NCPA - National Center for Policy Analysis

Administration Critical of Tax Distribution System

December 23, 2002

In order to gain support for tax cuts enacted last year, Bush administration economists have lately criticized tax distribution methods. On December 10, two of them spoke on the subject at the American Enterprise Institute.

The first was Larry Lindsey, outgoing director of the White House National Economic Council. He made the point that standard tax distribution tables often include Social Security taxes.

  • This is wrong, he said, because most of what such taxes pay for comes back to the taxpayer in the form of specific cash benefits -- while by contrast, little, if any, income taxes come back to the taxpayer who paid them.
  • Therefore, Social Security taxes are not really taxes in a meaningful sense of the term, because, while it's true, they take money out of one's paycheck, so do deductions for health insurance, life insurance and other things -- yet we don't view the latter as taxes because we are getting something specific in return.
  • An honest appraisal of the distributional effects of Social Security would not only look at taxes paid, but also benefits received.

Council of Economic Advisers Chairman Glenn Hubbard also spoke at the same event. He made the point that standard distributional tables are flawed by being "snap shots" of a particular moment in time, with no regard to age, changes in economic behavior or economic growth.

  • He pointed out that tax rates necessarily change over one's "life cycle," rising as one ages and increases income, and falling as one moves into old age.
  • Therefore, one may be in a low tax bracket at one point in life and a much higher bracket at another point.
  • One's tax bracket may also change if one responds to a cut in tax rates by working or investing more, or if economic growth rises due to the tax cut, which will increase employment and wages -- though these factors are not considered currently.

The Bush Administration is right to question the current methodology for tax distribution since its main purpose is to prevent taxes from ever being cut.

Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, December 23, 2002


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