Don't Target Taxes

One

of the mystifying things about President Bush's tax plan is that it targets select taxpayers for breaks, such as the education savings account and the child credit. Hasn't Dubya heard? Credits, exemptions and deductions aimed at specific taxpayer profiles don't resonate. Not with voters anyway. Al Gore's tax plan had more targets than a rifle range, and all it got him was a fast ticket home. Targeted cuts don't resonate with people who fill out their own tax returns either. Breaks that phase out as you go up the income ladder or are linked to the type of child care you choose, or whatever, complicate a code already so confusing that the IRS estimates it takes a record 13 hours, on average, to complete a 1040. So why do we have targeted tax breaks at all? Politics, of course.

A common way to target relief is to create income thresholds. The existing code has some two dozen. Among them: converting a traditional IRA to a Roth (can't do it if you make $100,000), making deductible contributions to a Roth (uh-uh, not if you're single and earning $95,000 or a couple earning $160,000), and taking HOPE scholarship and Lifetime Learning credits (limit: $40,000, singles; $80,000, couples). Bush can't just dump the thresholds. Democrats would scream: Tax cut for the rich!

Yet it's a distorted definition of rich that keeps those thresholds so low. In Chicago a two-earner household in which one is a rookie cop and the other a typical schoolteacher would together earn more than $100,000 a year. There's your rich.

The Bush plan at least raises some limits. The child credit, which he wants to double to $1,000, wouldn't begin to phase out until annual household income reaches $200,000--up from $110,000 for couples and $75,000 for singles. It's also likely that the threshold for converting to a Roth would jump to $160,000 and that the threshold for new Roth contributions would be indexed to rise with inflation. On another front, though, Bush is proposing yet another means test. Couples earning $160,000 would not be eligible for a $5,000-per-child deduction for education expense.

Do high earners deserve relief? The reality is that the top 5% of taxpayers (adjusted gross income above $115,000) pay 54% of federal income tax revenue. The top half account for 96%. We already have progressive tax brackets that claim a bigger slice from the well off, and we've just about eliminated federal income tax for half of all people with income. With a huge surplus, why complicate things with targeted cuts that are set too low anyway? And why not give something to those who tote the bill?

That's not what a lot of people want to hear. So life would be simpler if we leave taxes where they are and pay down the national debt to beat interest rates lower. The Bush plan provides $1,600 a year of tax relief to the average family--eventually. That roughly equals the immediate savings a homeowner with a $150,000 mortgage at 7% would realize if he or she were able to refinance at 5.65%.

Indeed, until Washington caught the fever of tax cut as antidote to recession (it isn't), paying off debt was the strategy. Funny, no one seems to care that it too is a break for the rich--at least for those with big mortgages. Which shows that tax cuts are all about packaging--not the package.

E-mail Dan at kadlec@time.com. See him Tuesdays on cnnfn at 12:20 p.m. E.T.