ANOTHER WAR: TAXES
It's a Fierce Conflict Whose Roots Go Back to Theodore Roosevelt
To Cover It Now, Journalists Must Deal with Inflated Numbers, Misleading Sound Bites, and Evasive Tactics
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| FIRST SHOT: In his State of the Union speech, President Bush asks for tax cuts of $694 billion. His critics contend that his plan unfairly benefits the rich.© AP Photo |
In January, the president of the United States turned to Joe Balsarotti of Clayton, Missouri, and asked him to stand up for the cameras. Joe and Jennifer Balsarotti are one of George W. Bush's tax families, the living, breathing examples of the benefits that would accrue to real people if his $694-billion tax-cut plan is passed. Tax families have been a favorite prop for Bush, first when he was campaigning for the presidency and then after he took office.
Now, with the economy careering aimlessly, with stock holdings and retirement savings ravaged by a souring stock market, and with no quick recovery in sight, a new tax plan is being proposed, and the tax families are back. Joe Balsarotti, owner of the small Software-to-Go company, figures to cut his tax bill by $2,600 this year alone if the plan goes through. Bush and the White House have refined this small drama to high art.
This year's story, of course, is more complicated than Joe Balsarotti's 1040, and it is bigger than the shouts of class warfare and the charges of dishonest numbers and overoptimistic projections. The debate has been muffled somewhat by the war drums over Iraq, but the stakes are huge.
The Bush tax proposal is big enough and the public issues it raises are important enough that it deserves better than he-said, she-said coverage. The proposal has set off a classic philosophical tug-of-war over the proper role of government in a $10 trillion economy. It reopens a historic debate that seemed settled nearly a century ago when angry populists pushed through the Sixteenth Amendment in 1913, establishing the essential progressive structure of the income tax as we know it today. The debate could have ramifications for decades to come, and it will almost certainly set the tone for the next election.
So the tax proposal and the crossfire it has ignited are particularly compelling, with their own set of challenges for the news media. How do we give this difficult story the coverage it deserves?
History
We've never had a bill aimed at the investor class before.
— Grover Norquist,
president of Americans for Tax Reform
Really? Tax debates start with the movement around the beginning of the twentieth century that forced adoption of the federal income tax in 1913, a populist crusade to make the wealthy pay a greater share of their income to their government. Ironically, a catalyst in that debate was Theodore Roosevelt, who became president when William McKinley was assassinated. One of Roosevelt's first acts as president in 1902 was to sign a bill repealing the estate tax, now popularly assailed as the "death tax." That measure had been stalled in Congress but was quickly passed after McKinley's death. Norquist aside, that bill could more accurately be tagged the first one aimed at the investor class.
But before leaving the White House, Roosevelt had a conversion. He began assailing the "malefactors of great wealth," and urged a progressive tax system as a way to blunt the development of an aristocracy of the wealthy. "The man of great wealth owes a peculiar obligation to the state, because he derives special advantage from the mere existence of government," he wrote in his 1906 message to Congress. The rich should pay their "full and proper share of the burden of taxation," he continued, and urged Congress to enact first an inheritance tax and then a progressive income tax. Seven years later, a constitutional amendment was passed and ratified, and a new tax system was in place.
The battle was far from over; it's still being played out today. For example, Roosevelt's epiphany has become an inspiration for Bill Gates Sr., father of the Microsoft founder. Just as Andrew Carnegie did in the early part of the last century, Gates and a coterie of America's richest, including George Soros and Warren Buffett, have been speaking and lobbying members of Congress not to repeal the estate tax.
And for historians, there may be a sense of déjà vu in this year's debate over ending taxes on dividends and a new array of tax-sheltered savings plans, on top of the push to fully repeal the estate tax. It puts attention on wealth and tax breaks for the wealthy in a way not seen since the 1970s' tax revolt and, before that, the days of Teddy Roosevelt. For the media, it's an opportunity to offer perspective and to assess the consequences of cutting taxes while the gap between rich and poor seems to be widening.
