TAX CUT BASICS How Trillion in Tax Cuts Leave Millions

TAX CUT BASICS How Trillion$ in Tax Cuts Leave Millions of Children and No Millionaires Behind CU E TA P TS X ! TH ST O 25 E Street, NW • Washington, DC 20001 • 202-628-8787 • www.childrensdefense.org March 2003 The Mission of the Movement to Leave No Child Behind® As we enter the 21st century, America’s strength reflects our courage, our compassion, our hard work, our moral values and our commitment to justice. Today, we can extend the American dream of our forefathers and foremothers to every child and family. We have the know-how, the experience, the tools, and the resources. And we have the responsibility as mothers, fathers, grandparents, and concerned and sensible people across the country. We can build a nation where families have the support they need to make it at work and at home; where every child enters school ready to learn and leaves on the path to a productive future; where babies are likely to be born healthy, and sick children have the health care they need; where no child has to grow up in poverty; where all children are safe in their community and every child has a place to call home—and all Americans can proudly say “We Leave No Child Behind.” Our mission and vision in the months and years ahead is to do what it takes to meet the needs of children and their parents by building on the strengths and sense of fairness of the American people, learning from the best public and private ideas and successes, and moving forward to a renewed commitment to all our children. To get involved with other concerned individuals, children’s advocacy organizations, and community and faith-based groups in the national Movement to Leave No Child Behind® contact the Children’s Defense Fund, 25 E street, NW, Washington, DC 20001 or check CDF’s Web site at http://www.childrensdefense.org. Acknowledgments This publication was made possible (in part) by funds granted by the Charles H. Revson Foundation. The statement made and views expressed however, are solely the responsibility of the author. March 2003 The 2001 Tax Cut Costs Far More Than Our Nation Can Afford. In 2001, President Bush signed a whopping tax cut that will cost the federal government $1.3 trillion over the next 10 years. This is a massive amount of money that the nation cannot afford. It has already caused large federal deficits and, if allowed to stand, it will starve essential investments in our children and families and neglect other crucial national priorities. To put the size of the tax cut into perspective, the 10-year cost of the 2001 tax bill far exceeds the entire cost of the comprehensive Dodd-Miller Act to Leave No Child Behind that would ensure all our nation’s children comprehensive health care, Head Start, child care, education and training, nutrition and shelter, and the supports and protections they need to become strong and productive adults. Tax Cut Law of 2001 or Investments in Children Comprehensive health care to all uninsured children + Head Start for available for all eligible children + Child care available for all eligible children + 100,000 new teachers $1.3 Trillion over 10 years $455 Billion over 10 years The Richest One Percent of Taxpayers Get More Than the Other 99 Percent of Us Combined – An Astonishing $121 Billion in the Year 2010 Alone. When the 2001 tax cuts are fully in place in 2010, more than half (52 percent) of the benefits will go to the richest one percent of taxpayers whose average annual incomes exceed $1 million. Super -Rich Top 1% = 52% The Other 99% = 48% Where the 2001 Tax Cut Goes When Fully in Place (2010) Total Cost Poorest 20% Average income = $12,200 Share of Total Cost 1% 6% 10% 13% 18% 52% $3 billion $15 billion $23 billion $31 billion $42 billion $121 billion Second 20% Average income = $27,500 Middle 20% Average income = $46,100 Fourth 20% Average income = $75,800 Next 19% Average income = $167,474 Richest 1% Average income = $1,491,000 Source: Citizens for Tax Justice, June 2002. Additional calculations by the Children’s Defense Fund. Average incomes shown are for 2010. The President’s New 2003 Tax Plan Hands Even More Money the Country Cannot Afford to Those Who Need It Least. In January 2003, President Bush proposed another massive new tax cut stacked toward the very rich. It’s called a “growth” package, but most economists doubt it will stimulate the economy. If allowed to pass, it will increase the federal deficit and threaten investments for children and families and other national priorities. $1.3 trillion $726 billion + 2001 tax cuts enacted = $1.3 trillion over 10 years 2003 "economic growth" plan = another $726 billion over 10 years (part of a new $1.6 trillion tax cut) “In fact, those who oppose the Bush plan think it will work no better than the 2001 tax cut: that it will do little for growth or employment, and will sharply raise the deficit….In the year and a half since that tax cut, which was sold as the perfect economic stimulus, the economy has lost 1.4 million jobs.” — Paul Krugman, Economist, New York.Times The Super Rich Get Most of the Tax Cuts – Ordinary Americans Are Left Behind. In 2003, the richest one percent of Americans with average incomes of over $1 million will get an average $11,302 each from the 2001 tax cut. They would get another $30,127 from the new tax plan the President unveiled in January 2003 for a total giveaway of over $41,000 for this year alone. For the average middle-income taxpayer, the combined tax cut would be just $720 (or $431 and $289, respectively). Among the bottom 20 percent of Americans with incomes below $10,000, the combined cut would be only $67 (or $61 and $6). Super-Rich Get $41,429 each (average income = $1,082,000) Middle-Income Americans Get $720 each (average income = $36,600) Poorest Americans Get $67 each (average income = $9,900) Average incomes shown are for 2003. “Put another way, the wealthiest one percent can get a Mercedes-Benz with their rebate, while the rest of West Virginia’s working families are lucky if they can afford a new muffler.” — Charleston Daily Mail (July 3, 2002) The 2001 Tax Cut Bill Will End the Tax on Millionaires’ Estates One notable piece of the 2001 tax law would eliminate the federal estate tax in 2010 – a tax that currently applies only to millionaires (those who die leaving over $1 million behind). Ending the estate tax will hand $50 billion to the wealthiest 1 percent of Americans and $5 billion to the next richest 4 percent, but will not give one penny to anyone else. For $138 billion over 10 years, the U.S. can: Repeal the Estate Tax or Invest in Children Provide affordable housing for 1 million families = $ 32 billion + Hire 100,000 experienced teachers = $ 47 billion + Provide after school programs for 1 million children = $ 33 billion “We need an estate tax precisely for the reason that estate tax repeal has become a political issue in the first place. In a selfgoverning democracy, we should be alarmed when the power of concentrated wealth attempts to shape the terms of policy debate and dictate the rules of our society.” — Bill Gates Sr. and Chuck Collins in Wealth and Our Commonwealth, 2002. The 2003 Bush Tax Cut Will End the Income Tax on Stock Dividends. A large piece of the Bush administration’s new proposed tax cut would eliminate taxes on dividend payments. This tax cut primarily benefits the wealthiest Americans. Nearly half of the benefits will go to the top one percent and taxpayers with incomes over $1 million would receive an average tax cut of more than $27,000 from just this one proposal – compared to an average tax cut of $42 for those with incomes between $30,000 and $40,000. To put this into perspective, the 10-year cost of the dividend proposal alone is more than enough to provide comprehensive health care for all 9.2 million uninsured children and Head Start for all unserved eligible preschool children who need its comprehensive services to prepare them for school and a productive future. For $396 billion over 10 years, the U. S. can Eliminate the Dividend Tax or Invest in Children Provide comprehensive health care for all 9.2 million uninsured American children ($193 billion) Make Head Start available for all unserved eligible children ($55 billion) Invest in Children – Stop Tax Cuts for Millionaires “The Bush tax plans leave no millionaires behind, but leave millions of children behind. It is callous and irresponsible to borrow money we don’t have to spend where it isn’t needed while dismantling and cutting investments for the most vulnerable children.” — Marian Wright Edelman, President, Children’s Defense Fund “Are we really cutting taxes – or just raising them on our kids?” — Concord Coalition Ad, New York Times (February 2, 2002) Investments in our children are investments in our nation’s strength, security, and future. It is vital that our nation ensure every child a Healthy Start, a Head Start, a Fair Start, a Safe Start, and a Moral Start in life and successful passage to adulthood with the help of caring families and communities. Yet millions of America’s children are denied the health care and child care that protect their safety and well-being; millions of children lack the quality early childhood services or good schools that allow them to learn and achieve their goals; and far too many of our children are abused, neglected, homeless, hungry, and poor. We need to raise our voices for new choices for our children and our nation. I For far less than the cost of the 2001 Bush tax bill, we could fund the entire comprehensive Dodd-Miller Act to Leave No Child Behind. For the cost of President Bush’s 2003 tax plan, we could double federal education spending over the next 10 years. For the $90,000 that the Bush administration will hand to each millionaire in 2003 under the new $726 billion tax plan, we could do any one of the following: I I I I I I I I Fully immunize 139 children against preventable disease. Provide 35 disadvantaged youth employment training for a full year. Pay the average public college tuition for 25 undergraduates. Give Head Start to 13 disadvantaged preschool children. Pay the annual salary of five child care workers. Pay the annual salary of three new public school teachers. The Bulk of the 2001 Tax Cut Hasn’t Happened Yet. If You Speak and Act Right Now It Can Be Stopped. There’s Still Time to Help Children. The 2001 tax law was written to start small with benefits that balloon upward after 2004 for the super-rich. For everyone else, the 2001 tax cut is largely frozen already; it does not increase much later. $100000 $85,000 $80000 $60000 $40000 $20000 0 2001 2001 2003 2004 2005 2006 2007 2008 2009 2010 $787 “You are not getting that much stimulus...compared to the cost to the Treasury.” — Ed Mckelvey, Senior Economist, Goldman Sachs (Investment Banking Firm). We don’t have to give tax cuts to rich people in order to create jobs and provide economic stimulus. On the contrary – huge long-term tax cuts lavished on the top income brackets are not a good way to create jobs. Most of the new $726 billion in tax cuts proposed by the Administration as a “growth package” will be remarkably ineffective as economic stimulus. Government can take