February 16, 2006
Thursday

WASHINGTON - A clash over the domestic crown jewel of the Bush presidency - the 2001 and 2003 tax cuts, with looming expiration dates - has emerged as a central theme of the Democrats' campaign to retake control of Congress this November.

Children, widows, the elderly, farmers, veterans, students, working mothers - every vulnerable group short of puppies - is to be sacrificed at the altar of the Bush tax cuts that benefit America's richest citizens, Democrats claim.

"Democrats will fight the president's anti-widow and anti-children agenda," House Minority Leader Nancy Pelosi, D-Calif., said.

Added Senate Minority Leader Harry Reid, D-Nev.: "After creating record deficits and debt with his budget-busting tax breaks, the president is asking our seniors, our students and our families to clean up his fiscal mess."

President Bush, who is struggling to extend the capital gains and dividends tax cuts while paring the budget, countered that his tax cuts are essential to the economy and keeping Democrats' hands off taxpayers' money. He waved off budget concerns.

"If Congress doesn't act, your taxes are going to go up, and you're not going to like it," Bush told a New Hampshire business group last week. "You will hear the argument during the budget debates - you know, all the noise coming out of Washington - that you need to raise taxes in order to balance the budget. I've been there long enough to tell you that's not the way Washington works. They're going to raise your taxes, and they're going to find new ways to spend your money."

Underneath the flamboyant talk, budget experts say, both parties are teeing up their constituents for a nasty surprise.

"We're setting things up for both conservatives' and liberals' worst nightmare," said Len Burman, co-director of the Tax Policy Center, a joint venture of the Urban Institute and Brookings Institution. "We're going to have a government that can't provide even essential services, and we're going to have tax rates that make our historical tax rates look like some golden era by comparison."

Democrats actually like many specific Bush tax cuts, even as they trash them in the aggregate. Democrats also are fighting to roll back taxes on the same upper-income voters whom they claim should be paying more - those earning between $200,000 and $500,000 a year. But these rich live in the blue states Democrats dominate like California and New York.

Reversing the Bush tax cuts alone cannot restore fiscal balance, analysts agree. This will require the very spending restraint that Democrats daily condemn.

Republicans, for their part, have quietly opened the door to a huge stealth tax increase - the alternative minimum tax - that could erase a sizable portion of the tax cuts they defend.

And by failing to restrain spending, Bush has made his tax cuts unsustainable without draconian spending cuts that neither the White House nor Republicans in Congress support.

In a sense, Bush's tax cuts, which are set to expire within five years, are a phantom, analysts said, paid for with borrowed money that portends much steeper taxes after he leaves office.

"The Democrats tend to say, 'Well, if we just repeal these tax cuts, our problems are solved,' " said Douglas Holtz-Eakin, former director of the Congressional Budget Office. "False. Republicans tend to say, 'Geez, if we have these dividends and capital gains, we'll grow our way out of it.' Also false."

The Bush tax cuts will total about $2 trillion over the next decade according to the Congressional Budget Office. Republicans call them pro-growth. Democrats call them giveaways to the rich.

"No one plays that game straight in my view," Holtz-Eakin said.

For starters, half of Americans do not pay the income tax because they do not earn enough. The top 50 percent of income earners pay almost all the individual income tax, and the top 5 percent pay more than half of it - 53.8 percent - according to the Treasury. That means any income tax cut will chiefly benefit top earners.

"If you want to affect growth in the United States through the tax code, you're going to affect savings and investment, and it's the rich who save in America," Holtz-Eakin said. "So you're inevitably going to be talking about tax policies for the rich. Low-income people don't save."

To offset this effect, the Bush tax cuts included an expensive array of tax breaks for the poor and middle class, including a new 10 percent bracket, a child tax credit, a refundable earned income tax credit, a savers' credit, marriage penalty relief and other tax breaks Democrats strongly endorse.

When Democrats say they want to roll back "the Bush tax cuts," they fail to mention these.

Democrats also favor fat business tax breaks such as the research and development credit.

Yet the biggest parts of the Bush tax cuts directly benefit wealthy taxpayers. These include reduced rates on the upper-income brackets, the capital gains and dividends tax cut and phasing out the estate tax.

William Beach, an analyst at the conservative Heritage Foundation, contends that by improving incentives to work, save and invest, these tax cuts return 25 to 40 percent on the dollar.

"We're arguing, and have been I think successfully for the past 10 years, that tax cuts that stimulate investment, entrepreneurship, in short, job creation and higher wages, are the kind of tax cuts you want," Beach said. Such tax cuts "directly affect the bottom 40 percent through wages and jobs."

The problem for Republicans is that while cutting taxes, they have allowed spending to surge. Brian Riedl, a Heritage Foundation budget analyst, calculated that federal spending under Bush has risen twice as fast as under former President Bill Clinton, a Democrat. The increases include 39 percent more for poverty programs and 76 percent more for the military. Last year, Riedl calculated that for every U.S. household, the federal government spent $21,878, taxed $19,062, and ran a $2,816 deficit.

"The biggest issue in taxes is actually spending," said Eugene Steuerle, co-director of the Tax Policy Center. "If you spend $50,000 this year and you make $40,000, you're going to have to make up that $10,000. Ultimately, the only way to get real tax cuts is to cut the level of spending."

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