The GOP's Tax Windfall
Cuts put the growth vs. equality debate back on the table
Amid weeks of sliding poll numbers, President Bush and Republican lawmakers have been clawing for any political win to rally their base voters as they head into the fall elections. They found one last week in a five-year, $70 billion tax cut.
"This legislation prevents a $70 billion tax increase on the American people and ensures continued economic growth and job creation," said Senate Majority Leader Bill Frist, a Tennessee Republican. "These provisions have proven to strengthen our economy."
Reprieve. The victory, which came after months of tough negotiations between House and Senate Republicans, will extend the 2003 tax cuts on capital gains and dividends. Those cuts were set to expire in 2008 but will now stay at 15 percent through 2010; they previously had been as high as 20 percent and 38.6 percent, respectively. It also contains a one-year reprieve for roughly 15 million Americans who would otherwise face the alternative minimum tax, which was originally designed to prevent wealthy citizens from escaping taxes but has wound up hurting upper-middle-income earners.
The White House says the cuts will continue to stimulate the economy and points to a boom in gross domestic product growth as proof. Critics say the law will amplify income inequality and do little to cut taxes for the middle class. "The benefits are extremely skewed," says Len Burman, head of the Tax Policy Center, run by the Brookings Institution and the Urban Institute. "All of the major features benefit people in the top quintile." Republicans argue that those at the top now pay the vast majority of taxes.
Democrats also point to the continuing federal deficit, which has been in the red for five straight years. However, higher-than-expected tax receipts--thanks to the thriving economy and high corporate profits--have started to improve that picture.
Republican strategists say the cuts will please the base but doubt that it will quickly lift the president's approval ratings--though it could prove a potent issue for the midterm congressional elections. "This is an important step," says Whit Ayres, a Republican pollster. "It isn't by itself going to change a whole lot. No one individual event will change a lot, but it's a step in the right direction, especially for the base."
This story appears in the May 22, 2006 print edition of U.S. News & World Report.