Bush's Economic Policies Pt. 2
By Jacquie Heffner , Mar 21, 2003
Bush's tax proposal seeks to effect savings plans and pensions. Included is a savings incentive plan that will have adverse affects on most working Americans' pension plans.
Currently, this element has moved to the backburner by the Bush administration, but it has not been completely removed from the package. This savings proposal could very well wipe out employer funded pension plans, plans which were legislated by congress to balance the rewards paid to executives and workers alike.
The "Savings Incentives" plan unveiled by the Bush Administration contains budget gimmicks, benefits high-income individuals, erodes employer-sponsored pensions for ordinary workers and will reduce by massive amounts federal revenues over the long run (Greenstein & Friedman, 2003). This proposal contains three new savings vehicles:
It replaces existing IRA's with Retirement Savings Accounts, which would operate in much the same way Roth IRA'S work. Under a Roth IRA there is no up front deduction for a contribution, but earnings in the Roth grow tax-free and no tax is paid on funds when they are withdrawn (Greenstein & Friedman, 2003).
The creation of new "Lifetime Savings Accounts." These LSAs would operate much like the RSAs with the exception that the funds could be withdrawn at any time and used for any purpose (Greenstein & Friedman, 2003).
Creation of Employer Retirement Savings Accounts. These ERSAs would work in "essentially the same way as existing 401(k) accounts, although the proposal includes certain changes that would weaken protections for low- and moderate-income workers" (Greenstein & Friedman, 2003).
"Under current law, taxpayers may not make deposits in Roth IRA's if their incomes exceeds $160,000 for married couples [and $110,000 for singles]" (Greenstein & Friedman, 2003). These limits were written into the law as economic research showed that deposits made by high-income individuals generally are a shifting of savings from taxable investments to tax-free accounts. This new Roth proposal would provide those at high-income levels with yet another tax break (Greenstein & Friedman, 2003).
This new plan would allow wealthy couples (incomes over $160,000), who currently are prohibited from investing in Roth IRA's, to place up to $15,000 a year in an RSA. All income from the investment, no matter what the source, would be permanently tax- free.
For instance, an investment by a wealthy couple of $30,000 a year, with a seven- percent rate of return, would in 20 years be able to earn $716,000 in tax-free investment income, under current law that income would be taxable. The loss of revenues to the federal government will place a huge strain in coming decades (Greenstein & Friedman, 2003).
LSA's would provide another vehicle for tax-free investment. Up to $7,500 per household member could be deposited into these accounts, in addition to deposits made into RSA's. Once again, no matter how high the income, the savings plan would be available, and any interest earned would be tax-free.
Unlike the RSA's the LSA's would allow individuals to withdraw money at any time, for any reason. Combining the LSA and RSA investment, a family of four could deposit up to $45,000 a year and permanently earn tax-free income.
As noted, the income initially used to start these accounts would be subject to taxes, the ensuing interest income would be permanently tax-free. The result of this is a shift of revenue losses into the future, when revenues are withdrawn tax-free.
Basically, this is a budget gimmick that appears to have no cost, but in reality has grave consequences for future generations. This proposal, coupled with the Administration's proposal to repeal the estate tax, "would allow wealthy individuals to secure large amounts of investment income tax free and then pass it on to their heirs tax free" (Greenstein & Friedman, 2003).
Under current law executives and owners who put more than $6,000 a year into retirement or savings accounts must offer a pension plan to employees. By using the new RSA's and LSA's, executives and business owners would not have to offer a retirement plan through their firm.
This weakens federal laws which were designed to "prevent owners and executives from concentrating an overwhelming share of business' retirement contributions on themselves and shortchanging their workers" (Greenstein & Friedman, 2003).
The new employer-base retirement plan proposal would also repeal a rule that requires small business' to set up retirement plans for low-paid workers if they "set up a plan that directs most of its retirement contributions to top officials" (Greenstein & Friedman, 2003). Even more importantly, over time, fewer employer-sponsored retirement plans will be offered to middle- and low-paid workers.
Owners and highly compensated executives would be able to "place huge sums in tax-sheltered retirement and saving accounts" (Greenstein & Friedman, 2003) while avoiding a company sponsored plan for rank and file workers.
"Federal pension law essentially establishes a social contract. Generous tax breaks are allowed for contributions to employer-sponsored retirement plans, including very large contributions on behalf of owners and executives" (Greenstein & Friedman, 2003).
