Tax Plans: Duel Over Who’s ‘Fair’

Right now, there’s a debate going on in Washington over the country’s first major federal tax cut in 16 years. The country’s response? About the same as it is to every public-policy issue these days: Who cares?

From a distance, the tax-cut plans proposed by President Bill Clinton and congressional Republicans don’t look that different. Both sides are proposing tax credits for raising and educating children, tax breaks for first-time home buyers and tax cuts for capital gains and inheritances.

Up close, however, there’s a serious debate going on over fundamental principles of fairness. Issues like: What’s a “fair” definition of income? And who deserves more tax relief--people who pay the most taxes, or people with the greatest need? It’s a debate worth caring about.

Democrats have always claimed “fairness” as their issue. With good reason. Last month’s Gallup poll asked people whether they thought the GOP tax cuts were more likely to benefit the rich or the middle class. People said the rich (52%). What about the Democratic tax cuts? Only 29% said the rich, while 24% said the middle class and 32% said “both.”

Which is why Democrats are playing the fairness card. House Minority Leader Richard A. Gephardt (D-Mo.) promised, “Democrats will insist that any tax relief be fair to working Americans.” Senate Minority Leader Thomas A. Daschle (D-S.D.) echoed this when he asked, “Where is the fairness if we can’t have tax relief for somebody earning $24,000 to $30,000?”

Republicans were initially delighted when Clinton offered his tax-cut plan last month. “We are very pleased that the president has taken a giant step closer toward our tax cuts,” former House GOP leadership chairman Bill Paxon (R-N.Y.) said. Instead of returning the compliment, however, Clinton attacked the GOP plan in his radio address last week, saying it offered “too little relief to the middle class.” The buzz word was fairness. “The tax cut must be fair,” Clinton said, “giving middle-class families the help they need to raise their children, send them to college, buy and sell a home.”

To be fair, Democrats argue, a tax cut must be based on need. So the White House held a news conference to put on display low-income people who need a tax cut but would not get it under the GOP plan.

Hold on here, Republicans argue. Those people don’t make enough money to pay federal income taxes. “When you are talking about tax cuts, the Republican position is very strong,” Gov. Tommy Thompson (R-Wis.) said. “You should give a tax cut to the people who are paying the taxes.” To Republicans, giving tax relief to people who don’t pay income taxes isn’t “fair.” It’s “welfare.”

“The president wants a hefty portion of tax reduction to go to people who pay no income taxes,” Senate Majority Leader Trent Lott said in his response to Clinton’s radio address. “That’s not tax relief. That’s welfare.”

Democrats complain that under the GOP plan, the richest 1% of Americans would get twice as much of the tax cut as the poorest 60% of Americans. That doesn’t sound fair. But consider this: According to the Internal Revenue Service, the richest 1% of Americans pay almost 30% of the total income taxes. The poorest 60% pay just 9% of income taxes. Isn’t it fair for people who pay the most taxes to get the biggest tax cut?

Republicans respond to the Democrats’ fairness offensive by accusing their opponents of fomenting class warfare. “The president has a powerful pulpit,” GOP national chairman Jim Nicholson said Tuesday. “He has chosen to invoke some of his vintage class warfare rhetoric about Republicans doing things to benefit the rich over the poor.”

Republicans claim the question should not be, “Who needs the money?” but “Who earned the money?” As a GOP press release puts it, “For Main Street America, this isn’t a debate about ‘Who is rich?’ but rather, ‘Whose money is it anyway?’ ” Republicans claim their tax cut “isn’t targeted to the poor or the rich, but instead to taxpayers at every stage of life.” All you have to do to get it is pay income taxes.

Wait a minute, Democrats say. Low-income earners may not pay much in income tax. But money gets taken out of their paychecks in payroll taxes for Social Security and Medicare. Shouldn’t they get tax relief? As Vice President Al Gore said, “Families who pay their taxes--not just income taxes but also payroll taxes--deserve a tax break and should not be left out of the current tax cut battle.” Daschle called the payroll tax “the forgotten income tax--forgotten, that is, except by middle-class working families.”

Republicans are a little embarrassed because their 1994 “contract with America” said the tax credit should go to people who owed payroll taxes, even if they did not pay income taxes. Why did they drop it? Because the contract called for a $200-billion tax cut. Clinton has agreed to a tax cut of only $85 billion. So something had to go.

Why did payroll tax credits go? Because Republicans maintain that payroll taxes pay for social insurance. They’re different from income taxes, which pay for big government. Most taxpayers get their payroll tax money back--many times over--in Medicare benefits and pensions when they retire. So tax relief is not as crucial.

Meanwhile, Republicans are apoplectic over the way Democrats define who is rich. “The administration thinks your income includes the cash you might receive if you rented out your home, even though you don’t,” Lott said. “And they want to count as your current income any pension benefits you might get years from now when you retire.”

It’s true. Democrats use something called “family economic income,” which includes a lot of things most people would not consider income--or pay taxes on. Things like “imputed rent” for homeowners, pension contributions and fringe benefits. Democrats use those figures to argue that two-thirds of the tax benefits under the GOP plan would go to households with incomes over $93,000. When Democrats accuse Republicans of giving too many tax breaks to the rich, Republicans reply, “Look out. A lot of middle-income taxpayers may discover that Democrats are calling them ‘rich.”’

Meanwhile, Republicans claim three-quarters of the tax benefits under their plan will go to families earning less than $75,000. Democrats reply, “Look out. They’re excluding a lot of tax breaks for the rich in that claim.” Like cuts in corporate taxes (those are not paid by individuals, Republicans argue), estate taxes (those cuts are mostly phased in after five years) and capital-gains taxes (Republicans assume those taxes will rise in the short run as investors move to transfer their assets).

This is tricky. So it’s no wonder most voters just give up. They lose interest for another reason, too: cynicism. These tax-cut plans, like most tax cuts in the past, are riddled with loopholes for special interests. Things like tax breaks for Nebraska bakers, Vermont dairy farmers and ethanol producers in the farm belt.

But even in the case of loopholes, there’s an issue of principle at stake: Should the tax code be used to make social policy? Like helping the poor. Or helping parents pay the costs of sending their children to college. Gore touted a welfare-to-work tax credit that “will spur economic growth in American cities by encouraging even more people to invest in distressed communities.”

Republicans have long insisted that cutting taxes on capital gains will spur new investment. Not to mention new tax shelters. But at least one Republican, flat-tax enthusiast Steve Forbes, doesn’t like to see taxes used for any of this. “The only good that may come of it,” Forbes said, “is that people are going to get so disgusted that they will put immense pressure on Congress to simplify the tax code.” Which is exactly what happened after the last tax cut in the 1980s.