Bush tax cut plan leaves few happy, except those who thrive on debate

By DAVID MOON, Moon Capital Management
June 17, 2001

Amid great fanfare, President Bush signed his $1.3 million tax cut plan into law, promising to return some of the federal government surplus to the people who sent the unneeded money to Washington. The plan was criticized by many liberals as favoring the wealthy, ignoring the plight of the working poor for whom a redistribution of federal tax revenues would mean a more substantial increase in their wealth or standard of living. Conservatives argued that since you could not give someone a tax cut in excess of their tax bill, the benefits of any tax cut must flow to the people who initially provided the tax revenue. To simply redistribute collected tax revenues to those who had not paid it would not be a tax cut, it would be a new welfare program.

Pardon me if I don't get too excited watching this almost purely theoretical debate. It has very little to do with reality and might never significantly affect your pocketbook. Having the debate is valuable, however, if for no reason other than it forces our elected officials to clearly show their beliefs about the role of government in our financial affairs.

But the debate is only remotely related to the actual tax package. This plan extends most tax cuts so far into the future that if the eventual outcome looks anything like the advertised version, it will probably be as the result of luck.

Many of the problems with our tax code are illogical, if not counter-productive and immoral. Consider the marriage tax penalty. No one argues that the federal government ought to financially penalize folks for choosing to seal their relationships with a legal and religious ceremony. At a time the federal government takes more of our money than it needs to support its current spending (plus eight percent growth this year), why not immediately eliminate the marriage penalty? This plan does not even begin to eliminate the marriage tax penalty until after the end of Bush's current term of office. Even then, the reduction is gradual.

The much-debated elimination of the estate tax is not slated to occur until 2010. Until then, the exemption amount increases every two or three years, giving the families of wealthy, but terminally ill individuals a financial incentive to keep life support going until the next exemption increase is phased in. Thanks to the government, you can add your doctor to your estate planning team.

Several of the tax benefits in this plan (such as deductions for higher education tuition) begin almost immediately, but are scheduled to expire at a certain future date. Why? Is deductible college tuition a good idea or not?

The problem is politics. Candidate Bush talked about across the board tax cuts, promising to make tax filing simpler and rates more flat. This is the revenue side of the conservative fiscal mantra and Bush needed to prove his worthiness to the conservatives, lest they leave him for John McCain. Running for office is much different than governing, however. Campaign policy can be implemented with a mistaken tap on a speechwriter's keyboard. Tax policy requires a selling effort to a 535 elected legislators, each with their own real and perceived constituencies.

What started as a plan to cut rates across the board, ended as a ten-year plan to provide more targeted tax benefits to people who act in the ways government wants them to. Go to college. Itemize your deductions. Don't itemize your deductions. Put money in your Roth IRA. Have a child. Take out a student loan. Hire an accountant. In other words, be good little boys and girls, act like the government tells you to and maybe you will get some of your excess money back. The debate was interesting and enlightening; the reality leaves almost everyone unsatisfied.

David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN).

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