Taxes and Government Spending - Current Issues In Taxation

The impact of taxes on the economy is a source of never-ending debate in U.S. politics. Taxing personal income decreases the spending power of the individual; however, government spending can, to a certain degree, fuel the economy. Limited taxation is favored by those who believe that workers and companies with more available money to spend will participate to a greater extent in the economy. This, they say, will lead to economic growth. However, others observe that cutting taxes without severely reducing government spending quickly leads to large budget deficits and undermines the government programs that provide a social safety net to the disadvantaged.

President Bush was reelected in 2004 under the promise of revamping America's tax system. A variety of proposals have been put forward, including a national sales

FIGURE 8.2

tax that would replace all other forms of federal taxes. President Bush's proposal, however, does not advocate such a radical shift in tax policy. Building on his record of cutting income taxes, the president favors simplifying the tax bracket system and making the provisions of EGTRRA permanent. The proposal is based on the administration's belief that "countries with low taxes, limited regulation, and open trade grow faster, create more jobs, and enjoy higher standards of living than countries with bigger, more centralized governments and higher taxes. … If people are given the freedom to create, they do. If people are given a stake in the outcome, they succeed" (The President's Agenda for Tax Relief, April 29, 2003).

The president asserts that his policies will reduce poverty by lowering taxes for low- and lower-middle income families. Figure 8.2 shows the estimated impact of federal tax cuts on a single parent who has two children and who earns between $22,000 and $30,800 per year. Figure 8.3 represents White House projections of the percent reduction in income tax burden for a married couple with two children and one income. According to The President's Agenda for Tax Relief, two-career families would receive additional reductions. In addition, the administration asserts that tax breaks benefit families by helping them reduce their debt.

FIGURE 8.3

Critics of the president's tax policy point out that changes in the tax structure unfairly shift the burden from corporations and wealthy individuals to low- and middle-class wage earners, that tax cuts already instituted have erased the federal surplus built up in the late 1990s, and that further tax cuts will lead to unacceptable increases in government debt. In a letter to the President's Advisory Panel for Tax Reform (March 18, 2005), Cassandra Q. Butts and John S. Irons of the Center for American Progress concluded, "Overall, the federal tax system has become increasingly reliant on the regressive payroll tax, has shifted the burden of tax payment from the wealthy to the middle class, and has allowed corporations to avoid paying their fair share of taxes. The president's stated future goals for the tax system … will only exacerbate the degree to which the system has become unfair."