As a Catholic economist, I support his proposal wholeheartedly. Let me tell you why.
Opponents of the tax cut charge that it “favors the rich.” The truth that is any plan to cut all rates across the board results in the poor receiving a smaller refund. This is a feature of our progressive tax rate structure. Here's how.
Everyone knows that tax rates increase as incomes increase. But people sometimes forget that the higher tax rate doesn't apply to all the income the person earns. The higher rate applies only to the income earned above the threshold amount that defines the next-higher tax bracket. (Take a look at the tax-rate schedules in the back of the instructions of your Form 1040 and you'll see what I mean.) That is what a progressive tax structure means.
The president plans to create a new, lower rate for the very poorest taxpayers. Specifically, he wants to lower the rate from the current 15% to 10% of the first $6,000 of taxable income for single taxpayers, $10,000 of income for heads of households, and $12,000 for married taxpayers filing jointly. This translates into an extra $300 for single taxpayers with incomes of $6,000, for instance, $500 for heads of households and $600 for married couples filing jointly.
At first glance, this particular rate-cut appears to benefit only the people earning the lowest incomes. In truth, however, any single taxpayer with an income greater than $6,000 will see a tax reduction of $300. For instance, a single person who earns $50,000 will receive a tax cut of $300 on their first $6,000 of income. That same person will receive additional cuts from any reductions in the rates paid in higher tax brackets. In this way, reducing the rates across the board will have a cumulative impact as people move up the income scale.
If you are trying to return large sums of money to taxpayers, sooner or later you'll have to give big chunks to people at the higher end of the spectrum. Why? Because they pay the lion's share of the taxes. The top 1% of income-earners pays the top 34% of income taxes, with the top 5% paying over half of all income taxes. Any substantial reduction in the federal surplus requires giving a lot to those top earners.
Besides, a great many people at the bottom of the income scale currently pay no taxes at all, for a variety of reasons. An estimated 35 million households with incomes under $20,000 will file income tax returns this year and ultimately owe no taxes. There isn't much more you can do to redistribute income to the lowest-income households using the tax code — unless you do something to take more people off the rolls.
And the Bush plan will probably do exactly that, for some. In a family-friendly move, the Bush plan doubles the child-tax credit. A tax credit is a straight deduction from the amount of taxes you owe. Doubling the child-tax credit, for instance, means a wholesome Catholic family with six children would pay $3,000 less in taxes than they are now paying. Some families, especially at the lower end of the income scale, will end up paying nothing at all.
Another result of the progressive tax code is that it really necessitates periodic tax-rate reductions. People move into higher tax brackets as their incomes increase. When the economy grows, the government will automatically absorb a greater percentage of national income just because of tax-bracket creep. For instance, the last decade witnessed a phenomenal increase in personal income, but nearly half of that went to taxes. (Yes, you read that right — you can look it up: http://www.taxfoundation.org/taxcuts.html).
As people grow wealthier, their need for government services declines. Periodic tax-rate reductions are a prudent way of adjusting for the government's increased absorption of income.
For all these reasons, it is unfair to consider this tax cut a “giveaway to the rich.” But how would the tax cut really affect the poor?
If cutting taxes were to mean cutting services, the critics might have a point. But this tax cut is taking place in the context of a projected budget surplus of $5.6 trillion over the next 10 years. The cut reduces government tax collections by $1.6 trillion over the same period. There is not a single spending program that is on the chopping block to make this proposal possible. It is hard to see how the poor would be harmed on this score.
Cutting taxes in this context is consistent with the Catholic principle of subsidiarity, which has been a part of Catholic social teaching for more than a century. Subsidiarity means that the primary responsibility for solving a problem should lie with the lowest unit of society that can accomplish the goal. The federal government should leave to the people tasks they can accomplish for themselves. The implication for tax policy is that people should keep their own money unless there is a compelling reason to take it from them.
The government is planning to collect $5.5 trillion for which it has no particular spending plan. Honestly, does hoarding this massive cache of money serve the common good? It is far-fetched to presume that unspecified spending of this magnitude will benefit ordinary people more allowing them to decide how to spend the money they earned.
Finally, we should keep in mind that perfection is not one of the options. We can all find parts of this tax-cut proposal that we would like to change. But our choices are not between the Bush plan and perfection. Our choices are the Bush plan and the status quo.
This Catholic economist is confident that Catholics can support President Bush's tax-reduction plan in good conscience.
Jennifer Roback Morse, a research fellow at the Hoover Institution, welcomes e-mail at firstname.lastname@example.org.