Loving and hating the Bush tax bill

The new tax legislation in the US is supposed to be about economics but it is also proving useful as a political Rorschach test.

There is fodder in the 400-plus page document for the groups who set out to criticise the bill: voters and lawmakers who had hoped it would be more ambitious; and those who oppose it in the name of high-minded causes such as "fairness" or "preserving the federal surplus".

But there is also ample material in the legislation for onlookers to cheer.

First, the downside and its publicisers. The schedule for implementation is extremely slow. Estate taxes and much-hated "stealth taxes" are scheduled to disappear, but only nine years hence. The phase-in of the all-important cuts to graduated rates is also untenably slow. In the coming year, for example, taxpayers can expect to see the statutory top marginal rate of income tax go down a measly one percentage point, to 38.6 per cent from 39.6 per cent. Other rates likewise drop a mere point. Only by 2006 will the new "final" top rate of 35 per cent become effective.

The ultimate cut to an official 35 per cent gives ammunition to members of the "fairness" camp, who claim the regime cedes too much to the rich. This, for example, is what Senator John McCain argued when he announced that he would be one of two Republicans to oppose the bill. Specifically, he lamented the bill's failure to "to make room for more tax relief for lower-income Americans".

On the Democratic side, opponents lambasted the legislation as too general. Senator Chuck Schumer of New York attacked an early version, saying that the White House ought to concentrate on "the need to make college affordable for American families", instead.

But the legislation also fails to satisfy the more radical among the tax cutters. Some point out that it fails to restore the top rate to the level that obtained under Mr Bush's father. Others allege that it is far more likely that Mr Bush will be replaced by a Democrat than it is that voters will ever see implementation of their 35 per cent. In fickle America this, alas, has the ring of truth.

Another bugaboo, the so-called Alternative Minimum Tax problem, has also attracted the attention of critics. Tax bill opponents, many of them self-proclaimed fiscal conservatives, note correctly that the lower rates in the new legislation may inadvertently force millions more taxpayers into the famous penalty box tax regime. They charge the Bush administration, which went out its way to present the tax legislation as pro-middle class, with hypocrisy.

These critics are correct in saying that an ideal Bush tax cut would do away with the dreaded AMT. What they fail to highlight is the reason that the Grand Old Party could not kill the AMT in this legislative round. Budget rules aimed at keeping the deficit small and supported by these self-same fiscal conservatives make slaying the AMT beastie "too expensive".

Yet there is also plenty in the new law to love for those who would look for it. One of the worst features of the 1990s has been the trend toward stealth taxes, which, as in Britain, infuriate the electorate. In the case of higher earners two such hidden taxes have proven particularly painful. The first is the phase-out of the personal exemption, an event that raises the effective top marginal rate. The second is a limit on itemised deductions, which likewise raises the rate above its official 39.6 per cent. The new legislation, as noted above, does away with these too late. Nonetheless, the fact that it even tries reflects a commitment to a more honest tax code.

But the main good news, at least to the glass-half-full crowd, is the direction of the tax legislation. For the first time since the early 1980s lawmakers, including some Democrats, have voted to reduce the size of the government, and by more than $1,000bn. The effort is a salutary one, at least for those who believe that the US succeeds when the public sector becomes smaller relative to the private sector and not the other way around.

Finally, it is interesting to note that the new legislation's opponents, while alleging injustice or inconsistency on the part of the administration, are not being entirely consistent themselves. The same Senator Schumer who has railed about giveaways to the rich also recently backed a cut in what is often referred to as the ultimate plutocrat levy, the capital gains tax.

As for Senator McCain and his "fairness" objection to the tax bill, it was only 14 months ago that the self-proclaimed Mr Character was selling himself as a flat taxer on the presidential campaign trail - in other words, a fellow who might support legislation more "pro-rich" than anything in the Bush bill.

© Copyright 2001 Financial Times

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