Bush’s Tax Cut: Implications for You and the Economy

The key to President Bush’s tax cut program is that it is aimed not at quickly boosting consumer spending but at spurring investment and restoring the high productivity gains of recent years.

That’s why the emphasis is on tax reductions for the top 10% or so of all taxpayers, those with annual incomes of more than $75,000 a year who account for more than 75% of all the income taxes collected by the federal government.

Lowering tax brackets for high earners and business owners, Bush and his advisors believe, will encourage the kind of investments in new technology and reform of U.S. business practices that led to extraordinary economic gains in the late 1990s.

In counting on the higher tax bracket to lead the economy, the Bush administration also is adopting a new policy toward the wealthy in American society.

The tax program comes at a critical time. The ‘90s gains in productivity--the factor that allows wages and living standards to rise without sparking high inflation--and economic growth are now stalling out in what many businesspeople see as the onset of recession.

Bush referred to the recessionary specter in sending his tax proposals to Congress last week. “A warning light is flashing on the dashboard of the economy,” the president said. “We need tax relief now.”

Yet despite administration avowals that its proposed tax cuts will jump-start the faltering economy, the Bush program is not particularly geared to pumping up consumer spending for a quick recovery of economic growth.

In fact, some businesspeople question whether the tax cut program will act fast enough to revive a seriously stalled economy.

To be sure, Bush wants to cut taxes for workers at all income levels, and he is calling for tax cuts to be retroactive to Jan. 1, so that withholding can be reduced immediately and a burst of tax reimbursements pushed into consumers’ pockets before the end of 2001.

But if Bush wanted to spur consumer spending, he could have chosen better ways to do that, says James Galbraith, economics professor at the University of Texas’ LBJ School in Austin.

A cut in the payroll deductions for Social Security and Medicare would give more taxpayers a real boost in the paycheck, Galbraith says, because “two-thirds of all taxpayers pay more in those contributions than they do in income taxes.”

Instead, both critics and supporters of Bush’s tax program agree, the administration’s tax bill is aimed at shareholders and investors--those with a direct or indirect stake in the behavior of the stock market.

These days, of course, when more than half of American workers own stocks and bonds directly through their own retirement accounts or indirectly through giant pension funds, the category of “investor” covers a broad section of the population.

The Bush administration’s new policy toward the better-off recognizes that fact. The new tax policy is less concerned with distributing wealth across all income levels than with lowering the burden of taxes on economic activity. Economic growth, this viewpoint holds, will take care of considerations of fairness.

The policy has opponents. Some economists note that children of the working poor, those earning less than $16,000 a year, could miss out on Bush’s expanded child-care tax credit because families at that level, in effect, don’t have to pay income taxes.

Deepak Bhargava, head of an organization representing poverty groups, is already lobbying Congress to extend the child credit beyond Bush’s proposed legislation. Congress will debate many such questions of income levels and fairness as it considers tax legislation.

Still, Bush’s policy toward the better-off reflects the reality that America has changed in the last decade. Education made the difference in whether household income grew in the 1990s.

“Between 1989 and 1998, median incomes rose appreciably only for families headed by college graduates,” according to the Survey of Consumer Finances and the Distribution of Wealth, a study compiled every three years by Arthur Kennickell, senior economist of the Federal Reserve Board.

Not surprisingly, in a decade of rising stock markets, wealth rose particularly for those with financial assets.

With a rise in the value of homes and stocks in recent years, the image of high-income families today is less that of plutocrats than two-earner couples devoutly considering themselves middle class.

The new wealth picture has brought a shift in emphasis, notes the Rev. William Byron, longtime professor of management at Georgetown University, who recently retired to head a parish in Washington. “The productivity gains of recent years have gone disproportionately to shareholders rather than to labor in higher wages,” he observes.

Byron is referring to companies using corporate cash flow to buy in stock, which tends to increase the value of shares held by continuing stockholders. Yet there have not been great protests of such patterns because fewer workers are members of labor unions and more workers are investors and shareowners.

Bush’s tax program, with its focus on lowering tax brackets for all income levels, seeks to broaden participation in the new economy. “He wants to lower the brackets and broaden the base of his economy,” says economist William Rhodes of Williams Capital Management, a New York investment bank.

Bush and his advisors admire the workings of the “new” economy. They recognize that in the last decade, investing in new technologies accounted for 30% of economic growth. Adoption of computer and information systems by U.S. business produced extraordinary gains in output per hour and returns on investment.

Bush’s proposed tax cuts, as he said during his presidential campaign, are an attempt to continue that productivity pattern. They are a long-term prescription for the economy. That’s why the cuts are to be phased in, with greater reductions in rates coming in later years of the decade.

The program thus is a change similar to those launched by Ronald Reagan, who dramatically lowered tax brackets in 1981, and John F. Kennedy, who came in lowering taxes in 1961, says tax scholar Lawrence Stone of Irell & Manella, a Los Angeles law firm.

But there is a danger in Bush’s approach. His tax cuts, even if they are passed quickly by Congress, may be too slow to revive the economy. Many businesspeople now see companies faltering under debt burdens and banks in increasing difficulty.

A major activity of institutional investment funds these days is investing in “distressed” companies, buying debt or common shares at a discount to help the companies through a crisis. In that kind of economy, “what is needed is a fast jolt of government spending or a cut in payroll taxes, something that rebuilds confidence,” said one Los Angeles businessman.

Bush is walking a high wire. If his tax cuts take too long to kick in and the economy remains slow into next year, he will run into political trouble as congressional elections loom.

The new president is taking a political as well as an economic risk with his tax cut program and its new policy toward the better-off in American society.

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James Flanigan can be reached at jim.flanigan@latimes.com.