Bush Calls for Faster Relief in Tax Cuts

President Bush on Monday moved to speed up the effect of the tax cut he will propose this week, saying that it should apply to the full 2001 tax year.

Prospects for a big tax cut have improved dramatically in recent weeks, but Bush also said he is prepared for a tough fight over the details. He warned Congress not to tinker with his design.

“This is the right size plan. It is the right approach. And I’m going to defend it mightily,” he said.

The plan, which would cost $1.6 trillion over 10 years, would cut the average tax bill for a family of four by $1,600, primarily by lowering tax brackets and increasing the child credit from $500 to $1,000.

Until Monday, Bush had not said when he thought the measure should take effect. He hopes Congress will approve the plan by July 4.

It would not apply to the 2000 tax year, for which taxpayer returns are due April 16. If Congress acts by midyear, however, the new rates could lower income tax withholdings, boosting take-home pay during the second half of the year.

Before Bush took office, the tax measure appeared to be one of the tougher sells on his legislative agenda. But glowing predictions about an increasing budget surplus and spreading fears about near-term economic problems have left legislators debating not whether to cut taxes but by how much.

Presenting himself as having inherited a failing economy from President Clinton, Bush said that “a tax relief plan is an important part of helping our country’s economic recovery.”

Among Democrats sensing the growing sentiment for a tax cut, opposition is built around concerns that the federal budget cannot handle increased Pentagon spending, growth in Medicare and funding of domestic policy initiatives that Bush favors while leaving a “rainy day” fund to protect the balanced budget against an economic downturn.

“It is too big,” Sen. Kent Conrad (D-N.D.) said of the Bush proposal. “That runs the risk of putting us back in the deficit ditch.”

In search of a new strategy, Democratic leaders have endorsed cuts that would total as much as $900 billion over 10 years. They are seeking to focus the coming debate on who would get a tax cut, arguing that the Bush plan is too heavily skewed to the wealthy. They have estimated that more than 40% of the plan’s benefits would go to the top 1% of all taxpayers. Senate Majority Leader Tom Daschle (D-S.D.) put it this way:

“If you make $1 million a year, under the Bush plan your tax cut would be big enough to buy a new Lexus. If you’re from an average working family, you can get a new muffler for your used car.” Democrats also contend that Bush has underestimated the effect of his plan on the surplus. They said that its actual cost would be more than $2 trillion, when increased interest payments on the federal debt and other likely changes are considered.

Still, Democrats have ceded considerable ground.

For one, they said they will accept a far bigger overall tax cut than they were willing to approve in the past. For another, Conrad and other Democrats have warmed to cutting income tax rates. For years they have insisted that tax cuts should meet specific social needs--to encourage education savings or to help pay for health care, for example.

But if Bush wants Congress to refrain from tinkering with his proposal, he has as much to worry about from Republicans as from Democrats. House Majority Leader Dick Armey (R-Texas) and other Republicans are talking about providing a bigger tax cut than Bush proposes and increasing business-oriented tax cuts. And while there is broad Republican support for Bush’s plan, no one expects Congress to rubber-stamp it.

“The Bush plan is a good starting point for Congress to get to work on,” said Trent Duffy, spokesman for Republicans on the House Ways and Means Committee.

One point seems to be gaining steam rapidly: With the economy weakening, support is growing in both parties for the idea of making any tax cut retroactive so that its economic impact is more immediate.

“It makes sense,” Conrad said, “because we’ve got an economic downturn now. . . . If we put in place a tax cut, it could be of some help in preventing a deeper slide.”

But Daschle warned that accelerating part of Bush’s tax cut could drive up its overall cost.

Under Bush’s proposal, the five current income tax brackets--15%, 28%, 31%, 36% and nearly 40%--would be scaled back to four--10%, 15%, 25% and 33%.

To illustrate the impact, Bush brought into the White House three families whose circumstances would be noticeably improved if his proposal is enacted. With them he displayed in the Diplomatic Reception Room a mock-up of a check, made out to “U.S. Taxpayer” for $1,600, the average benefit that he says families would receive.

One family with a total income of $36,675 and taxable income of $15,740 would see its entire $1,055 tax bill eliminated. A second, with family income of $73,850 and a tax bill of $9,506, would move from the 28% bracket to the 25% bracket. It would get a 23% cut, reducing its tax bill by $2,181.

A third family, whose total income is $138,667, would get a $3,266 saving, or 13% from its $24,237 annual federal income tax bill.

Bush was asked by a reporter during a photo session why no one from the uppermost tax bracket was included.

“Well, I beg your pardon,” he responded. “I got a little pay raise coming to Washington from Austin. I’ll be in the top bracket.”

His pay as governor of Texas was $115,345. As president, he is paid $400,000 a year.

The Center on Budget and Policy Priorities, a Washington policy research organization, however, offered scenarios to contrast with those brought to life at the White House:

For one, a single mother working full time to support herself and two children on $22,000 would receive no tax cut because, by claiming a standard deduction, allowable personal exemptions and the current child care credit, her tax bill already would be zero. Increasing the child care credit or lowering her tax rate would have no effect on her paycheck.

The center also examined an example Bush posed in his radio address Saturday of a waitress making $25,000 who Bush said deserved a tax cut. That cut would amount to $100, the center found--or even nothing, depending on child care costs.

In addition, argued Robert Greenstein and Isaac Shapiro in a study written for the policy group, the extension of eligibility for the child credit to couples with incomes up to $200,000, from the current $110,000, would further reduce the taxes of wealthy families.

But, for a family at the lowest end of the economic spectrum, the credit would be zero, or perhaps $500 because that family “would have insufficient income tax liability against which to apply the increase in the child credit.”

Bush is planning to draw public attention to the plan each day this week through Thursday, when he will send his proposal to Congress, keeping largely to the tax cut he outlined in the campaign.

Seeking specific examples of how far a tax break of $1,600 would carry an American family, he said it was sufficient to pay a month’s mortgage, a year’s tuition at community college or, for “the average California family, 24 months’ worth of electric power.”

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3 Scenarios Under Bush Plan

Following are White House scenarios of how the president’s tax cut plan would affect three families:

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FAMILY 1

2 adults, 1 wage earner; children ages 4 months old and 3 years old

*--*

{Tax Bracket} Income Current New Savings $36,675 15% 15%* $1,055

*--*

*

FAMILY 2

2 adults, both wage earners; child age 5

*--*

{Tax Bracket} Income Current New Savings $73,850 28% 25% $2,181

*--*

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FAMILY 3

2 adults, both wage earners; children ages 17, 19, 24

*--*

{Tax Bracket} Income Current New Savings $138,667 31% 25% $3,266

*--*

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* First $12,000 taxed at 10%

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Source: White House

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Criticisms of the Bush Plan

The Center on Budget and Policy Priorities, a nongovernmental research organization in Washington, counters the Bush tax cut plan, saying:

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* The bottom 40% of the population would receive just 4% of the tax cuts, about one-ninth of what the richest 1% of the population would receive.

* It fails to include any marriage penalty relief for low-income working families, even though as a group such families face some of the largest such penalties.

* It ignores working poor families because relief is not provided until a family’s income surpasses 130% to 160% of the poverty line, depending upon family size and configuration.

* It does not reduce taxes for everyone who pays them, because many low-income working families that do not owe income tax pay significant payroll taxes.

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Source: Center on Budget and Policy Priorities