When it comes to tax cuts, the rich get richer

More than four years after Congress passed President Bush’s centerpiece tax-cut
legislation, economists are still arguing over who has benefited the most _ the
poor, the middle class, or America’s most affluent.

But there isn’t any doubt about who will be smiling most from the 2006 round
of tax cutting: It’s the rich, and they’re about to get richer.

Starting Jan. 1, two new pieces of Bush’s original 2001 tax cut will kick in,
both overwhelmingly aimed at households well into six figures of income. One
provision would ease restrictions on high wage-earners’ ability to fully itemize
their tax deductions; the other would relax limits on the value of personal

Together, they’re expected to reduce federal income taxes by $27 billion over
five years, with 97 percent of the benefits falling to those making at least
$200,000 a year.

A month after these provisions take effect, Congress is expected to resume
another round of tax-cutting, and here again it’s the most affluent who will be
the biggest recipients. Although the precise outcome of Congress’ new tax-cut
plan remains in doubt, it appears Americans with large dividends and capital
gains, along with households paying the Alternative Minimum Tax, will be the

Before adjourning in late December, the House gave initial approval to $94.5
billion worth of tax cuts over five years, and roughly 90 percent of them were
aimed at high earners.

Some critics say the combination of tax-cut provisions forms an odd
juxtaposition with Congress’ simultaneous bid to cut $40 billion in federal
spending over the next decade, much of it aimed at entitlement programs
benefiting the poor.

Robert Greenstein, director of the liberal Center on Budget and Policy
Priorities, said the new tax cuts have a “kind of gilded-age feel. … There’s a
pretty stark contrast between some of the provisions in the budget bill … and
these two new tax cuts.”

Greenstein said affluent Americans already have fared well in the early
rounds of Bush’s tax cuts, citing studies that suggest an upper-income tilt to
the president’s signature economic program. An analysis by William Gale and
Peter Orszag of the Brookings Institution said the Bush cuts had increased
disparities between rich and poor in after-tax income.

“These tax cuts are skewed pretty heavily in favor of people at the top,”
said Greenstein.

Others, employing different economic measurements, argue that the Bush tax
cuts have been in roughly proportion to the federal income taxes Americans are
already paying.

“The tax burden among income groups has been relatively unchanged,” said Dan
Mitchell, a tax expert at the Heritage Foundation. “The administration bent over
backwards to make sure that was the case.”

But there’s no argument over the character of the tax cuts taking effect Jan.
1 and those awaiting action by Congress early in 2006. If your household income
is $200,000 or more, you’ll like this round of tax cuts; if it’s in the seven
figures, you’ll like it even more.

The two tax provisions effective with the new year have an intriguing
political footnote. They essentially undo legislation signed by Bush’s father,
George H.W. Bush, in 1990 as part of a deficit-cutting package.

Each was a variation on the same theme: limiting the benefit of certain tax
breaks for high-income earners. The higher the income, the larger the limitation
_ at least to a point.

One of the provisions phases out benefits of the personal exemption (now
$3,200 per family member) for high earners. The phase-out begins with income of
$145,950 for singles and $218,950 for married couples, and works its way toward
total elimination of the benefit.

The other limitation is on itemized deductions, and in this case the
phase-out begins at $145,950 for both singles and couples, and deductions cannot
be cut back by more than 80 percent.

The Bush tax cut removes these limitations in chunks _ one-third now, another
third in 2008 and the final third in 2010.

According to the Urban-Brookings Tax Policy Center, 53.5 percent of the
benefits will go to households with incomes over $1 million; another 43.2
percent will go to those making $200,000 to $1 million; and the remaining chunk,
3.3 percent, will go to those making $100,000 to $200,000.

Similarly, the congressional proposal to extend lower rates on capital gains
and dividends also would have its biggest impact on the affluent. An estimated
53 percent of the benefit would go to those making $1.3 million, according to
Citizens for Tax Justice, with three-fourths of Americans receiving nothing.

Left-leaning groups such as the Citizens for Tax Justice say the proposal
appears jarring at a time when Congress is curtailing programs such as heating
fuel assistance, Medicaid and college loans.

“It’s hard to believe that Congress could see more tax cuts for the rich as a
priority,” said Robert McIntyre, CTJ’s director.

The Heritage Foundation’s Mitchell and other proponents counter that tax cuts
have been an important factor in the nation’s robust economic growth of the last
couple of years, and that tax cuts inevitably have a large impact on the
affluent because they pay the overwhelming share of income taxes.

“It’s no coincidence at all that we’ve had strong economic growth after the
tax cuts,” Mitchell said.