The tax rebate is a policy made in sound-bite heaven. Forget complicated mouthfuls like phased-in reductions in marginal income tax rates; forget the AMT and the EITC. Just calculate the surplus, and put the excess money in the mail. It's not surprising then, that the rebate has been the only area of consensus in this year's steadfastly partisan tax debates.
Endorsed by such unlikely allies as Pete Domenici, the ranking Republican on the Budget Committee, and Democratic leader Tom Daschle, both parties thought they won with the tax rebate. For Republicans, the instant payoff was a way to ensure support for the back-loaded Bush plan, which, as it was originally written, didn't include any reductions until 2002 (and then only a paltry $75 a person). Democrats saw a one-time refund as political cover, allowing them to deliver some kind of tax cut to their constituents while continuing to block the administration's broader plans.
And, at least at first, Democrats rallied behind the tax refund as a more equitable alternative to the Bush plan. In theory, a tax rebate is the perfect progressive policy. Just by filing a tax return in 2000, everyone from the secretary to the CEO should get a check for the same amount in the mail. But the rebate that made it into the $1.35 trillion package that Bush signed last week isn't nearly as generous. Children and students claimed as dependents are ineligible. So are senior citizens on a fixed income. Even many low-income workers are excluded, because refunds are based on income tax returns -- not on the payroll taxes deducted from every worker's paycheck.
In fact, in order to qualify for a full rebate ($300, or $500 for a single parent), a single person must have $6,000 of taxable income after accounting for deductions, exemptions and credits. According to a recent analysis by Citizens for Tax Justice, these restrictions will leave out more than a quarter of American taxpayers altogether. Another 13 percent will only receive partial rebates. And the poorer you are, the less you get. Sixty-two percent of the taxpayers in the bottom 60 percent of the income distribution will not receive a full rebate.
How did the Democrats find themselves throwing their weight behind yet another inequitable tax fix? The concept of a check in every box was first floated in early February by two progressive economists, Richard Freeman of Harvard and Eileen Appelbaum of the Economic Policy Institute. "Imagine," they wrote in a New York Times op-ed, "a prosperity dividend paid to every American man, woman and child." The hypothetical $500 check would give a quick boost to the faltering economy and would be far more equitable than tax cuts tilted toward the upper class. Freeman and Appelbaum correctly noted that if everyone received the same sum, "it would mean the most to low- and middle-income families with young children" for whom $500-a-head could go a long way.
A week after the piece ran in the Times, the House Progressive Caucus unveiled the American People's Dividend, modeled on Freeman and Appelbaum's proposal. But unlike the one-time prosperity dividend, the People's Dividend would have guaranteed $300 in the mail for 10 years, a long term commitment that Appelbaum says entirely misses the point of her plan -- the need for a temporary stimulus. "What I found astounding," Appelbaum noted recently, "is that the Republicans understood the need for a stimulus, and the Democrats, who are usually so attuned to the needs of working people, did not. Republicans were absolutely clear that the economy was slowing; they didn't want a recession on their watch."
As evidence of an economic slowdown mounted through February and early March, the notion of a one-time rebate caught the attention of key Republican lawmakers. Economists were everywhere ridiculing Bush's attempts to promote his giant tax cut as a targeted stimulus package. "A tax cut passed in late 2001 for partial enactment in 2002" will not reduce the risk of recession, sneered Clinton's former chief economic advisor Laura Tyson in Business Week. "Worse, such a cut may prolong the slowdown by weakening the Fed's resolve to reduce short-term interest rates early this year."
Something had to be done to salvage the tax cut's reputation, and so, borrowing heavily from Freeman and Appelbaum's proposal, Republican Pete Domenici, then chairman of the Senate Budget Committee, introduced a $60 billion tax rebate in late March. Yet, unlike the prosperity dividend, Domenici's rebate would only go to workers who paid income taxes in the previous year. Democratic heavyweights Daschle and Joe Lieberman soon countered with a more inclusive rebate plan of their own that encompassed all taxpayers.
But it was too late. The Republicans beat them to the punch, and the debate became not about who should get the refund but about whether the rebate package should be linked to the larger Bush program. In the end, Bush signed a version of the Domenici rebate into law as a section of the $1.35 trillion tax cut package. "I think the Democrats lost a major opportunity," reflects Appelbaum. "If they had understood in February, or even early March, that the economy was slowing and had pushed a separate stimulus plan, they could have been successful in delaying Bush's tax cut." A one-time prosperity dividend might have alleviated the immediate pressure to cut taxes, buying time to study the budget and assemble a more responsible long-term program that would take promised expenditures like missile defense into account.
More than partisan tactics, the politics of the tax rebate reveal a deeper divide about who qualifies as a recognized member of the national economy. Consider the term "prosperity dividend." A dividend usually refers to the portion of a company's earnings paid to its shareholders (or off-site owners). What does our new tax bill say about who "owns" the surplus? Certainly not all Americans -- not children, the elderly, the disabled, or the quarter of taxpayers who didn't make enough to owe income taxes last year. Check your mailbox come July to see if you're in or out.
