And so it put out word, in a memo circulated among the business lobbies and later obtained by The Washington Post, that some sartorial changes were in order. “The theme involves working Americans ...,” the memo instructed. “[T]he Speaker’s office was very clear in saying that they do not need people in suits. If people want to participate—AND WE DO NEED BODIES—they must be DRESSED DOWN, appear to be REAL WORKER types, etc. We plan to have hard hats for people to wear. Other groups are providing waiters/waitresses, and other types of workers.”

If the advocates of the Bush tax cut were honest, a memo like this would not exist. They would insist that wing-tipped representatives of corporate America deserve a tax cut just as much as construction workers do—indeed, since they contribute more to federal coffers, they deserve one even more. But the tax cut’s proponents realize that their perspective is not broadly shared. Indeed, the memo’s author considers the public so class-conscious that it perceives “working Americans” as a social type distinct from, and morally superior to, “people in suits.” 

And so the tax cut’s advocates have produced a series of distortions, misrepresentations, and outright lies intended to convince Americans that the tax cut primarily benefits the poor and the middle class, or at least to demonize those who would suggest otherwise. It’s important to expose those distortions, but it’s even more important to understand that they are not the tax cutters’ real argument. Their deeper argument—which goes largely unspoken—is that government should not, by rights, help the poor and the middle class at the expense of the rich. That is the larger debate that should frame the struggle over the president’s tax cut. And it’s the one the cut’s architects are determined not to allow.

From the very beginning, President Bush has sold his tax cut by insisting that it would primarily help society’s less fortunate. In 1999, when he announced his plan, Bush declared, “Let’s start where the need is greatest: with social mobility for hard-working American families.” During the campaign, he affirmed that “by far the vast majority of my tax cuts go to the bottom end of the spectrum.” And lately, if you listen to the president defend his tax cut, you can almost hear an echo of Huey Long. In a recent speech, Bush noted that workers earning $22,000 a year face a higher marginal tax rate than workers who earn ten times as much. “[S]omebody struggling to get ahead, somebody working the hardest job in America, pays a higher marginal rate than successful folks, Wall Street bankers,” he bemoaned. “And that’s not right. And that’s not fair.”

In this ocean of malarkey, there is a drop of truth. It is true that many low-income workers face something resembling high marginal tax rates. That’s because the federal government offers certain benefits to the poor—wage supplements, food stamps, and so on—and these benefits are gradually phased out for workers above the poverty line. This phase-out works like a tax: For every dollar you earn, the government reduces your subsidy a little bit.

But that doesn’t mean it is a tax. And that’s why Bush’s solution does almost nothing for the working poor. All it does is reduce income taxes, of which low-paid workers pay little or none at all. 

Bush’s favorite example of who would benefit from his tax cut—repeated countless times over the last 18 months—is a single waitress with two kids who earns around $20,000 per year. “Under my plan,” he likes to boast, the waitress “will pay no income tax at all.” That’s true. Because the waitress almost certainly doesn’t pay any income taxes to begin with.(The only exception would be if she had no child care expenses at all—unlikely for a working single mother of two—in which case she would owe no more than $120.) It is typical of the duplicity Bush has brought to the subject that the people whom he claims would benefit most from his tax cut would not, in many cases, benefit at all. When pressed on this, the White House has responded with a shrug. “If you don’t pay taxes,” sighs Larry Lindsey, Bush’s main economic adviser and the ghostwriter of his tax plan, “it’s very hard to get a tax cut.” But this is another deception—while low-income workers may not owe income taxes, they do owe payroll taxes. Nearly 80 percent of the workforce, in fact, owes more in payroll taxes than in income taxes. If Bush truly wanted to help the working poor get ahead, he would propose cutting payroll taxes. But these are among the few federal taxes Bush has shown no interest in cutting.

Conservatives argue that, if we cut payroll taxes, the Social Security trust fund (which payroll taxes finance) would go broke sooner. That problem can be easily finagled, though, by making up the gap with surplus income tax revenues. Some worry that using income taxes to finance Social Security, which has never been done before, would undermine it. But income taxes already help support Medicare, and this fact has hardly rendered the program unpopular.

