Show pity to Alice in Tax Wonderland

Rebate (noun): a return of a part of a payment.

Taxpayer (noun): one that pays or is liable for a tax.(Merriam-Webster Collegiate Dictionary)

"What does the new tax law mean to me?" US citizens are asking. Alas, the answer is not clear. Responsibility for the confusion lies partly with the bill's authors: the changes are complex. But a larger share of the blame belongs to those who wish to deprive President George W. Bush's team of the political victory they know the tax cut represents. These obfuscators include many lawmakers, especially Democrats and left-leaning think-tanks. The press is also doing its part. The tactic is enough to make the muddled citizen feel like Alice in Tax Wonderland.

Consider, for starters, this year's rebate. Married couples will get $600 back in October or before. Singles get $300. Or do they? Not according to the Queens of Hearts and the March Hares who tend to set opinion. Take Citizens for Tax Justice, a think-tank whose interpretations of tax news are often reprinted or paraphrased on television or in the newspapers. This week CTJ sent out a blast with the title, "51 million taxpayers won't get full rebates from 2001 tax bill".

But who exactly are these 51 million whom Uncle Sam is short-changing? They are households with income below $40,000 or so. Under current law, this means that they pay little or no income tax, or even get extra money back through the federal programme known as the Earned Income Credit. In Alice's terms - the terms of common sense - it is actually impossible for these citizens to get a "rebate". A rebate, as the dictionary tells us, must be made on a payment, and these households never made one in the first place. These citizens are not even, pace CTJ, taxpayers in the sense that most of us understand the term (people who pay income tax). So a more accurate headline might be "Rebates go to all taxpayers; those who don't pay taxes won't receive additional subsidy".

Yet the press generally followed the CTJ line, running headlines such as "Your rebate check may or may not soon be in the mail" (Pittsburgh Post-Gazette); "Tax rebate may disappoint" (Arizona Republic); "Tax rebate will bypass many, study finds" (New York Times). This is not to say the non-recipients don't pay money to the government. They all - if they work legally - pay Social Security, as well as Medicare contributions. Combined, these social programmes demand at least 15 per cent of worker pay from the first dollar earned - historically the highest share ever. But the critics who want to take the joy out of the rebate party tend to be those who insist that Social Security and Medicare are not taxes at all but "contributions" to two hallowed federal insurance programmes. As Humpty Dumpty said to Alice, "When I use a word, it means just what I choose it to mean - neither more, nor less."

Similar sophistry is evident when it comes to the two greatest flaws in the tax legislation: its slow schedule for implementation and the so-called "sunsetting provision". The latter is particularly outrageous, for it means that all the tax cuts written this year will disappear like the Cheshire Cat come 2011, leaving us - unless lawmakers act again - back at the current rates.

Senator Tom Daschle, the new majority leader, expressed typical concern about timing issues last month: "I will simply say this is the Democratic approach to meaningful tax relief this year, tax relief that can be realised this year, not seven or eight years from now . . . tax relief that recognises we also have other very important priorities, priorities involving paying down the debt."

Why is it, though, that the new rates are not becoming law right away? The White House would gladly have made all its tax cuts law in the first year. Economically, this would have been right. An across-the-board rate cut introduced at once has, after all, a far greater claim to be a stimulus than one phased in over several years. Yet the opposition as led by Mr Daschle, as well as many of the self-identified fiscal conservatives within the Republican party killed this plan as "too expensive". They focused on paying off the federal debt. Pro-tax-cut forces caved in and designed a schedule that didn't look expensive on paper.

As for sunsetting, it results from budget law arcana and could have been overridden by the very lawmakers who are mocking it now. But Republicans did not find enough allies in Congress. Few have pointed this out, of course, but what can we expect of life in the rabbit hole?

© Copyright 2001 Financial Times

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