Winners, Losers, and Gimmicks

President Bush says that, when crafting a tax plan, the government shouldn't be in the business of picking winners and losers. But the tax bills making their way through Congress do precisely that - and you can probably guess how things are turning out.

The winners are those at the top of the income scale, and not just because they pay more taxes to begin with. Both the House and the Senate would speed up cuts in individual income tax rates passed in 2001. For three income brackets, rates would drop by 2 percentage points. But the top rate falls by 3.6 percentage points, from 38.6% to 35%. One argument for this is that it would help small businesses, many of which pay taxes at individual rates. But only 2% of taxpayers with small-business income pay the top rate - and many of these are not mom-and-pop businesses but rather wealthy individuals with complex tax returns full of partnerships and royalty income and the like.

The losers are those near the bottom: low-income working families eligible to receive money under the Earned Income Tax Credit. The House bill approved last week accelerates a planned increase in the child tax credit and relief from the so-called marriage penalty - for everyone except those who qualify for the Earned Income Tax Credit. The pending Senate bill accelerates child tax credits for some in this group, but like the House version it would provide no marriage penalty relief for EITC recipients - who can face a particularly steep hit. Consider the situation of two single parents, each with one child and each earning $10,000. If they remain single, each receives about $2,500. If they marry, their total tax benefits fall by more than $1,000. As Sen. James M. Jeffords (I-VT) argued without success in the Senate Finance Committee, leaving the penalty in place discourages marriage - exactly the opposite of what conservatives who voted against the Jeffords amendment say they want.

As for gimmicks: We had thought the House measure - with its laughable "sunsets" of rate reductions, child tax credits, and marriage penalty provisions after a mere three years - was about as phony as a tax bill could get. It pretends that these tax breaks will expire in three years, so the official long-term cost of the bill, $550 billion, is far lower than the likely true impact. Now the administration and some Senate Republicans are peddling a dividend tax proposal that threatens to make the House bill look responsible. It combines the best of tax trickery - both slow phase-ins and artificial sunsets - to make the cost of a dividend tax cut look lower and therefore allow Republicans to jam it into the Senate's $350 billion limit.

This is a charade; proponents of the cut have no intention of allowing it to expire. But some Senators appear tempted to join this masquerade, which would give the administration enough votes to win Senate passage. Ohio Republican George V. Voinovich, who has talked tough about being a deficit hawk, can't keep those credentials while signing on to a tax package that will cost far more than the $350 billion he has insisted is his upper limit. Nebraska Democrat Ben Nelson said through a spokesman yesterday that he would support this dividend cut because it's big enough to "send the right message to Wall Street". It's big, yes, and also dishonest, unfair, and unaffordable. Which message precisely is Mr. Nelson looking to send?