The real reason Bush isn’t helping the working poor is that he doesn’t want to. By this I don’t mean just that his administration doesn’t want to waste scarce surplus dollars on the poor that could be more usefully given to the rich, although that’s probably true as well. What I mean is that Republicans actively desire that the tax burden of the poor not be alleviated. Why not? Because they believe, with some justification, that as taxes on the middle and lower classes fall, government seems like a better and better deal to these voters, turning them into Democrats. Conservatives whisper fearfully of this prospect. “With the lower- to middle-income taxpayers paying so little,” a spokesman for the conservative Tax Foundation told The Washington Post last year, “there won’t be pressure” for tax cuts. Before Bush unveiled his tax cut plan, National Review explained why he should avoid cutting taxes for low-income workers. “Taking still more people off the tax rolls might look good today,” the conservative organ advised, “but it creates political headaches tomorrow: People who pay next to nothing for big government are easy pickings for the tax-and-spend party.” The calculation here is almost admirably devious. On one hand, Republicans need to promise working stiffs a tax cut to win their votes; but they must never actually deliver on this promise, because then the stiffs would cease to vote Republican. As the example of the waitress making $20,000 per year illustrates, Bush has straddled this dilemma skillfully, claiming that he is wiping out the tax bills for low-income workers while actually doing nothing for them at all.    A corollary of Bush’s false assertion that his tax cut would help everyone, but especially the poor, is that the Democrats’ proposals might help the poor but wouldn’t help every one else. “To me, the best tax policy is to treat everybody fairly and to say if you pay taxes, you get relief,” the president likes to declare. But the corollary is wrong as well. Democratic proposals do give tax relief to everyone. For low-income workers who owe payroll taxes but not income taxes, the Democrats (unlike Bush) offer tax credits. And for everyone else, including the wealthiest Americans, the Democrats offer—yes—an income tax cut. One Democratic scheme would confine its income tax cuts to the lowest tax rate, and news reports often state, erroneously, that this would help only the lower and middle classes. That’s not true: Even if you’re in the top tax bracket, you pay the top rate on only the portion of your income above about $300,000 per year. Below that level, your income is taxed at lower rates. This means that all income taxpayers pay the lowest rate on at least some of their income, and cutting that lowest rate would benefit them all. So Bush’s line is a complete inversion of the truth: Democrats are the ones who give a break to every taxpayer, and Bush is the one who leaves some out.

But the white house has not relied solely on a pseudo-populist rationale for the tax cut. It has also devised a pseudo-economic rationale: The tax cut is needed to get the economy out of a recession. “[T]here are some clear warning signs,” Bush declared ominously in December, “warning signs that will require what we believe is important action in the halls of Congress, such as tax relief.”

This line has a veneer of plausibility—there are circumstances in which a certain kind of tax cut can stimulate consumer spending and help avert a slowdown. But Bush’s tax cut, designed while the economy was still booming, is exactly the wrong kind to do this. If you want tax cuts to stimulate the economy, you need something quick and targeted at the poor, the group most likely to spend its windfall rather than save it. The Bush tax cut, by contrast, is slow and accrues mostly to the rich. In any case, most contemporary economists are skeptical of using tax cuts for short-term stimulus—conservative economists especially so. It seems virtually certain that none of Bush’s economic advisers believe the tax cut will stop a recession.

What they do believe is that cutting taxes will boost economic growth in the long run. The theory underpinning this belief is supply-side economics—the hoary notion that cutting tax rates for the rich can have massively beneficial results that trickle down to one and all. The Bushies don’t advertise their affinity for supply-side theory. But Lindsey is a longtime supply-side defender, and the tax cut has the classic supply-side focus of cutting marginal tax rates. In the popular imagination, supply-side economics is associated with the 1980s, but, in truth, its grip on the GOP is stronger now than ever. Twenty years ago, traditional fiscal conservatives had enough clout in the party to convince Ronald Reagan to take back a portion of his tax cuts in 1982, and ten years ago they persuaded the previous President Bush to raise taxes as part of a deficit-cutting deal. But today this once-proud wing of the party has been reduced to a handful of Northeastern holdovers who barely manage a whisper of dissent.