Firms who take advantage of these tax breaks must also follow federal rules which have been designed to make sure that some contributions, even modest, are made on behalf of ordinary workers (Greenstein & Friedman, 2003).
The savings proposals outlined above not only creates a way for the wealthiest in this country to invest their money tax-free; this plan breaks the social contract with those who are middle- to low-income workers.
Ordinary Americans would "be harmed in multiple ways: from the federal budget deficits that the plan would enlarge and the slower economic growth, higher long-term interest rates and/or budget cuts in programs that benefit them that would ultimately ensue: from the state budget cuts and/or tax increases that many states would have to institute to make up for the revenue losses they would incur; and from the reductions in pension coverage for some workers" (Greenstein & Friedman, 2003).
Nobel economists, wealthy investors, business groups and members of congress are warning that this proposed tax cut plan needs to be abandoned and replaced with "a long-term budget-balancing drive that should include tax increases" (Fram, 2003).
The nonpartisan policy organization, the Committee for Economic Development, has stated, "Deficits matter -- they lead to less investment, less productivity and a lower future stand of living" (Fram, 2003).
The tax cut proposal Bush is pushing is losing more and more support as time goes on, not for political reasons, but because his plan is fundamentally flawed, weakens our already shaky economy and disproportionately benefits the wealthiest income earners in this nation.
Warren E. Buffett, chairman of Berkshire Hathaway, has stated that this tax proposal would unfairly benefit wealthy individuals. According to Buffet, the proposed tax plan would reduce his tax bill by $300 million a year, "meaning he would pay proportionately less in taxes than his secretary" (Bloomberg News, 2003).
Nobel economist George Akerlof has stated, "there is wide agreement that [the Bush plan's] purpose is a permanent change in the tax structure and not the creation of jobs and growth in the near term…Passing these tax cuts will worsen the long-term budget outlook, adding to the nation's projected chronic deficits" (Powell, 2003).
In response to President Bush's most recent State of the Union Message, New York Times writer Bob Herbert states, "Despite rising unemployment, the president's plan for the economy (is) …a continuation of his tax-cut mania" (Herbert, 2003).
Herbert also points out that the tax cut proposal by Bush does nothing to help create jobs or economic stimulus, there is no help to states and local governments who are now struggling with the worst fiscal crisis faced since 1946 and curtails health services to the elderly.
The Bush tax proposal also does not address the alternative minimum tax, a tax that will effect 85 percent of taxpayers with two or more children. The AMT, originally designed to make sure that the rich would pay at least a minimum in taxes, was never indexed for inflation, and currently it only applies to 1.8 million taxpayers.
In 2010, 36 million taxpayers making between $75,000 and $100,000, with two or more children will be forced to pay the AMT tax. The AMT tax will not allow parents to claim exemptions for their children and also disallows deductions for state taxes. The tax rate under the AMT is 26 to 35 percent, resulting in almost a complete loss of the proposed tax cuts under the Bush tax proposal (Burman, et al., 2002).
Further, "this shift in who pays the alternative tax explains why those making $75,000 to $200,000 will pay a larger share of all income taxes in 2010, while those making $1 million or more will pay less" (Burman, et al., 2002). To "fix" this tax will cost as much as "$951 billion over the next decade" (Burman, et al., 2002).
If the Bush tax proposal becomes law, adjusting the AMT will result in even more decreases to federal revenues. If the AMT is not adjusted, most middle- and upper-class taxpayers will find they will be paying tax rates higher than those with incomes over $1 million.
At a time when unemployment is rising and workers wages are shrinking, the Bush administration is doing little if anything to help those Americans in the middle- or low-income levels. "The rising costs of benefits, especially health insurance and retirement plans, (continue) to outpace any increases in wages and salaries (Strope, 2003).
As layoff announcements from American companies rise, those who do have jobs find the Bush administration revamping labor regulations which will result in workers losing overtime pay, a change in labor law which does not require Congressional action. Additionally, Bush is proposing to cut $144 million earmarked for employment and training programs (Associated Press, 2003).
The Bush tax cut proposal is at best a giveaway to those at the very highest income levels in America. Those Americans who are in the middle- to low-income levels will see little if any federal tax relief, rather, most will see their state and local taxes go up which will result in a higher tax rate.
Henry J. Aaron, Senior Fellow at The Brookings Institution, when testifying before The Joint Economic Committee in Congress stated "the Administration's program will reduce growth of national income by ever larger amounts" (Aaron, 2002).