a variety of steps to boost job creation, but one point is clear: to reduce unemployment this year, it is not effective to cut taxes next year, and for nine years thereafter. But that is exactly what the Administration proposes. Only about $40 billion of the $726 billion tax cut takes effect in 2003; the rest phases in over 9 more years. Tax cuts for the rich are not the price we have to pay for economic growth. Ending the tax on stock dividends makes up more than half the cost of the President’s $726 billion tax cut package, and is heavily tilted to the very highest income levels. The Congressional Research Service found that “dividends are concentrated among higher income individuals who tend to save more” and that “using dividend tax reductions to stimulate the economy is unlikely to be very effective.” Why? Businesses are not hiring workers now because people are not buying enough of their products. Putting money in the hands of people who need it now for basic necessities would help the economy grow. Tax cuts that go into savings do not provide the short-term boost the economy needs now. After many business leaders and economists pointed out that the Bush plan would not provide the desired short-term stimulus, the Administration switched gears and instead emphasized that the proposal would produce long-term growth. But these claims have been hotly debated too. By creating permanent tax cuts that create large deficits for many years, the Administration’s plan may actually hurt long-term growth. Big prolonged deficits mean government has to borrow large sums. This can lead to higher interest rates, so businesses find it more expensive to expand. And government, faced with deficits, will spend less on health care, education, and other services. Workers in these sectors are likely to be laid off or to lose pay, and that hurts the workers, their families, and the economy. How Many Taxes Can You Cut? 1) In 2001, a 10-year tax cut costing $1.3 trillion dollars was enacted into law. Its major components were reductions in the percentage of income (the tax rate) paid in federal income taxes, an increase in the child tax credit from $500 to $1,000 per child, reduced income taxes for married couples, and the repeal of the estate tax. The tax cuts were designed to phase in gradually. Here are major components of the 2001 package, showing the cost in 2003, 2010, and the total for 2001 – 2010. 2003 2010 2001-2010 Income tax rate reductions Increase Child Tax Credit (includes gradual increase from $500 to $1,000, and makes Child Tax Credit at least partly available (a “refundable” credit) to families with earnings over $10,000) Reduce income taxes for married couples (includes rate and standard deduction changes as well as change in Earned Income Tax Credit to help low-income married couples) Estate tax repeal Other TOTALS: $ 61.5b $ 118.5b $ 874.9b $ 9.9b $ 25.2b $ 171.8b $ 0.8b $ 7.0b $ 11.4b $ 90.6b $ 9.2b $ 23.5b $ 10.6b $ 187.0b $ 63.3b $ 138.0b $ 100.5b $1,348.5b Source: Citizens for Tax Justice, June 2002. 2) The Bush Administration keeps adding more tax cuts. The President proposed a new $670 billion 10-year tax cut at the beginning of this year. Part of the cost comes from speeding up the phase-in of the income tax cuts enacted in 2001. The most costly single proposal would end the tax on stock dividends. Other reductions include increasing tax breaks for small businesses, and adjusting the Alternate Minimum Tax so that taxpayers benefiting from the proposed tax cuts will not be subject to higher taxes. 2003 10-year Total End tax on stock dividends Accelerate income tax rate cuts to 2003; Speed up expansion of lowest (10%) bracket Accelerate Child Tax Credit increase to 2003 But does not speed up refundable CTC Accelerate tax reduction for married couples But does not speed up increase in Earned Income Tax Credit for married couples Small business tax reduction Alternate Minimum Tax adjustment TOTALS: $8 b $11 b $14 b $5 b $396 b $119 b $ 90 b $ 55 b $1b $1b $40 b $ 29 b $ 37 b $726 b 3) The President’s new budget proposal drastically increases the tax cut total. The Administration’s 2004 budget adds still more tax cuts on top of the $726 billion described above. Including the $726 billion, the 10-year total for tax cuts in the budget adds up to $1.6 trillion more than the cuts enacted in 2001. TAKE ACTION! Congress can stop the skyrocketing 2001 tax cuts! Congress can reject new tax cuts for millionaires! But only because… You can contact Congress. You can stay informed. You can join the Movement to Leave No Child Behind! To Contact Congress: Call the Capitol Switchboard and ask to be connected directly to the offices of your Senators and Representative: 202-224-3121. Send a message through the CDF Action Council site: http://www.cdfactioncouncil.org. To Stay Informed: Be connected! To receive regular updates about proposals before Congress that affect children, including tax cuts, get on CDF’s e-mail lists. Here’s how: go to http://www.childrensdefense.org/listservs.php and choose the lists from which you’d like to receive information. For tax updates, select “Legislative Update” and “End Child Poverty.” Find timely and clear information about the impact of impending tax cut proposals online, from these organizations: Children’s Defense Fund: Citizens for Tax Justice: Center on Budget and Policy Priorities: Urban-Brookings Tax Policy Center: http://www.childrensdefense.org http://www.ctj.org http://www.cbpp.org http://www.taxpolicycenter.org To Join the Movement to Leave No Child behind Visit http://campaign.childrensdefense.org