Waiting for the Trickle-Down

June 4, 2003

CONSIDER THE CHIEF EXECUTIVE of a middle-market company. He earns more than $1 million a year, takes wonderful vacations and drives a very nice car. His savings from President George W. Bush's newest tax cut: $93,000 a year.

Now consider one of his clerks. She's single, earns $30,000 a year, drives an aging subcompact, and tries her best to support a 17-year-old son in high school. Her tax cut: Not one cent.

It would take a very cold-eyed economics wonk, of the trickle-down persuasion, to call this fair. Unfortunately, there are plenty of such wonks in Washington. They have the ear of the White House and the GOP majority in Congress.

In fact, 8.1 million Americans won't get a penny from Mr. Bush's tax cut, even though they pay income taxes. They're generally low-income working people who are either childless or have children older than 16 - too old to qualify for the expanded child credit. In addition, 6.5 million minimum-wage families, with nearly 12 million children, won't get the $400-per-child tax credit increase. Those figures come from the Urban Institute-Brookings Institution Tax Policy Center. That's a liberal think tank, but its basic tax arithmetic is rarely challenged.

The center's figures cast grave doubt on two grand arguments for the Bush tax cut.

Argument No. 1: It helps everyone who pays taxes.

Obviously, it doesn't. In fact, 29 percent of the tax cut goes to Americans in the top 1 percent of income. The bottom 40 percent of earners get less than 2 percent of the tax cut.

No. 2: The tax cut is a "Jobs and Growth Plan" that will get the slogging American economy back up to a jog.

The tax cut would put more than $200 billion into the economy in the first two years. That is bound to stimulate growth a little. But if a quick pick-me-up was the main intention, the government would give the big cut to the clerk, not the millionaire. The clerk would use a tax refund to buy clothing for her teenager, or new tires for the car. That's the kind of spending that gets an economy moving.

The millionaire is more likely to sit on an extra $93,000 until prospects for investment improve. In the short run, that gains the economy nothing.

Mr. Bush's advisers know this. The president is using the current slowdown as an excuse to make a long-term shift in tax policy. He is adopting the philosophy of the cold-eyed wonks of supply-side economics. They hold that cutting taxes on capital and the wealthy serves to stimulate investment in business. As business prospers, and investors become millionaires, some of the benefit trickles down to the clerk.

The theory never has been proven to work. In the meantime, the CEO will be richer, and the clerk can drive on bald tires.

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