Memorandum

 

To:	Friends of ABC
From:	John Endean
Date:	May 10, 2001

RE: Tax Cuts

The word seeping out of the Senate Finance Committee is that President Bush's proposal to cut income tax rates across-the-board is in trouble. Specifically, the Committee seems disinclined to reduce the top marginal rate from 39.6 percent to 33 percent by 2006. Instead, the Committee appears ready to cut the top rate down to somewhere in the range of 36 - 37.5 percent.

One way of looking at this piece of news is to say that a tax cut is, after all, a tax cut and a 2-3-percentage point drop in the top marginal rate is nothing to sneeze at. And given that the taxpayers affected are very high-income people, who cares whether that 33 percent goal is reached, anyway?

It's an arguable perspective, but it ignores one thing: a tax cut that reduces rates more at the bottom end of the scale than the top will result - has to result, absent other remedial measures - in a tax system that is more progressive than it was prior to the cut. Since the Finance Committee's tax package is not complete, I don't know how much more progressive the Committee wants the tax code to be. But the direction, if not the distance, the Committee is heading is self-evident.

Again, who cares? Well, I may be wrong, but I don't remember too many winning Congressional campaigns last fall that were overtly predicated on the notion that the tax code should be more progressive. As a matter of fact, to the very slight extent progressivity was discussed at all, it was usually in terms of the public's view, amply tested by pollsters, that no one should be obliged to pay more than (if memory serves) about a quarter of their income to the IRS.

After all, it was just a few years ago that everyone was said to be eager for a flat tax and the simplification it allegedly would bring. I remember just how much heat our little organization, the American Business Conference, took for backing a fundamental tax reform idea - the USA Tax - that would have retained the progressivity of the personal income tax it sought to replace. Didn't we neo-Leninists understand, our critics constantly carped back then, that the irresistible wave of the future was a proportional income tax, and that progressivity was an outmoded concept left over from the Square Deal or the New Deal or the Fair Deal or one of those other Deals?

What a difference a few years make! Now we have a President who has dared to propose a reduction in income taxes that would maintain and perhaps even increase a bit the current code's progressivity - and he's being pilloried as a tool of the fat cats. Am I missing something here?

One can disagree with the total size of the tax cut President Bush has called for, I suppose, but I think it is difficult to argue against his desire, given the absence of a clear consensus for a more progressive code, to cut income taxes in a way that does not change the current level of progressivity.

We unquestionably need in this country an open discussion about how the government extracts revenues from the economy, and who should be paying and on what tax base. A few years ago, when talk of fundamental tax reform was in the air, it looked like we were about to embark on just such a discussion when the whole matter was hijacked with talk of tax returns on postcards, tearing up the IRS by its roots, and other panaceas du jour. Indications are that Treasury Secretary Paul O'Neill wants to reopen the discussion about the appropriate direction for tax policy. In that endeavor he deserves the support of all interested parties - which is just about everyone.

In the meantime, if we are to reduce marginal income tax rates, it makes sense to do so, as the President initially recommended, in a manner that does no violence to the current progressive structure one way or the other. Stealthy efforts to increase the burden of the income tax on a shrinking number of our citizens should not go unnoticed even if, as in the case this year, these efforts for "fairness" are undertaken in the form of tax cuts.

###

For more information about membership in American Business Conference or about our advocacy, contact Andre Thomas or email: abc@americanbusinessconference.org

American Business Conference
1730 K Street, NW Suite 1200
Washington, D.C 20006
202-822-9300
202-467-4070 Fax