Politics & Policy

Liberal Lies, Cbo Truths

Kerry and the media are wildly distorting a non-partisan report on the Bush tax cuts.

Have you seen all the headlines in the liberal press about the new report from the non-partisan Congressional Budget Office? Here are but three samples, listed proudly on John Kerry’s website:

‐ “Tax Burden Shifts to the Middle” — Washington Post

‐ “Budget Office Says Biggest Tax Cuts Go to Richest 1%” — Wall Street Journal

‐ “Report Finds Tax Cuts Heavily Favor the Wealthy” — New York Times

And Kerry himself is touting the report on the campaign trail, claiming it proves that “Over the last four years, the burden of taxes has shifted from the wealthy to the middle class.”

Those are the liberal lies that completely distort the findings of the CBO report. Here’s the truth.

The report proves that what George W. Bush said about his tax cuts is absolutely positively true: “tax relief is for everyone who pays income taxes.”

It’s true for the rich and it’s true for the not-so-rich. Across 109.4 million tax-paying households — from the wealthiest 1 percent with incomes averaging over $1 million, to the lowest-earning quintile with incomes averaging $14.9 thousand — the report shows that all income classes have seen their income-tax rates lowered thanks to Bush’s tax cuts in 2001, 2002, and 2003.

Here’s a simple table based on data from the CBO report, showing how 2004 income-tax rates have dropped for everyone, compared to tax laws in force in 2000.

The report also shows that Bush’s tax cuts have been “progressive” — that is, they have shifted the share of the overall federal income-tax burden toward the wealthy, and away from lower-income earners. Without the Bush tax cuts, the highest-earning 20 percent of households this year would have paid 78.4 percent of all federal income taxes. Now, after the Bush tax cutes, their share of the burden has risen to 82.1 percent. Every other quintile now pays a smaller share of the total income-tax burden.

Here’s another simple table based on data from the CBO report. This one shows how the 2004 income-tax burden has shifted upward for the rich, and downward for everyone else.

What a brilliant victory for compassionate conservatism! Everybody gets an income-tax cut, and when it’s all done the rich end up paying proportionately more.

The report also shows that Bush managed to craft a tax-reduction package that even benefits the lowest-earning taxpayers who already pay what amount to negative income taxes. That’s right. Thanks to various refundable tax credits, before the Bush tax cuts the lowest-earning quintile not only paid no income taxes at all, they on average received money from the IRS. Under Bush’s tax cuts, as the first table above shows, they now receive even more money. Now that’s compassionate.

But will John Kerry or the liberal media give Bush one ounce of credit for any of this? No. The liberal establishment always has to find a way to demonize anything that comes from the policies of George W. Bush, no matter what the truth is.

Let’s take a look at how the supposedly conservative Wall Street Journal spun the story. Here’s the lead of the Journal’s story on Friday covering the CBO report:

President Bush’s three tax-cut laws will reduce this year’s income taxes for the richest 1% of taxpayers by an average of $78,460, more than 70 times the average benefit for the middle 20% of taxpayers, congressional analysts found.

The nonpartisan Congressional Budget Office today will release the government’s first multiyear projection of the Bush tax cuts by income class …

These paragraphs involve three major deceptions that not only reveal profound partisan bias, but downright misrepresentations of what the report even said.

To begin, the Journal gives the false impression that the statistics cited in the first paragraph are from the CBO report. They are not. They appear nowhere in that report. Instead, they are from a separate analysis of the CBO report by the Democratic members of the Joint Economic Committee of Congress, which includes Teddy Kennedy.

The first paragraph of the Journal’s story is substantially identical to the first paragraph of the Democrat’s press release touting their own analysis:

An analysis of the CBO data by Joint Economic Committee Democrats shows that the average tax cut for the richest one percent of households is more than 70 times larger than the tax cut for middle-income families in 2004.

Next, the Journal’s version of the Democrats’ analysis inserts a critical — and erroneous — word that was deliberately not used by the Democrats. The Journal refers to income taxes, whereas the Democrats just refer to taxes. In fact, the expression “income tax” appears literally nowhere in the Democrats’ report. And the CBO report is always careful to draw a distinction between income taxes and total taxes.

It’s an important distinction because the 2002 tax cuts allowed for greater deductibility of capital expenses for corporations — a deliberate (and successful) attempt to stimulate corporate capital investment after the terrorist attacks of September 11, 2001. The CBO attributes those corporate tax cuts to individuals, based on the extent to which individuals receive dividends and capital gains. So naturally the highest income-earning taxpayers will get the bulk of this — even though all taxpayers enjoy the many benefits of a stronger economy as a result of greater capital investment by corporations.

If that corporate tax cut and the CBO’s quirky methodology for attributing it to individuals is eliminated from the analysis, then the 70-to-1 advantage of the top 1 percent versus the middle 20 percent is almost cut in half. Yes, the Democrats surely used data selectively to make their claims as extreme as possible — that’s their partisan job. But the supposedly objective Journal made the data seem even more extreme than the Democrats did by incorrectly stating that it was about income taxes as opposed to an abstract measurement of total taxes.

Finally, the Journal eliminated a critical word from the Democrats’ press release –”2004.” The Democrats were clear that they were talking about a particular point in time, while the Journal made it sound as though the analysis applied to all time. The corporate provisions of the 2002 tax cut expire after 2004, so the extreme numbers focused on by the Democrats settle down considerably in 2005 and thereafter.

This week I spoke with several senior staff members at the Congressional Budget Office. “Stunned” is how they feel about what the media has done with their report. “Frustrated” is how they feel about the media’s utter lack of willingness to let the report’s authors tell the story about what the report really says.

These CBO staffers have been in Washington for many, many years. You’d think they’d know how it works by now. But apparently they have never seen the media as rabidly partisan and as relentlessly ignorant as it is right now.

– Donald Luskin is chief investment officer of Trend Macrolytics LLC, an independent economics and investment-research firm. He welcomes your comments at don@trendmacro.com.

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