A Reagan-style tax cut seeks family appeal

George W. Bush may share the same philosophy as Ronald Reagan when it comes to tax cuts -but his presentation couldn't be more different.

Rather than focusing exclusively on the supply-side argument that giving a tax break to the wealthy will boost the economy - or even the classic Republican view that the government will spend whatever it doesn't give back - President Bush is emphasizing what his plan will do for ordinary families. He even brought several of these families to the White House yesterday to start the week-long rollout of his $1.6 trillion plan.

It's a shrewd opener, say political observers, because the future of the plan will likely depend on how Mr. Bush handles Democratic criticism that his tax cuts are weighted too heavily toward the rich. He'll also need to address the other major question of the day: Can the country really afford a cut of this size?

What the president is proposing is "traditional Reaganomics," says economist Daniel Mitchell at the conservative Heritage Foundation here. But by making the case that his plan holds something for the working poor and middle class, "he's just being politically astute." It's a given, says Mr. Mitchell, "that he's going to get hit with all the class-warfare demagoguery from the other side, so you may as well say from the beginning: Tax relief is for everybody."

More tellingly, Bush's plan reflects a bedrock conservative belief that no American should have to pay more than a third of his or her income to the federal government in taxes. "Our tax code should not punish success at any stage of life," he said yesterday. With "the top federal income-tax rate at almost 40 percent, and the state income taxes on top of that, people can sometimes feel like the junior partner in their own lives."

Democrats have come a long way in their support for almost all the elements of the Bush plan - with many of them now favoring a reduction in tax rates, in the marriage penalty, and in estate taxes. But they still argue that the plan gives too big a break to the wealthy. In dollar amounts, 43 percent of the benefit will go to the wealthiest 1 percent of Americans.

But the president's spokesman, Ari Fleischer, said yesterday that middle- and low-income families will get a more meaningful break on their taxes than the rich: "If someone pays $2,000 a year in taxes and they get a $1,000 tax cut, that is a massive tax cut for that family."

Under Bush's plan, according to the administration, families of four who earn less than $35,000 - about 6 million families altogether - would no longer pay any income tax (though they would still pay payroll taxes for Social Security and Medicare). Families of four with incomes under $50,000 would have their income tax bite reduced by 50 percent - a savings of about $2,000. And families of four earning less than $75,000 would see their annual income taxes drop 25 percent, a savings of about $2,500.

"The president's tax-relief proposal is fair and responsible and provides a typical family with at least $1,600 more of their own money," says deputy White House spokesperson Claire Buchan.

But Democrats argue this is not enough. If Bush really wants to remove the "tollbooth" that blocks the working poor from entering the middle class, they say, he has to address other issues.

For example, one-third of working Americans already have zero income-tax liability, because they earn so little, according to the Center on Budget and Policy Priorities. The Bush plan would do nothing to help this wide swath of working poor, Democrats say.

To address this, Democrats on the Hill are looking at several options. One is to make the child tax credit refundable. That way, working, poor parents could collect the credit even if they had no income-tax liability.

Another is to reduce the payroll tax - the Social Security and Medicare taxes which all working Americans must pay, and which are not covered by Bush's proposed reductions.

The other philosophical tussle between Republicans and Democrats is over the size of the cut and whether the country can afford it.

In recent weeks, Democrats have been revising how big a tax cut they are willing to support. During the campaign, they backed Al Gore's proposal to cut taxes by about $500 billion over 10 years. Now, they're up to $750 billion, spurred on by new surplus estimates, a shared view that tax cuts can help the economy, and a bow to the political reality that Republicans are in the driver's seat in Washington.

But they're still skeptical of new budget-surplus estimates that, the Bush team says, will allow the administration to preserve Social Security and Medicare, pay down the debt, pump up the military, and have a $1.6 trillion tax cut, too.

Plus, possible costly revisions of the plan have yet to be considered. One flaw both sides acknowledge is a tax oddity called the Alternative Minimum Tax - a kind of insurance plan for the Internal Revenue Service, which kicks in when people who deduct reach a certain low level of tax payments.

Even Treasury Secretary Paul O'Neill cautions that unless the AMT is fixed, "while the [president's] proposals would take people off the tax rolls, the AMT would put them back on in a way that would mystify them beyond belief."

Another revision - which the White House says it will consider after it sends its tax plan to Congress on Thursday - is making the reduction in tax rates retroactive to the start of this year. While that might give a more immediate boost to the lagging economy, it would also add about $400 billion to the price of the package, according to the Center on Budget and Policy Priorities.

Still, the Bush team is confident that its plan is affordable. Not only is a tax cut supported by Federal Reserve Chairman Alan Greenspan, they say, but it fits well within the Congressional Budget Office's 10-year surplus estimate of $5.6 trillion.

Republicans on the Hill are even more confident. They want to pile on more, such as a bigger tax break for business, and a cut in the capital gains tax. If they are successful, the package could swell to more than $2 trillion.

(c) Copyright 2001. The Christian Science Publishing Society