Tax Cut Strategy Separates the Presidential Aspirants

Few issues define the competing presidential candidates this year as starkly as what they would do about the federal income tax.

Not only are there sharp differences between Republicans and Democrats, but the two leading GOP candidates--Texas Gov. George W. Bush and Sen. John McCain of Arizona--are locked in a fierce philosophical battle that is shattering the party’s once-unified stance on the issue.

The contrast between the Republicans and Democrats is straightforward enough: The Democratic candidates--Vice President Al Gore and former Sen. Bill Bradley of New Jersey--have offered no major tax-cut proposals, preferring to focus on other issues.

The few tax proposals they have are modest--such as providing targeted tax breaks for helping the poor or making it easier for families to save for education. Gore also wants to help ease taxes for married couples. And Bradley would make health insurance premiums deductible.

“The tax-cut issue just hasn’t been a big issue with the Democrats,” says William G. Gale, a tax expert at the centrist Brookings Institution think tank in Washington.

Bush Package an Echo of Reagan Era

By contrast, Bush and McCain have proposed tax-cut packages that not only separate them from the Democrats but contrast them with each other, pitting the now-classic Reagan-era doctrine of sweeping tax cuts against a more populist plan designed to stake out the middle ground on the issue.

Bush’s approach is straight out of the Reagan textbook: He would slash the top rates paid by wealthier taxpayers, flatten out the long-standing structure of progressive tax rates that exact a bigger bite on the rich and phase out inheritance taxes.

He also would push through a spate of proposals that are popular primarily with suburban families, from easing the “marriage penalty” that hurts many two-earner couples to increasing the child tax credit and expanding education savings accounts. But those are second-tier items at best.

McCain would cut taxes for middle-income Americans by bringing a larger portion of the work force under the lowest tax rate, 15%, but leaving untouched the higher rates at which richer Americans are taxed. He would reduce, but not eliminate, the estate tax.

He also backs the same sort of vote-getting measures that Bush has proposed: easing the marriage penalty, increasing the child tax credit and expanding special tax-deferred savings accounts.

On the surface, the biggest difference between the two GOP packages would seem to be their cost. Bush’s plan would drain an estimated $483 billion over five years; McCain’s would sap about half as much, an estimated $237 billion.

But the philosophical differences also are sizable. The Bush proposal continues the Reagan-era approach that tax relief should primarily benefit the segment of Americans who pay the most in taxes: those at the upper end of the income scale. McCain’s plan targets the middle- and lower-middle classes.

Different Votes Are Targeted

Stanley E. Collender, a federal budget expert with the Fleishman-Hillard government relations and communications firm, says it’s easy enough to explain the Republican split in tactical terms. “Bush’s plan is designed to appeal to those who vote in GOP primaries,” he says. “McCain is aiming for the general election.”

But the jury is still out on whether either approach will prove a good strategy in either contest.

Bruce Bartlett, one of the early advocates of the philosophy that led to the large tax cuts won by the Reagan administration in 1981, argues that those reductions--and the stock market boom--have eased the tax bite on middle- and upper-income Americans. That, in turn, has dampened voter enthusiasm for sweeping tax cuts, Bartlett says.

Marshall Wittmann, an analyst at the conservative Heritage Foundation, believes voters also may be worried that allocating too much of the projected budget surpluses over the next decade to tax cuts will leave the Social Security and Medicare programs more vulnerable.

That’s the argument that the Democratic nominee will be counting on this fall.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Where They Stand on Taxes

The four leading presidential contenders offer tax reform plans that range from sweeping changes to more modest efforts. And Alan Keyes, the remaining longshot candidate in the Republican race, has proposed simply abolishing the income tax and replacing it with a national sales tax. Current federal income tax rates range from 15% to 39.6%, depending on income; most Americans are taxed at the 28% rate or lower.