Aaron also stated, "To call attention to such distributional patterns is sometimes labeled 'class warfare.' But if class warfare is present, it is initiated by those who insist on cutting taxes disproportionately for the wealthy while pleading poverty when asked to provide aid to states now forced to cut poor children and elderly from the Medicaid rolls, suspend social services and curtail public library services.
Those of us who call attention to who gains and who loses are not engaging in class warfare; we are merely reporting news from the front of the actions of those who have initiated hostilities" (Aaron, 2002).
Higher deficits, reduced health care services, decreased funding for education, roads and childcare services are being offered as the sacrifices that low- and middle-income Americans will bear, while the wealthiest of this country will burden decreased tax liability, higher incomes and future tax free investments.
There is no doubt that the tax proposal being presented by Bush creates inequity in our country, now and for decades to come.
Aaron, Henry. Testimony to The Joint Economic Committee. 26 Feb. 2002
Andrews, Edmund L. "A salesman for Bush's tax plan who has belittled similar ideas." The New York Times 28 Feb. 2003
Bernasek, Anna. "Bushonomics: The Reagan tax cuts offer clues to what's in store for us." Fortune 19 Feb. 2001: p126
"Buffett tells democrats tax cut favors rich." Bloomberg News 14 March 2003
Burman, Leonard, et al. "Tax Sideshow Threatens to Become One Ring Circus." Tax Policy Center 18 September 2002. Click Here
"Bush administration revamps labor regulations." The Associated Press 1 Feb. 2003 Dale, Maryclaire.
"Child care costs strain working poor." The Associated Press 5 March 2003
Daly, Mathew. "Forest service could face huge deficit." The Associated Press 5 March 2003
Fram, Alan. "Business group urges deficit control." The Associated Press 5 March 2003
Gale, William G. and Peter R. Orszag. "The President's Tax Proposal: Second Thoughts." Tax Policy Center: Tax Analysts: Tax Notes 27 Jan. 2003. Click Here
Gehrke, Robert. "Congress cuts aid for jailing aliens." The Associate Press 15 Feb. 2003
Goldstein, Amy and Jonathan Weisman. "Bush seeks to recast Federal Ties to the poor." Washington Post 9 Feb. 2003: pA1
Greenstein, Robert and Joel Friedman. "Proposed 'Savings Incentives' Would Cause Revenue Hemorrhage in Future Decades: Proposal Would Heavily Benefit Wealthy Taxpayers, While Weakening Pension Coverage for Workers and Shirting Costs to Future Generations." Center on Budget and Policy Priorities 5 Feb. 2003. 8 Feb. 2003 Click Here
Greenstein, Robert and Richard Kogan. "Cutting $10 Billion in Appropriations for Poverty and Other Programs While Promoting a $670 Billion Tax Cut: Does this Represent Fiscal Discipline and Balanced Policy? Center on Budget and Policy Priorities 17 Jan. 2003 Click Here
Hage, David and Robert F. Black. "A hardheaded budget play." U.S. News & World Report 23 Jan. 1995: p50
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"House Republican budget contains large cuts in Medicare, Medicaid and other domestic programs." Center on Budget and Policy Priorities 13 March 2003 Click Here
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"Law of Averages" Washington Post 21 Feb. 2003: pA26
Lav, Iris J. "The state fiscal crisis is impeding economic growth; federal aid to states would Be most effective stimulus." Center on Budget and Policy Priorities. 18 Feb. 2003 Click Here
McKenna, Barrie. "Bush budget calls for record deficits." Bell Globemedia Interactive Inc. 4 Feb. 2003: B9 Click Here
Meckler, Laura. "75 million uninsured in 2001-02." The Associated Press 5 March 2003
Meckler, Laura. "Medicaid plan comes under Democratic fire." The Associated Press 12 Feb. 2003
Miller, John. "Getting back more than they give." Dollars & Sense Sept. 2001: p60
Park, Edwin. "Administration proposes long-term care insurance deduction and other health tax cuts that are likely to be ineffective and primarily benefit higher income individuals." Center on Budget and Policy Priorities 5 March 2003 Click Here
Powell, Bonnie Azab. "Horrendous: Nobel economist George Akerlof criticizes Bush administration's economic stimulus package." UC Berkeley News 12 Feb 2003 Click Here
"Squeezing the poor." Washington Post 16 Feb. 2003: pB6
Strope, Leigh. "New jobless claims rise for 2nd week." The Associated Press 8 Feb. 2003
"White House wants to end housing program." The Associated Press 6 Feb. 2003
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