Tax Policy on the Campaign Trail
by Matthew Madia, 11/7/2006
During the current campaign season, both Democrats and Republicans have allowed election-year rhetoric to distort the true nature and outcomes of current tax policy. The administration and Republicans across the country assert that Democrats plan to raise taxes for most citizens and that these "tax increases" would devastate the economy. At a recent campaign rally in Colorado, Bush was direct in asserting this view: And the American people must understand the facts; if you vote Democrat you're voting for a tax increase. It is a powerful statement without any facts supporting it. First, the simple claim "you're voting for a tax increase" misrepresents the current state of federal taxes. Provisions in the current tax code, if not proactively altered by Congress, will expire in 2010. Bush might be claiming that a Democratic Congress would seek to pass new legislation that would increase taxes, although Democrats have not suggested this. On the other hand, Bush may also be claiming that a Democratic Congress would fail to re-pass Bush's first-term tax cuts set to expire--a tax hike in the mind of Bush and his compatriots. In fact, the sunset provisions of the current tax code are politically advantageous for those who originally drafted them: a Republican Congress could claim to cut taxes by making the tax cuts permanent, while a Democratic Congress could be blamed for raising taxes by allowing the law to remain as written. But Republicans are not alone in using the temporary nature of recent tax laws to accuse the opposition of "raising taxes." Senate Minority Leader Harry Reid (D-NV) issued a statement in October accusing Republicans of "raising taxes on the middle class and on businesses" by not passing an "extenders" bill for certain tax credits- the very same tactics currently being used by Bush and other Republicans to confuse the issue. In addition, statements by Bush and other candidates generalize about the impact of the expiration of those tax cuts, assuming all Americans will be effected equally. Not all tax code changes are equal, and any future change would affect different taxpayers in different ways. For instance, a change in the rate for capital gains or dividend taxes would mainly affect the richest 10 percent of the population - the owners of 70 percent of American wealth. Some Democrats have been severely critical of the entire package of tax cuts passed by the Bush administration - including many cuts that do help middle-income families like the child tax credit, marriage penalty relief, and college tuition deduction. House Ways and Mean Ranking Member Charlie Rangel (D-NY) recently told Bloomberg News that he could "'not think of one' of Bush's tax cuts that would merit renewal." Despite Rangel's statement, it remains unclear what position Democrats will take on many of the Bush's first-term tax cuts should they take power in Congress. Most Democratic candidates have been largely silent on the issue, although many have spoken out on addressing economic problems and on the fact that the rich are getting richer. The Democrats' position is also difficult to gauge because of the virtually limitless permutations of tax code changes that are possible under new leadership. Certain Democrats, especially Reid and Sen. Max Baucus (D-MT), have been among the most vocal supporters of the "extenders" tax cut package that stagnated in Congress this year, including a combination of business tax cuts and a more cosmopolitan collection of populist cuts, including expansion of the child tax credit, the college tuition tax credit, the state and local tax credit, the teacher credit, and marriage penalty relief. Democrats may seize the opportunity to change the tax code, but the provisions that impact most Americans are unlikely to change much. The only likely difference would be that the Democrats may extend many of the popular tax breaks passed under Bush, but would offset their cost elsewhere - a position supported by almost all Democrats and more than a few Republicans. Additionally, there is the explosive issue of the Alternative Minimum Tax, which was designed to make sure that super-wealthy taxpayers pay at least a minimum amount of tax, but which now affects many upper-middle-income taxpayers. The cost of fixing the tax is becoming increasingly expensive each year, and if Democrats hold true to their promises to offset the cost of a reform proposal, it could mean significant cuts to spending or increases in other taxes. Tax Policy and the Economy In an attempt to credit his tax policies with kick-starting the economy, Bush has declared an unambiguous connection between current economic expansion and his tax cuts: Well, the facts are in. The tax cuts have led to a strong and growing economy...And if you're voting Republican you're voting for low taxes and a strong economy. Bush is warning voters that if his tax cuts are allowed to expire, it will have direct and detrimental consequences for economic growth. Yet, not all of the facts support the president's claims. There were six-and-a-half years of enormous economic growth and widely shared prosperity after President Clinton raised taxes in 1993. If one assumes tax policy is the prime mover of the economy, as Bush is wont to do, then a comparison of the years after President Clinton's tax increase and Bush's tax cuts reveals that tax increases are a far superior method of increasing economic growth. Between 1996 and 2000, the economy grew 18 percent and resulted in a $236 billion budget surplus. In the years following the Bush tax cuts (2001-2005), on the other hand, the economy grew 13 percent and resulted in $318 billion budget deficit. The current recovery is not just weak compared to that of the 1990s. It is also incredibly weak by historical standards. In a recent report from the Center for American Progress, John Irons and Mirra Levitt point out that, when compared to other recoveries, the current one is rather dismal. Average GDP growth of the previous 10 recoveries has been 19 percent. The current Bush recovery has seen the economy grow 15 percent, ranking seventh out of the past 10 recoveries. Employment growth has been considerably paltry, as well. In the previous 10 recoveries, employment increased, on average, 7.9 percent; Bush's "strong and growing" economy has resulted in an increase in employment of just 1.9 percent, placing Bush job-growth tally in ninth place. While tax policy, the federal budget, and the economy are favorite campaign-speech fodder for the president and congressional incumbents, a detailed examination of election-year rhetoric reveals how disingenuous politicians are about fiscal policy. The federal budget deficit is on track to expand even more in future years; inflation pressures continue to rise; the economy is sputtering along at a below-average pace for most Americans; and there remain many daunting long-term fiscal challenges. Americans deserve leaders who are upfront about fiscal and economic policy, whether it is an election year or not.