Partisan lines harden in debate over tax cuts

Here's a switch: Democrats and liberals are accusing the Republicans of engaging in "class warfare."

Ever since the battle over the $1.4 trillion tax cuts in 2001, President Bush and his supporters have tried to squelch talk of the benefits going mostly to the well-to-do by charging the critics with class warfare.

Now what's gone around is coming around.

On March 21, the House passed a budget resolution with $265 billion in cuts, primarily from programs for low-income families, children, and elderly or disabled people. Also, student loans will be hurt.

"Class warfare turns out to be alive," holds Robert Greenstein, director of the Center on Budget and Policy Priorities. "Deep budget cuts that could harshly affect the poor, the vulnerable, and many middle-class Americans alongside lavish tax cuts for the nation's richest individuals."

Last Wednesday, though, the Senate voted to halve the president's latest proposal, for a $726 billion tax cut over 10 years, to $350 billion. Several moderate Republicans joined Democrats to pass that budget resolution amendment 51 to 48. They disliked the combination of big tax cuts, growing budget deficits, and a $75 billion six-month down payment on the cost of the Iraqi war requested by Bush. The Senate had already voted a $100 billion trim of the Bush tax-cut plan to accommodate war expenditures.

Presumably, the Senate action would allow smaller spending cuts. Republican leaders tried unsuccessfully to enlarge the budget resolution beyond $350 billion. A budget resolution acts, in effect, as a mushy limit on tax cuts and spending.

The Senate and House must agree next month on a resolution number. Final spending and tax-cut votes are months away.

If a large tax-cut, large benefit-cut combination comes out of the congressional mill, and it is possible, Democrats could have a dandy campaign issue in the 2004 elections. It worries moderate Republicans.

You can imagine the Democrats' campaign slogans: The nation's poorest families face slashes in Medicare and childcare so millionaires can pay $90,000 a year less in taxes.

Populism might have a comeback - if better-off voters care about the poor.

Merely dropping the corporate dividend tax cut in Bush's new tax-cut plan would save enough revenue - $396 billion over 10 years - to more than fund the benefit cuts in the House plan.

Partly because dividend-tax relief benefits mostly high-income taxpayers, it is regarded as vulnerable in Congress. About 75 percent of the tax benefits would go to those making $100,000 or more, the top 8 percent of taxpayers, finds economist Brian Roach. They would save $3,000 in taxes per year. Most would be middle-aged and white.

The administration's sales pitch for this tax cut is "misleading,"says Mr. Roach, a researcher at Tufts University, Medford, Mass. Contrary to the claim that seniors receive more than half of all dividend income, Census Bureau data indicates they get only one quarter.

The administration holds that the average tax savings for the 7 million seniors receiving dividends would be $936 a year, "money they could spend or reinvest for their retirement."

But that $936, notes Roach, is an average rather than what the "typical" or "median" senior would save. Although not able to come up with a specific median number for seniors, Roach notes that three-quarters of seniors have no dividend income at all. Of those who do, most would realize benefits less than $936 while a relatively small number would save far more.

The Bush administration uses the same statistical tactic in other tax-cut claims. Because incomes in the United States are so skewed to the top, an average often sounds better from a political standpoint than the median. For illustration, if one person saves $3,000 a year in taxes and another $75,000, their average saving comes to $36,000.

Mr. Greenstein accuses administration officials of audacious manipulation of budget numbers: "They are cynical to a degree that I have never witnessed in any other administration, Democratic or Republican."

Since high-end taxpayers would receive the bulk of the benefits from the dividend proposal, it would increase US income inequality, already at a historic high and greater than in any other developed country, notes Roach.

But administration officials argue that all this income-distribution analysis is irrelevant, that the tax cuts will so boost the economy that everyone will benefit from more jobs, more income. The dividend plan alone would add 431,000 jobs over the next 18 months.

It is a trickle-down theory. It maintains that tax savings, especially by small business, would be invested in job-creating activities.

Roach counters that tax cuts aimed more at low-income groups would give the economy a bigger, more immediate boost because they tend to spend nearly all extra income, whereas the prosperous save proportionately more. Business, with a large amount of excess capacity at present, needs more customers far more than it needs new capacity.