The triumph of supply-side thinking in the GOP has taken place, curiously enough, just as any intellectual basis for the theory has collapsed. All economists, of course, understand that high tax rates can distort people’s behavior in ways that dampen their productivity.The distinguishing characteristic of the supply-siders is that they believe this effect is so important that almost nothing else matters. This allows them to argue for upper-bracket tax cuts from distinctly non-plutocratic premises. If the top tax rate was cut, they once claimed, incomes would rise across the board, and, with them, tax revenues, permitting more spending as well. “To help the poor and middle class,” wrote George Gilder in Wealth and Poverty, the preeminent supply-side tract, “one must cut the taxes of the rich.”

Whatever the general truth of their argument, the early ‘80s offered the most favorable economic environment for supply-side claims. When Reagan became president, the top statutory tax rate stood at an imposing 70 percent. If 70 cents of the next $1 you earn is going to be taken away, you have a reasonably strong incentive to find a loophole or tax shelter, or otherwise devote your time and resources in ways that aren’t especially productive. Today, the top rate stands at 40 percent. Whether or not you believe high tax rates depressed the economy 20 years ago, the case for that view is far weaker today. Meanwhile, enough time has passed since the 1980s for academic economists to reach a rough consensus on the effect of tax cuts. Their conclusion is that, while high taxes may encourage tax shelters and other paper-shuffling, they don’t do much to discourage people from working.

But far more important than those theoretical insights into the validity of the supply-side argument has been the empirical evidence of the 1990s. When President Clinton increased the top income tax rate by more than one-quarter in 1993, supply-siders unanimously predicted disaster. “There is no question,” wrote economist and GOP adviser Lawrence Kudlow in The Wall Street Journal, “that President Clinton’s across-the-board tax increases ... will throw a wet blanket over the recovery and depress the economy’s long-run potential to grow.” This was not merely hyperbole intended to sink a Democratic president. It was an unavoidable conclusion of conservative economic dogma. If supply-side theory has any merit at all, then an upper-income tax hike of the magnitude proposed by Clinton must, at the very least, drag the economy far below its potential.

But the results of the last eight years are as if the economic gods had determined to disprove supply-side economics forever. Not only did the economy grow much faster than anticipated, but it did so in ways that specifically seemed to mock every notion the supply-siders held dear. They believed higher taxes on the rich would suppress their entrepreneurial and innovative vigor, and that tax receipts from the rich would fall as they sheltered their income. Of course, tax receipts from the rich skyrocketed. And, needless to say, higher taxes did not seem to discourage anybody from getting rich in innovative or entrepreneurial ways.

The implications for the future could not be more clear. The Bush tax cut is essentially an attempt to roll back the Clinton tax hike. It is therefore logically and necessarily true that if you believe the Bush tax cut will help the economy, you must believe that the Clinton tax hike hurt the economy. Since it demonstrably did not, we can be pretty sure the Bush tax cut will do little good for the economy, and, by precluding other economically efficient uses of the surplus (like debt reduction and education spending), it may well do real harm.How could evidence as devastating to their theory as the Clinton boom leave conservatives so undaunted? Perhaps because the argument that supply-side tax cuts help the economy, like the argument that tax cuts help the poor and the middle class, is not their deepest one.They may believe it, but they don’t need to believe it in order to want to cut taxes. The deepest argument for the Bush tax cut is not distributional or economic, but moral: The rich should have their taxes cut because they deserve it. Giving away some people’s money to others in an effort to improve society is simply wrong.

Bush doesn’t put it this way, of course. But he sets out a series of convictions that lead inescapably to reducing the taxes of the rich. For instance, he frequently insists that “the federal government should take no more than a third of anybody’s income.” Republicans came upon this principle recently when they discovered that most people don’t realize the top tax rate is higher than that, and they have taken to it with a moralistic fervor. “President Bush,” writes Michael Novak of the American Enterprise Institute, “is correct to say that for the government to confiscate more than a third of a citizen’s goods is wrong, unjust, unfair, and thoroughly immoral.”