The Numbers
Nothing should be taken at face value.
— Robert Greenstein,
executive director, Center on Budget and Policy Priorities
Especially numbers. The Bush tax measure consists of five major components: ending the income tax on dividend earnings; eliminating the penalty paid by some two-income married couples; accelerating the rate cuts enacted in the 2001 bill, but not yet in effect; raising from $600 to $1,000 the tax credit for each child originally phased in by the 2001 tax bill; and raising the tax exemption for capital spending by small businesses from $25,000 to $75,000. Democrats have their own ideas, namely some form of direct aid to financially strapped states, payroll tax cuts, and a freeze in some of the components of the 2001 tax act.
But it's the Bush plan that draws the sparks. Like any tax proposal, it is supported by pages of explanations, details, and computations. It was the subject of press briefings at the White House and the Treasury Department and supplemented by easy access to policy-makers and by fact sheets distributed almost daily for a week after the plan was unveiled. Business and special interest allies did the same. The critics matched the volume. The Center on Budget and Policy Priorities held frequent teleconference calls and issued research papers. They were supplemented by comparable studies by the Brookings Institution and Urban Institute experts and analysis from Citizens for Tax Justice.
The more moving pieces a proposal includes, the greater the opportunity for skewing the charts, and the claims this year have been bewildering. They are almost certainly true and defensible; they are also in almost total conflict. And they underscore the importance of going beyond the claims to understand and present the intricacies of the proposals and the varieties of consequences.
Let's return to Joe and Jennifer Balsarotti, the tax family. The fact sheet assembled by the White House highlights three parts of the tax proposal that affect them. Together, they earn $100,000, including the earnings of their software company, which he bought ten years ago. Both work and have comparable income, which means that easing the marriage penalty would save them approximately $1,300. Accelerating the cuts in their income tax rates, which were scheduled to phase in over the next six years, would save them $800. They would also save $500 with the proposal to exempt dividend earnings from taxation. The White House estimates that their current $16,900 tax bill would be cut by $2,600.
But not all $100,000 households can expect the same savings, and part of what reporters can do for readers and viewers is make that clear. For example, the accounting firm Deloitte & Touche, at the request of several media companies, has projected three different case studies of households with $100,000. A household with a single taxpayer and one child saved $717; a single taxpayer with no children, $1,021; and a two-income couple with two children, $2,242. The White House fact sheet also touts a $1,100 reduction in taxes for a family of four with income of $39,000. Three Deloitte & Touche examples for $40,000 households show the three different impacts: a family with two children, savings of $1,133; a family with one child, $400; a single taxpayer, $126.
The time frame also affects the debate. For example, the administration is pushing the bill as an economic stimulus, arguing that in the first year alone, tax cuts would total $98 billion. Charts produced by Kent Conrad, a Democratic senator from North Dakota, said the cut provided very little stimulus, closer to $36 billion "this year." The difference is how you define a year: Conrad's figure is for spending in this fiscal year, which ends September 30. The administration is using a twelve-month calculation to reach its $98 billion.
Reporters need to be wary, too, of the easy use of the word "average." Administration officials frequently point to the White House fact-sheet claim that "23 million small-business owners would receive tax cuts averaging $2,042." Indeed, with the administration's definition of a small-business owner expanded to include investors as well as owners, the numbers look good. But the Urban-Brookings analysis found that 79 percent of taxpayers with small-business income would get less than the $2,042 cut. Further, 52 percent would get less than $500.
The Rhetoric
It's all about sound bites, deluding the people, pandering to the lowest common denominator. I didn't adjust [in Washington] and I'm not going to start now.
