- The Washington Times - Wednesday, June 6, 2001

Readers are asking what I, as one of the original supply-siders, think of the tax reduction package that has found its way through the political process. My answer is that I am uneasy about the bill.
True, the Bush administration and Republican Congress with support from a few Democrats moved rapidly forward with most of the Presidents proposal. Rates are cut (eventually), and the estate tax is repealed (eventually), so why am I uneasy?
For the following reasons:
Irrationality designed the tax legislation. Elected policy-makers permitted mythical Social Security and Medicare "lock boxes" and nonsensical "static revenue estimates" to prevail over economic rationality.
In order to "save" revenues, the reduction in tax rates is phased in over many years, and the Death Tax is not repealed until 2010. Then, one second past midnight Dec. 31, 2010, Cinderellas coach becomes a pumpkin, and the entire tax reduction, so laboriously phased in, expires. The estate tax automatically reinstates, and tax rates return to their 2000 level. If you intend for your estate to benefit from the repeal of the Death Tax, make certain you die in the year 2010.
Republicans are betting that whoever controls the government a decade from now will vote to extend the life of the tax cut another year or two or five or 10. And well they might, depending on budgetary and ideological factors. But the future policy-makers might reshape the tax cut. The automatic increase in the top tax rate might be allowed to stand with the revenues used instead for a rebate to lower income tax filers.
More ominously, the repeal of the Death Tax in 2010 is offset by a change in capital gains taxation of inherited property. Currently, the values of inherited assets are "stepped-up" to market values so that estates are not hit with both death and capital gains taxes. In 2010, the "stepped-up" basis is repealed in effect, replacing the estate tax with a capital-gains tax. After another decade of class warfare, what assurances are there that heirs in 2011 and thereafter will not find themselves stuck with both taxes?
Uncertainty rules. We will not know for a decade whether the tax reduction is real or not.
Another disturbing feature in the legislation is the intentional shrinkage of the percentage of the voting population with income tax liability. Apparently, Republicans feel so guilty about cutting tax rates on upper-income earners that they compensate by dropping lower-income earners off the tax rolls altogether.
At the present time only 65 percent of voters have any income tax liability.
Moreover, the "earned-income tax credit" and refundable tax credits (such as the refundable child tax credit in the Senate version of the tax cut) are creating a large number of tax filers who receive net cash payments from the IRS. Bill Archer, until recently chairman for six years of the House Ways and Means Committee, reported in the May 29 Wall Street Journal that 43 percent of those who file income tax returns actually benefit from the income tax, because they receive "refunds" in excess of their tax liability.
The earned-income tax credit and refundable credits destroyed the integrity of the income tax. No longer solely a device for raising revenues, the income tax is incorporated into the welfare system and makes cash payments directly to poor people.
We are approaching the point where voters adversely affected by the income tax are a minority that can be exploited to the hilt. There are 129 million taxpayers. The top 5 percent of income earners (6.5 million people) already bear 54 percent of the income tax burden. The top 25 percent (32 million people) pay 83 percent of the total personal income tax collection.
The remaining 75 percent of taxpayers (97 million people) bear only 17 percent of the income tax burden, and 70 million voters have no income tax liability whatsoever.
With 167 million voters with little or no income tax liability and 32 million burdened with 83 percent of the liability, have we achieved the tyranny of the majority? Will the political temptation to plunder the minority and to turn them into tax slaves destroy the creativity and productivity of the American economy?


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