Democrats Reject Bush Tax Plans Despite Bipartisan Promise

by Mike Godfrey, Tax-News.com, Washington

08 October 2001

Following President Bush's call on Friday for a further package of $60bn tax cuts and increased spending, Democrats have criticised the President's plans, stating that they do not provide enough support for indivduals suffering as a result of the economic slowdown.

Leading Democrat politicians, such as the House Minority Whip, David E. Bonior, believe that the plans put forward by Republicans are weighted too heavily towards massive tax cuts for American business, and do not do enough to address concerns over healthcare and insurance. 'We're going to fight like hell to make sure working people get their fair share, and that means a 50-50 split at least,' he promised.

A Treasury official last week confirmed that the administration's preferred measures include allowing companies to write off the cost of new investments, repealing the corporate minimum tax, and expanding existing tax breaks for applying current losses to previous profits. On Friday the president said the provisions in this year's tax bill that do not take effect until 2004 or 2006 should be moved forward to 2002. While Bush gave no figures, earlier estimates from Congress' Joint Committee on Taxation about the impact of the tax bill suggest that would reduce tax revenues by around $35 billion next year, on top of the $70 billion already in law. Such an action would be temporary in the sense that within four years tax rates, the child tax credit, the marriage penalty phase out and some other provisions would be the same as if the cuts had not been accelerated to become effective next year.

However, President Bush and his administration are also under attack from fellow conservatives angry that the legislation will likely not include such measures as a cut in capital gains tax, or a reduction in corporate tax rates. Mr Bush reportedly received a letter from a group of leading tax cut advocates last week, accusing him of echoing the rhetoric of former Treasury Secretary Robert Rubin.

Efforts in Congress to reach a consensus had already begun on Thursday when Treasury Secretary Paul O'Neill, the US administration's chief negotiator on the economic stimulus package, met with senior Congressional taxwriters. The meeting was the first of a series of talks seeking a bipartisan agreement. Present at the meeting was Senate Finance Committee Chairman Max Baucus D-Mont, who said: 'We're starting the process and trying to get people to concentrate on specific items to see if there is consensus.'

At any rate it is likely that the tax breaks or extra spending will be implemented within the next six months and be compensated by tax-raising initiatives in the long-term future.

The tax cuts put in place earlier this year, the added spending already agreed to and the additional $75 billion package of proposals should approach 2 percent of the gross domestic product next year, said Tom Gallagher, an analyst with International Strategy & Investment. That is about double what Fed Chairman Alan Greenspan told Congress recently that it would take to have a significant impact on the economy, and it is greater relative to the size of the economy than the tax cuts in 1982 during the Reagan administration, Gallagher said.

But there are strong indications that taxpayers have saved three-fourths or more of their added take-home pay, which is another reason some economists are worried that additional tax cuts may boost saving rather than spending. The administration is therefore discussing some type of income tax credit, probably focused on taxpayers whose incomes were too low to qualify for this year's rebate checks but who pay Social Security payroll taxes. Since lower-income households typically are able to save relatively little of their disposable income, there is a general agreement among economists that much of the added after-tax income likely would be spent.

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