As you can imagine, the TaxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. Foundation has been in great demand throughout this campaign season to give our assessment of the tax plans put forward by Governor George W. Bush and Vice President Al Gore.
Our best hedge against being drawn into these partisan situations is to remind reporters that the Tax Foundation’s assessment of the candidate’s tax plans follow from the same set of principles that have guided our work for the past 63 years.
The questions we ask of each of the candidate’s plan are fairly simple: Are the tax cuts broad-based, or do the proposals effectively pick winners and losers? Do the proposals make the tax code more complex, or do they reduce the complexity in the code? And, what effect will these proposals have on marginal tax rateThe marginal tax rate is the amount of additional tax paid for every additional dollar earned as income. The average tax rate is the total tax paid divided by total income earned. A 10 percent marginal tax rate means that 10 cents of every next dollar earned would be taken as tax. s, people’s incentives to work hard and take risks, and, ultimately, their long-term impact on economic growth?
While it is impossible to contrast every aspect of these plans in the limited space here, our bottom line assessment is that the plan being advanced by Governor Bush–while certainly not perfect– meets far more of these criteria than does the plan advocated by Vice President Gore.
For its size, Bush’s 10-year, $1.3 trillion plan is relatively straightforward and easy to apply to any randomly sampled taxpayer. The centerpiece of the plan is a restructuring of today’s five-rate individual tax system. Bush’s plan would replace the current rates (now set at 15, 28, 31, 36, and 39.6 percent) with four rates of 10, 15, 25 and 33 percent. This plank in the plan satisfies each of our criteria: It’s broad-based; it takes a step toward simplifying the code; and, the lower marginal tax rates on labor would have a positive impact on long-term economic growth.
The Bush plan contains two provisions that would benefit married couples–especially those with children–but would also add fuel to the fire of discontent from the growing number of single, young professionals who would be ineligible for the tax cuts. The first of these measures would double the current $500 per-child tax creditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly. and raise the starting point of the phase-out of the credit for married couples from $110,000 to $200,000.
The second measure would restore the deduction for two-earner families. This would allow the couple to deduct 10 percent–up to $3,000–on the first $30,000 in income of the lowest earning spouse. For a couple who each earn $35,000 per year, this provision would cut their marriage penaltyA marriage penalty is when a household’s overall tax bill increases due to a couple marrying and filing taxes jointly. A marriage penalty typically occurs when two individuals with similar incomes marry; this is true for both high- and low-income couples. by roughly 36 percent.
In contrast to these broad-based proposals, the Gore plan contains more than two dozen new or expanded targeted tax credits, deductions and other incentives. Only two provisions in the plan come even close to being “broad-based.” The first is Gore’s plan to increase the standard deductionThe standard deduction reduces a taxpayer’s taxable income by a set amount determined by the government. It was nearly doubled for all classes of filers by the 2017 Tax Cuts and Jobs Act (TCJA) as an incentive for taxpayers not to itemize deductions when filing their federal income taxes. for married couples to twice the deduction available to single filers.
The second “broad-based” provision is Gore’s Retirement Savings Plus Account (RSP) proposal to supplement the current Social Security system. General tax revenues would subsidize, on a graduated basis, savings made by individuals and families up to $2,000. While most analysts have included these subsidies in assessing the benefits of the Gore plan, these RSP’s are designed more like a means-tested entitlement than they are a tax cut.
The range of targeted measures in the Gore plan make direct comparisons to the Bush plan confounding and subject to considerable value judgements. For example, a reporter recently asked us to assess how each tax plan would benefit a family we will call the Smiths. The Smiths are currently a dual-income working couple, he earns about $45,000 per year and she earns roughly $25,000. They tithe and try to save as much as they can afford.
While our initial analysis was fairly straightforward, things got dicey when we were informed that Mrs. Smith was about to have their first child and she was considering staying home with their newborn. “How might this affect their taxes?” asked the reporter. While such a family change makes for some easy calculations under the Bush plan, the Gore plan brings the analyst only mindbending confusion.
Take childcare. If Mrs. Smith stays home with her newborn, they could be eligible for Gore’s expanded Dependent Care Tax Credit (DCTC) for stay-at-home moms — until their child reaches age one. But if Mrs. Smith goes back to work, they could be eligible for the expanded and refundable DCTC. But, of course, who knows how much they will be making in five more years when the expansion is fully phased in. Same goes for the new After-School Tax Credit.
How about savings? In addition to the new RSPs, Gore is also proposing a 401(j) account for “life-long” learning and a new National Tuition Savings plan. If the Smith’s are able to save the maximum amount under the RSP, will they have anything left to contribute to the others?
Of course, the reporter forgot to tell us a few things. Maybe Mr. Smith’s paying tuition for his 19 year-old child from his first marriage and could be eligible for the College Opportunity Tax Cut. Maybe Mrs. Smith is learning computer programming, in which case they could get a $6,000 credit for job training expenses. The permutations are endless.
In the end, we have to say that the two candidates’ tax plans cannot be compared. While the Gore tax plan lowers the tax burden for several groups of taxpayers, the restrictive wording of the provisions promises an unhealthy dose of extra complexity for the tax code, something that neither taxpayers nor the IRS need.
The Bush tax plan is more like the legislation passed in 1981 and 1986–broad rate cuts designed to return significant sums to consumers so that their extra spending, saving and investing will boost the economy.
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