— Former Treasury Secretary Paul O'Neill
O'Neill left Washington as the final details of the tax plan were being resolved. But his forecast of a blizzard of "sound bites" came true. Even before Bush announced details of the plan, Democrats labeled it the "Leave No Millionaire Behind Act." The tax-cut alliance turned "abolishing double taxation" into an applause line. Bush himself led the cheers on a series of campaign-style trips, at the White House, and during his State of the Union speech. "For America's 84 million investors, and those who will become investors, I propose eliminating the double taxation on stock dividends," he said.
But the 84 million is a stretch. Most of the 84 million own their stocks as part of tax-advantaged retirement plans, which would not benefit from the new exclusion. About 35 million households receive taxable dividend income, and most of that goes to the more affluent, prompting the charge by Democrats — and a few Republicans — that the proposal favors the wealthy. The president frequently claims that "92 million Americans will keep an average of $1,083 more of their own money." He's right, but there's that word again. The figure is inflated by including the much larger benefit for the wealthy. Analysis of 2000 tax data by the Urban Institute and Brookings Institution presents a different picture. They concluded that 80 percent of taxpayers would receive less than the $1,083 tax cut, and roughly half would receive less than $100. The top 1 percent, however, would receive an average cut of $24,000.
But the call to abolish "double taxation" is being adopted by party loyalists and the army of grass-roots lobbyists mobilized in part by Grover Norquist and his Americans for Tax Reform. He has had success with catchy antitax slogans as the orchestrator of the lobbying effort to repeal the estate tax. He and the pollster Frank Luntz popularized "death tax" as the target, rather than "inheritance tax" or "wealth tax," as it's been known in earlier generations. More than 70 percent of the public opposes the "death tax," even though fewer than half of 1 percent of the estates would hit the 2009 threshold of $3.5 million, the amount at which the tax must be paid.
Norquist and Luntz are working together again. "Every day across America, 10,000 stockbrokers and dealers are making twenty to a hundred phone calls selling stocks," says Norquist. "They are explaining the details of this tax cut. That's a million calls a day!" More important, he says, it's an easy sale; "As soon as you get to ‘double taxation,' you've won the argument. You don't have to go any further."
Getting beyond the rhetoric can be difficult but also fruitful. David Cay Johnston, a Pulitzer Prize-winning reporter for The New York Times, called the American Farm Bureau and other estate-tax critics on their claim that America's farming families were forced by an onerous tax burden to sell their farms. He talked to real estate experts and experts in agriculture economics, and no one could point to a single example.
The Politics
A tax cut is always good politics. The question is whether it can also be good policy.
— Senator John Breaux, Democrat of Louisiana
This tax bill is unique for its appeal to the growing audience of investors, who now account for more than half of the nation's households. They are part of an expanded universe of households where stock prices and dividends are understood and where the tax bill is getting special attention. The bill's advocates use the "investor class" appeal to cast the measure in a more historical context. "At the end of the day, this will be remembered in the same way as the Civil Rights and Voting Rights acts of 1964 and 1965," Norquist insists. "Those in favor say, ‘I want to help you, investor.' And those opposed say, ‘I don't like you, investor.' "
Critics reply that the universe of "investors" that the bill will affect is actually small and selective. First, the bill will have little impact on most investors, they point out, since their investments are held in the tax-free retirement plans. Second, as many as half of the corporations pay no dividends anyway.
And an increasing number of corporations that do pay dividends don't pay taxes, which mars the double-taxation rationale. CSX, the giant transportation conglomerate formerly run by Treasury Secretary John Snow, for example, paid no taxes in three of the last four years even though it had profits of $934 million.
But Bush backers like Norquist say those arguments mask the Democrats' failure to develop alternative proposals that better address the concerns of the new investor class.
Not coincidentally, the Bush proposal is aimed directly at 2004. Even if the measure is approved this year, most taxpayers won't see any benefit until after they file their 2003 returns next April. "This is a jobs bill for two people — the president and the vice president," says Stan Collender, Washington vice president for Fleishman Hillard, a public affairs firm.
