Bush's Tax Cut: Nickels and Dimes for the Working Poor

By Laura D'Andrea Tyson

Well, it happened. The Bush tax-cut package has become law. Fuzzy math and fuzzier economic logic have prevailed over fiscal responsibility and fairness. Even with accounting gimmicks breathtaking in their audacity and duplicity, the President and Congress will have to temper their spending plans, dip into the surpluses for Medicare and Social Security, or scale back, delay, or even repeal some of the tax cuts. Otherwise, the federal government will almost certainly once again find itself facing deficits as far as the eye can see. So much for the commitment to fiscal responsibility.

And what about the commitment to "compassionate conservatism"? That, too, has fallen victim to the tax cuts. Most Americans believe that people who work full-time should be able to earn enough to keep their families out of poverty--a simple yet compelling standard of compassionate conservatism. Unfortunately, this is not the case for millions of American families, and the Bush budget does little to improve the situation.

Consider the economic position of low-income workers. An individual employed full-time at the minimum wage earned $7.21 per hour in 1999, including the earned-income tax credit. That's far below the so-called living wage--the minimum of $8.21 per hour necessary to keep a family of two adults and two children out of poverty, according to Census Bureau figures. About one-quarter of the workforce--including 21% of men, 34% of women, 34% of African Americans, 45% of Hispanics--earned less than this living wage.

SHORTFALL. According to a review of the literature by the Economic Policy Institute, even this living wage covers only about 60% of the cost of such basic needs as safe housing, transportation to and from work, child care during working hours, and decent health care. Market wages do not meet these basic needs for low-income workers in other advanced industrial societies, either--but together with government programs they do. Not the case in the U.S., where such programs either do not exist or are inadequately funded.

The Bush budget is principally directed toward helping high-income taxpayers. About 37% of the new tax cuts will go to the wealthiest 1% of taxpayers, although they pay only about 25% of federal taxes while owning 40% of the nation's wealth. The average percentage gain in aftertax income for those in the top 1% will be about three times larger than the gain for those in the middle, and about seven times larger than for those in the bottom 20%.

Moreover, the Bush tax cuts are built into a tax code that already favors the wealthy. High-income households can afford to buy or build larger houses to take advantage of the tax deduction for mortgage-interest payments. The top 20% of earners receive more than two-thirds of the benefits from tax deductions for private retirement savings. About three-quarters of these earners also enjoy employer-provided pension plans, and more than 80% are covered by employer-provided health insurance, both of which receive generous tax breaks. In contrast, fewer than 20% of workers in the bottom fifth of the wage spectrum enjoy employer-provided pension coverage, and fewer than 30% enjoy employer-provided health coverage. Since more than 80% of high school graduates from the richest 20% of families attend college, compared with less than 50% of those from the poorest 20%, upper-income families who would send their children to college anyway also benefit disproportionately from generous tax credits and deductions for college tuition.

Bush's top-heavy tax cuts come on top of a dramatic increase in income disparities during the past two decades. A recent study by the Congressional Budget Office shows that during the last 20 years, average real aftertax income for the bottom fifth stagnated at around $11,000 (in 1997 prices), while the top fifth enjoyed a 50% increase--and the top 1% enjoyed a 157% increase, to an annual average exceeding $650,000 per year. Such growing inequality cannot be explained by demographic changes in the age of the population or in the size and composition of families. Nor has there been any increase in the mobility of Americans between income levels--the majority of low-income households continue to have low incomes.

In her recent book, Nickel and Dimed: On (Not) Getting by in America, Barbara Ehrenreich provides a first-hand account of the plight of America's working poor. She concludes that they are the true philanthropists of our society--working for less than they can live on, involuntarily sacrificing the quality of their own lives and those of their families for the rest of us. It's too bad that the President and members of Congress did not absorb the message of this book before they cast their votes for a costly tax bill that overlooks the working poor while showering additional rewards on the wealthy. As a nation, we should be ashamed of ourselves.

Laura D'Andrea Tyson is dean of the Haas School of Business at the University of California at Berkeley. She is chair of the Council on Foreign Relations Task Force on Japan.

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