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What is the Deal? Do you need to buy a birthday, anniversary or holiday gift? Visit the Galleria! January 12, 2003 What is the deal with Tax Relief? By Jan A. Larson President Bush announced his economic stimulus package last week that called for $670 billion in tax relief. Of course the very first thing that came out of the mouths of the usual cast of Democratic characters, some before they had even read the proposal, was that it favored the rich. There is only one thing to say in response. Duh! Tax relief (or tax cuts if you prefer) can only affect those that pay taxes. Those that pay more taxes will get more relief, at least in terms of dollars. The real key to understanding tax relief, however, is not to look at the dollars, but to look at the percentages. The top 10% of taxpayers, that is the “rich,” pay on the order of 70% of the taxes collected. Those in the bottom 30% pay nothing. By definition, the bottom 30% percent of wage earners cannot get tax relief. The opponents of the President’s plan will point out how a taxpayer making over $300,000 will get a much greater benefit than a taxpayer making $40,000. Again, duh! The taxpayer earning $300,000 will pay on the order of $100,000 in taxes every year. The taxpayer earning $40,000 will pay less than $5000. Even if the tax liability of the $40,000 earner were reduced to $0, he/she could only realize $5000 in tax relief. According to a published report in USA Today, a family of four earning $40,000 would, in fact, see their tax bill reduced to nearly zero. The “rich” that critics charge will unfairly benefit are not just wealthy business executives, athletes and entertainers, but include those with a household income greater than $92,000. There are plenty of hard working families that are “rich” under this definition. They work to put their children through college, pay a mortgage and save for retirement. Even the extremely wealthy don’t just sit on their money. They buy food, clothes, cars (which support the economy), they start their own businesses (which provide jobs), invest it in the stock market (which provides capital for other businesses) or put it in the bank (which provides funds for mortgages, auto loans, etc). Providing tax relief to those that pay the most in the first place comes back into the society in many ways. Opponents are also pooh-poohing the proposal to eliminate the double-taxation on corporate dividends. The trend in the past 20 years has been for corporations to “reinvest” their earnings instead of paying them out as dividends for the very reason that paying them out results in a much higher rate of taxation than if those earnings are realized by the investor as capital gains. This, however, is at least partly to blame for the high degree of volatility that has been observed in the stock market in the past 10 years. A return to valuing stocks based on dividend payouts would provide a much more tangible way for investors, large and small, to determine the “fair” price for a stock. This, in turn, would restore confidence in the stock market and that, in turn, would increase capital available to companies to grow and create jobs. A sure sign that the President’s economic plan is a good thing is reflected by the comment made by Sen. Lincoln Chaffee, when he said, “I can’t see giving away any more of our revenues, which we’re doing in tax cuts.” The politicians in Washington will spend, spend, spend every last nickel they can put their hands on. This may not be so bad if we received a dollar’s worth of services for every dollar we pay in taxes, but we don’t. The bureaucracy and waste in our government produces far less than a dollar’s worth of services for every dollar collected. A tax cut should serve as an impetus for Congress to cut the fat, not lament that there isn’t as much money to spend. The President’s stimulus and tax relief plan provides a solid plan to restore a healthy level of growth to the American economy and no matter how much opponents may cry that it benefits the rich, it will be good for all Americans. -- Send feedback to the author. The "What is the Deal?" column will appears weekly on the Pie of Knowledge website. Guest submissions are welcome and encouraged. To submit an article to "What is the Deal?" click here. To subscribe to the "What is the Deal?" mailing list and receive early notification when a new column is available, click here. The Pie of Knowledge will never, ever divulge email addresses to any third party for any reason unless so ordered by a court of law. Contributions to the Pie of Knowledge are greatly appreciated. 
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