Taxing to the Dark Side

Bush misleads Americans about tax cuts—again—during the State of the Union.

George W. Bush. Click image to expand.
George Bush

It made sense for President Bush to lead with the economy in last night’s State of the Union address. We’re perched on the edge of a possible recession for the first time since 2001. And he has always used the SOTU to mobilize the nation to deal with a crisis. Given that Bush has generally had his way entirely when it comes to fiscal matters—massive tax cuts, massive spending increases, and the new Medicare prescription-drug benefit—this last State of the Union could have been a valedictory, in which he rehashed highlights and urgently argued for a legacy.

But the speech, subdued and generally lacking passion, was no valedictory. Nor did he muster much energy and eloquence to deal with the current economic woes. Rather than build a narrative, as he did in the past when discussing national security challenges, Bush simply ticked off the items on the economic agenda that have consumed so much energy and time—stimulus, subprime, health care, etc. There was no high-minded talk of the ownership society, or an investor nation.

The only legacy moment came when he discussed his desire to make permanent the temporary tax cuts enacted in the first term. Not surprisingly, it rang a bit hollow. He told Congress that making the tax cuts, due to expire in 2010, permanent today would go a long way toward soothing frayed economic nerves. “With all the other pressures on their finances, American families should not have to worry about the federal government taking a bigger bite out of their paychecks. There is only one way to eliminate this uncertainty: Make the tax relief permanent.” This is, of course, a fantasy confined to a dwindling number of office suites in the White House, the Wall Street Journal editorial page, and certain time slots on CNBC. On the long and growing list of factors weighing on the economy—stagnant job growth, the housing mess, problems with bond insurers, the self-inflicted wounds of the financial sector, a debased currency—the prospect that tax rates are going to revert to 1990s levels in three years is pretty far down.

What’s more, neither Bush nor any of the Republican candidates angling to replace him will acknowledge the fact that Bush’s tax cuts can’t be saved because of Bush’s legacy of profligate fiscal behavior. The combination of the tax cuts and massive spending on education, health care, and war has pushed the national debt from $5.67 trillion in the fall of 2000 to $9.17 trillion today, an increase of 61 percent. Rather than seriously try to deal with entitlements, he created a massive new one—and then told Democrats that the only real solution to the entitlement mess was to rip up Social Security. The annual deficit, under superficial control only because his administration and Congress spent hundreds of billions of dollars of excess Social Security payroll taxes, is poised to rise again this year—and in the years to come. The Congressional Budget Office last week projected that the fiscal 2008 deficit will rise 34 percent from fiscal 2007. Factor in $30 billion in spending on Iraq and Afghanistan, and the increase is likely to be greater than 50 percent.

Rather than reveal any sense of realism about the implications of this decade’s tax-and-spend policies, Bush reverted to the fundamental dishonesty that has characterized his discussion of the tax cuts right from the beginning. (Go read Paul Krugman’s 2001 pamphlet Fuzzy Mathagain.) To those who would argue for letting the tax cuts expire, he said: “Try explaining that to 116 million American taxpayers who will see their taxes rise by an average of $1,800.” Sigh. The use of the average here in this regard is astonishingly misleading, because the distribution of incomes has been so wildly unequal during the Bush Boom. The median—or typical—taxpayer will suffer nothing close to $1,800 in higher taxes when they expire. As David Cay Johnston noted in the New York Times, “The top 1 percent paid 27.6 percent of all federal taxes in 2005,” and they’ll be disproportionately impacted when the tax cuts expire. A study by Citizens for Tax Justice noted that the top 0.6 percent of tax filers, those with more than $500,000 in income, received nearly three-quarters of the benefits of the capital gains and dividend tax cuts in 2005. It would have been far more accurate for Bush to note that the few Americans who received the overwhelming majority of the benefits of the tax cuts (and who saw their incomes soar) will face a sharply higher bill, while the overwhelming majority who received relatively small benefits (and saw their incomes stagnate) will feel a smaller pinch.

There was one moment when the old, cocky Bush made an appearance. “Others have said they would personally be happy to pay higher taxes,” he said, his eyes twinkling mischievously. “I welcome their enthusiasm. I am pleased to report that the IRS accepts both checks and money orders.” Get it?

Much has been made of how the repeated failures of his presidency seem not to have taken much of a personal toll on Bush. But on taxes, it’s likely he will ultimately feel a personal impact. During the years of low marginal tax rates, Bush was on the public payroll, holding the relatively low-paying job of president. Come next year, as he told author Robert Draper, he’s going to start to “replenish the ol’ coffers” by giving speeches and likely writing a memoir—just in time to pay higher taxes.