This is also an opportunity for the media to look beyond the numbers to the politics — in the alignment of interest groups; the local and national lobbying efforts already under way; and the new tools: e-mails, faxes, and door-to-door campaigning.
The Big Picture
We are looking for immediate changes in the code that will be good changes in the long haul.
— Karl Rove, counselor to the president
In the eyes of the ideological allies of the administration, the Bush tax bill is a small step in the larger crusade to eventually replace the current, graduated income tax with either a consumption tax — a tax on spending rather than income — or a flat, single-rate income tax. As they see it, the tax code has simply gotten too big and unwieldy — 1.4 million words of law and 8 million words of regulations last year — and it is a burden on the economy. The new Bush proposal, on top of the $1.35 trillion cuts enacted two years ago, adds to the momentum for comprehensive change. Further, they insist, it will unleash an era of economic growth that will close budget gaps and help meet the health and retirement needs of baby boomers.
Democrats and their partisan and ideological allies see only the red ink of the current budget deficits and the future costs to Social Security and Medicare, just as 77 million baby boomers start retiring in the next decade. They argue against dismantling the progressive structure envisioned by Theodore Roosevelt and dismiss the supply-side economics argument. They worry that the economy, instead, needs a quicker injection of stimulus, that the proposed tax cut takes away any chance of bolstering Social Security. "Digging the hole deeper before we start filling it is no way to go," said Senator Conrad, the North Dakota Democrat.
So the big picture for the administration is rosy, while the big picture for the administration's critics is grim.
The big picture for the news media is the opportunity to present the debate in a larger context.
The tax debate can be simplified by breaking the proposals down and examining their impact on individuals and segments of the community. Tax accountants and software specialists have tax programs by the dozens that help add precision. But the debate should also be seen in the larger context of the drive for a sea change in the way we tax Americans. Today, Norquist and his allies have abandoned a one-shot conversion. Instead, they've quietly outlined a five-step process. Ernest Christian, a lobbyist and former Treasury tax official from the Center for Strategic Tax Reform, and Gary Robbins, a visiting fellow at the conservative Heritage Foundation, detailed the effort late last year:
"The ‘Five Easy Pieces,' as they came to be called by many tax cognoscenti, are: a) lowering marginal rates (the rate paid on the last dollar of income); b) eliminating double tax on corporate earnings; c) accelerating depreciation, ultimately to the point of 100 percent first-year expensing for business capital investment; d) expanding Roth IRA to all personal saving; and e) excluding export and foreign-trade income of American companies from tax in much the same way that other countries do in the world marketplace." With the 2001 tax bill, and this year's proposals to end taxes on dividend income and to consolidate and create new tax-free savings accounts, the administration has addressed three of the five pieces, and Christian and Robbins can say, "‘Stealth' tax reform is already under way."
The big picture also includes looking at what isn't part of the debate.
Corporate taxes, for example. Except for a relatively small provision for small business, there's no benefit for corporate America in the tax proposals. That raises this question: What is the future of corporate taxes, which used to account for more than a third of all tax revenue, but now, with creative accounting and expanding shelters, accounts for well under 10 percent? Tax havens and other shelters have been estimated to cost taxpayers upwards of $60 billion a year; and the individual income tax now accounts for nearly 85 percent of federal revenue, the highest level since World War II. That's one more reason for public unrest.
And what about the alternative minimum tax, which was expanded from corporations to individuals three decades ago? Because of tax credits and deductions, growing numbers of taxpayers are caught in the AMT net. In ten years an estimated forty million taxpayers will pay the AMT penalty. Correcting the imbalance will cost more than $600 billion over a ten-year period. No one has an immediate solution.
"I don't know if this tax cut will turn your 101(k) into a 401 (k). I don't have enough information," the acerbic morning radio host, Don Imus, mused recently. The immediate challenge for the press is making sure he can't say that again.
Read Toedtman's Tax Primer
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