As a principle, this is confused. According to what theory is a 34 percent tax rate “unjust” while a 33 percent tax rate is not? No doubt the American Enterprise Institute has its moral philosophers researching a clearer elucidation of this principle. But even if we accept the 33 percent maxim, it doesn’t necessarily mean what Bush says it does. Bush conflates marginal tax rates with the total tax rate. Even if you pay close to 40 percent on your last dollar, you pay much less than that on your first $300,000 of income or so—meaning your total share is probably under one-third. (The richest 1 percent pay, on average, one-quarter of their earnings in federal income taxes.) On the other hand, this formulation ignores the effects of all other taxes—payroll, state, local, and so on. If you include all those taxes, the average tax rate for lots of people—most of them not upper-income—rises well above one-third. So, whatever Bush means by this line, it is not a reason to cut the top rate to 33 percent.

Bush also echoes a favorite GOP line that the budget surplus constitutes an “overcharge” that must be returned to the taxpayers, in the same way that a restaurant would be obliged to give you a refund if it miscalculated your bill. This suggests some interesting implications.One is that it is inherently immoral to pay down the national debt. Another is that a budget deficit—should one reappear—constitutes an “undercharge” and is thus proof of the need for a tax increase. The main point of this silly analogy, of course, is to make tax-cutting seem like a foreordained conclusion (Oops! Overcharged ya—here’s your refund!) rather than a conscious democratic choice, to be weighed against alternatives, such as paying down the debt or expanding health care coverage.

Another backdoor way of saying that taxing the rich is immoral is Bush’s insistence that tax cuts should go to “the folks who pay the bills.” It’s a clever formulation. To most people it sounds as if he’s talking about hard-pressed middle-class taxpayers trying to make their mortgage payments. But what Bush really means is that the surplus should be returned to taxpayers in the same proportion in which they contributed to it. Since he excludes the Social Security surplus, which is funded by regressive payroll taxes, what he really means is that income taxes must be reduced by the same proportion in which they are raised: If Bill Gates pays 10,000 times as much income tax as I do, he deserves a tax cut 10,000 times larger. But this is another social choice—if we are to have a huge tax cut, we could just as easily give it disproportionately to the middle class—that Bush’s language is intended to make seem ineluctable.

The hidden premise underlying Bush’s rhetoric is that market outcomes represent a morally ideal distribution of income. This idea pops up regularly in the conservative press. “Mr. Bush’s impulse to return that surplus to all those who have created it,” editorialized The Wall Street Journal last week, “seems pretty fair to us.” Of course it does: The inherent morality of the unfettered market has long been an axiom of free-market conservative ideology. But, in the last century, democratic societies have largely rejected it. There are plenty of factors that contribute to an individual’s economic standing over which he or she has no control—inherited traits, subsidized education, social connections, and simple luck. That standing is not entirely a reflection of hard work and old-fashioned gumption. And, as a result, redirecting some wealth from the rich to advance the greater good is entirely fair.

Of course, redistribution must have limits. At some point, the effort to transfer income from rich to poor becomes a matter of diminishing returns. The task of a functioning democratic polity is to find a reasonable balance. But contemporary American conservatives object to the very idea that the public has a right to consider the amount of redistribution it desires. Their objection can be summed up in a single phrase: “class warfare.” Through obsessive repetition the buzzword has effectively stigmatized the notion of distributional justice, however timidly it may be broached, as vaguely dangerous and un-American. “I urge Congress not to get trapped in the—the kind of rhetoric of class warfare,” Bush argued not long ago. Neutral reporters have adopted the term (“Liberal Democrats,” asserts NBC’s Tim Russert, “are saying, `Let’s have some good old-fashioned class warfare ...’”), and Democrats feel obliged to forswear it (“I don’t believe in class warfare,” insists Indiana Senator Evan Bayh).

