Although Congress and the White House have now reached agreement on a tax cut, down to the very end the Clinton Administration was highly critical of the distributional effects of the House and Senate tax bills. Treasury Secretary Bob Rubin, for example, often complained that the House tax bill would give almost half the total tax cut to just the top 10 percent of taxpayers.

Rubin's assertion was supported by a Treasury analysis based on a tax cut of $71.2 billion in 1998.

• However, its own estimate of the actual impact on federal revenues next year shows a gross tax cut of just $4.0 billion.

• In fact, the net effect would actually be to raise revenue in 1998, because the Treasury scored only the revenue-losers and left out the revenue-raisers.

• Moreover, the actual loss of federal revenue from the tax cut never gets close to $70 billion; according to Treasury's figures, the gross revenue loss rises to a maximum of just $45 billion in the year 2007.

So where did Treasury get the $70 billion tax cut upon which it based its distributional analysis?

First, Treasury assumes that every provision of the tax bill becomes effective immediately, including those that do not take effect for many years. Second, Treasury disregards all changes in behavior when distributing the effects of tax cuts, but makes some effort to calculate behavioral effects when computing the overall revenue impact.

The latter point is most critical when looking at capital gains. Since taxes are only paid when an asset is sold, many people hold on to their gains even when they would prefer to sell in order to avoid paying capital gains taxes. But experience shows that cuts in the capital gains tax create an unlocking effect, leading to increases in sales of capital assets and an increase in federal revenue, at least in the short run. For this reason, even Treasury admits that both the House and Senate capital gains tax cuts would have raised net federal revenue in the first five years(see figure).

But this revenue increase is completely ignored in the distribution tables. There, Treasury assumes that every asset sold would have been sold anyway without any cut in the capital gains tax. Therefore, sellers of such assets are assumed to be receiving a huge tax cut even though they are actually paying more, rather than less, taxes.

At a minimum, Treasury's distribution tables are a gross distortion of reality. At worst, they are a lie. Tax increases were magically turned into tax cuts to serve the Clinton Administration's class warfare agenda.

Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, August 4, 1997.