*

GEORGE W. BUSH (R)

Proposes a sweeping package that calls for $483 billion in across-the-board tax cuts over five years--and as much as $1.7 trillion over 10 years, according to outside analysts. His plan would:

Scrap the five existing income tax brackets and replace them with four rates--10%, 15%, 25% and 33%. The system would be phased in over five years.

Reduce the so-called marriage penalty--which often forces two-earner couples to pay more in taxes when they file jointly than they would if they remained single--by permitting them to deduct 10% of their first $30,000 in earnings.

Double the current $500-per-child tax credit to $1,000 a child and make the tax break available to couples earning up to $200,000 a year, an increase from $100,000 a year now.

Phase out inheritance taxes over eight years.

Expand the annual contribution limit to tax-deferred education savings accounts to $5,000 per child, up from $500.

What he says: “The president and vice president insist that tax cuts are a ‘risky’ proposition. What is risky is when politicians are given charge of a surplus.”

What others say: An analysis by Citizens for Tax Justice, a liberal-oriented research group, argues that more than one-third of Bush’s proposed tax cuts would go to those earning more than $300,000 annually--the top 1% of all Americans.

*

JOHN McCAIN (R)

Proposes a tax cut of $237 billion over five years. The cost would be partly offset by closing $150 billion in corporate tax “loopholes,” which he has yet to specify. His plan also would:

Reduce taxes for middle-income Americans by expanding the current 15% bracket to include some currently taxed at a 28% rate--single people earning up to $35,000 and couples earning up to $70,000.

Reduce the marriage penalty by gradually increasing the standard deduction for those filing jointly to $8,600, up from $7,200 now.

Double the $500-per-child tax credit to $1,000, phasing in the change over two years.

Create a special savings account for lower-income Americans in the 15% income-tax bracket, providing tax breaks for interest and dividend income.

Permanently ban sales taxes on Internet purchases.

What he says: “We can afford a tax cut, and American taxpayers deserve one. But it must be a tax cut promise a leader can keep.”

What others say: “McCain’s proposal threatens to make the already Byzantine tax code even more impenetrable and complex.” -- Bush economic advisor Larry Lindsey.

*

BILL BRADLEY (D)

Opposes enacting any sweeping tax cuts unless the economy flags, saying only that he will “fight for the lowest rates for the greatest number of Americans.” Favors targeted tax reductions. His plan would:

Make health insurance premiums tax-deductible for all Americans.

Close special-interest provisions, such as corporate tax shelters.

Expand the earned-income tax credit for low-wage workers with children.

Give families that don’t make enough to pay income taxes--and thus can’t take the dependent care tax credit--the equivalent in cash for child-care expenses.

What he says: “When a tax break is created to help only a few people, or a company finds a way not to pay taxes, we all end up paying more.... We will spend money wisely on the things that make the most difference for the greatest number of people, and we will end the influence of special interests in Washington.”

What others say: “I don’t think he’s looking in the right direction. Taxing corporations ultimately hits employees, customers and stockholders.” --Martin Regalia, chief economist for the U.S. Chamber of Commerce.

*

AL GORE (D)

Eschews any sweeping, across-the-board tax cuts, calling instead for more targeted, modest tax proposals. He also wants to pay off the national debt by 2015. His plan would:

Create special “lifelong learning” tax-deferred accounts in which families and employers could save up to $2,500 a year for education and training expenses.

Ease the marriage penalty by raising the standard deduction for two-earner couples to $8,600, from the current $7,200.

Increase benefits for low-wage workers with children by raising to $29,000--from $27,413 now-- the amount that they may earn and still qualify for the earned-income tax credit.

Make permanent the corporate tax credit for research and development.

What he says: “You’d better believe America’s middle class deserves a tax cut. But they neither want, nor do they deserve, a tax scheme that endangers our prosperity itself.”

What others say: “The last time candidate Gore promised a tax cut--during the 1992 campaign--[the Clinton/Gore administration] turned around and socked families with the largest tax increase in American history.” -- Republican National Committee Chairman Jim Nicholson.