At first glance, class warfare seems like a strange thing to worry about. In America in this day and age the upper classes have little to fear in the way of angry proletarian mobs. Nonetheless, conservatives seem to regard even the slightest mention of distributional equity as a dangerous form of hate speech. A recent column by The Wall Street Journal’s Peggy Noonan ponders why Democrats “always want you to show your loyalty to the poor by hating the rich.” But Noonan does not provide a single example of Democrats hating the rich. This may be because Noonan is too lazy to dig up such an example, but more likely it is because none exists. Why would the Democrats hate the rich, anyway? A disproportionate number of elected Democrats—including Jay Rockefeller, Jon Corzine, and Maria Cantwell—are rich. (OK, Cantwell was rich.) Any Democrat with a prominent role in public life almost certainly earns enough to place him near the top of the income scale. And any such Democrat would also have to spend much of his waking life sucking up to possible donors who are richer still. Maybe some Democrats do hate the rich, but, if so, they quite sensibly keep their prejudice to themselves.

In fact, Noonan’s complaint notwithstanding, the only tax cut combatants who’ve been publicly slandering the rich are Republicans. When a group of multimillionaires defended the estate tax, Noonan’s Journal colleague Paul Gigot—who rarely finishes a column without inveighing against class warfare—dubbed them the “Fat-Cat Cavalry,” sneering that they had dropped in “from Aspen or St. Bart’s.” Introducing Bush at a tax cut rally last month, GOP Representative David Vitter taunted tax cut skeptic Mary Landrieu, “We don’t know what Washington, D.C., mansion you live in, Senator.” But such language does not qualify as class warfare, as conservatives employ the phrase, because it is on behalf of the interests of the rich. For the same reason, conservatives don’t mind that Bush speaks out against the injustice of the poor paying higher taxes than people on Wall Street. The rule here seems clear: It’s doesn’t count as class warfare if you’re lying.   In Washington parlance, then, “class warfare” does not mean anything like war between classes. It is simply an all-purpose slur to stifle discussion of distributional equity, in much the same way as the left can use fatuous charges of bigotry. National Review Online actually made this point explicit, scolding GOP Senator Charles Grassley for “obsess[ing] over federal debt reduction, and what he calls tax equality’ (read: class warfare).”

Indeed, there is something telling in the apocalyptic tone conservatives increasingly use to describe even moderately egalitarian policies espoused by liberals. Daniel Mitchell, a senior fellow at the Heritage Foundation, accuses Democrats of promoting “the poisonous Marxist ideology of class warfare.” Tony Snow, a normally genial columnist and Fox News talking head, writes, “Upper classes have always pulled societies forward economically—and their conspicuous prosperity always has aroused the jealousies of lower classes. The envious set out to strip the rich of their lucre, believing mistakenly that by redistributing income they could make everybody affluent.”

These comments, it must be remembered, are not made in the context of some neo-socialist effort to redistribute wealth. No one involved in the current budget debate is suggesting that taxes on the wealthy be increased. No one is even arguing that the wealthy should do without a tax cut. The most left-wing stance anywhere on the political stage (and it is a minority view even within the Democratic Party) is that the rich should merely receive the same size tax cut as everybody else. And this at the end of a quarter-century during which the share of after-tax income held by the top 1 percent of tax filers has more than doubled.

For all their histrionics, conservatives are not really worried about Marxism taking root in America, or the specter of class bigotry. What they really fear is that an honest discussion of the class ramifications of the Bush tax cut will lead Americans to decide that they don’t much like them. And that they’d rather have larger tax cuts for the poor and smaller ones for the rich. Or that they’d rather have a smaller tax cut for everyone and use the money for a prescription-drug benefit. The Bush administration has understood all along that it can win a debate over economic priorities only by preventing that debate from occurring in the first place. And, for the most part, it is succeeding. Those business lobbyists in hard hats should feel pretty good—their masquerade is working better than they ever could have hoped.

Jonathan Chait is a senior editor at The New Republic. This article originally ran in the May 21, 2001, issue of the magazine.