The Latest Bush Plan -- Consumption Taxes

The President's tax medicine hasn't worked so far, but get set for more

By Robert Kuttner

Looking beyond the convention rhetoric, what economic program could we actually expect from a second Bush term? Further tax cuts would certainly be a top priority despite looming deficits of unsustainable scale. And unlike the mélange of tax cuts that marked President Bush's first term, these new cuts would all point in one direction -- a move to consumption taxes, to shift the burden of taxation off wealth and onto work.

Conservative antitax groups, such as Stephen Moore's Club for Growth and Grover Norquist's Americans for Tax Reform, are abuzz with the prospects of either a flat tax, a national sales or value-added tax (VAT) to replace all income taxes, an explicit consumption tax, or massive shelters for savings that would turn the income tax into a de facto tax on consumption only. The Treasury has its technical staff researching possibilities, and President George W. Bush said on Aug. 10: "I'm not exactly sure how big the national sales tax is going to have to be, but it's the kind of interesting idea that we ought to explore seriously."

WE CAN ALSO READ THE TEA LEAVES for a second term by reviewing several Bush tax proposals from his first term that did not make it into law. In its 2004 budget the White House proposed to exempt all dividends and most capital gains from taxation by crediting taxes that the relevant corporation had already paid. In a compromise, Congress cut rates on both dividends and capital gains, to 15%. The original Bush plan would have cost the Treasury $396 billion in lost revenue over 10 years, according to the congressional Joint Committee on Taxation.

Another deferred Administration proposal would allow people to put large sums into savings accounts whose investment income would then be tax-free. Over time, this would shelter most investment income from taxation, leaving taxes mainly on wage-and-salary income. The Bush medical savings-account plan, allowing far larger tax-deductible accounts to pay for insurance premiums and medical expenses, is another variant on the same theme -- as is the effort to kill the estate tax, the only explicit tax on accumulated large wealth.

All of these proposals will be back, and all have three things in common. First, they benefit mainly wealthy people with substantial discretionary income to save. As such, they would end what's left of mild progressivity in the tax system. Second, they would further increase the already alarming federal deficit. And perhaps most important, despite the "supply-side" rationale, there's no evidence that any of them would actually promote savings, investment, or growth.

Recent statistics suggest that the Bush supply-side medicine to date has been a notable failure as an economic tonic. The Census reported on Aug. 26 that, for the third straight year, median income fell in 2003. In inflation-adjusted terms, the median household lost $1,535 in annual income between 2000 and 2003, according to the Economic Policy Institute's analysis of the Census data. By contrast, over 10 years, the median household will realize only about $620 a year from the Bush tax cuts. So the Bush economic program was a losing deal for the typical American family.

Nor has the Administration tax program been good for jobs, savings, or domestic investment. The economy has one million fewer payroll jobs than it did when the recovery started. According to a study by Mark Zandi, chief economist at, only 0.1% of the 2001-03 growth can be credited to the tax cuts. Some 0.4% of the growth reflects increased military spending. Low interest rates get most of the credit for stimulating growth.

Practical failure has never stopped the supply siders. This time, however, there are two complications. First, like kids in a candy store, supply siders are uncertain which consumption tax to choose, and each variant raises concern. A VAT or national sales tax would strike some voters as just another new tax. As Robert McIntyre of Citizens for Tax Justice observes, getting all current federal revenue from a retail sales tax would require a rate of over 50%. And second, with many conservatives worried about the deficits, Congress might insist that any new tax be a net revenue-raiser, not the net tax cut supply siders want.

Of course, after November, these intoxicating supply-side choices might all be mercifully moot.

Robert Kuttner is co-editor of The American Prospect and author of Everything for Sale.

    Before it's here, it's on the Bloomberg Terminal.