Study: Kerry Tax Plan Starts Class War

Published June 1, 2004

According to Financial Times columnist Amity Shlaes, “George W. Bush has a war, and now John F. Kerry has one too–a class war.”

At Georgetown University in April, Kerry opened fire when he vowed to raise taxes on the top 2 percent of wage-earners in the U.S. while cutting taxes on the other 98 percent. The idea is not only to create jobs–Kerry says he can get 10 million–but to create economic opportunity. Shlaes wrote, “Kerry wants to plow through class barriers like an Abrams tank. Or, as he put it, to reclaim America on behalf of those who seek paths to a better life.”

Kerry, the Presidential nominee of the Democratic Party, has proposed a number of changes to U.S. tax policy that he argues will boost the economy’s performance and increase jobs.

“John Kerry has a plan to secure America’s economic future and ensure that workers can achieve the American dream in our changing economy,” claimed Kerry’s Web site on May 7. “His vision is to put Americans back to work; make America’s economy the most competitive in the world; and to restore America’s values of equity and fairness to our tax code by helping America’s middle class families and small entrepreneurs succeed.”

However, an econometric analysis of the Kerry plan, released on April 16 by The Heritage Foundation, shows the negative effects of an increase in taxes for high-income taxpayers overwhelm the positive effects of making key elements of the Bush tax plan permanent for taxpayers with incomes under $200,000. The net effect, according to the study, is “a slower economy and job creation significantly below potential.”

The analysis estimates the effects of the Kerry tax plan using a standard macroeconomic model of the U.S. economy. The analysis shows:

  • Employment growth under the Kerry plan recedes. Employment growth reflects the slower pace of economic activity. Under the Kerry plan, the annual rate of non-farm employment growth will be consistently below forecast each quarter for the 10 years following January 2005.
  • GDP slows. The nation’s output of goods and services quickly drops below current forecasts under the Kerry plan, and growth remains slower throughout the next 10 years.
  • After-tax income shrinks. Income after taxes, or inflation-adjusted disposable personal income, is below baseline in each year of the forecast under the Kerry plan.
  • Savings plummet. Lower disposable personal income means the Kerry plan would bring lower personal savings.

Kerry Tax Plan
Kerry mixes tax cuts with tax increases in his proposed tax plan. Though many details remain to be announced by the Senator’s tax team, the following appear to be principal, well-developed elements of his plan and were incorporated in the economic analysis of his proposals:

  • For taxpayers with incomes above $200,000, the tax benefits of policy changes from 2001 and 2003 no longer apply. Their first dollar is taxed at 15 percent rather than 10 percent, and their last dollar is taxed at 39.6 percent rather than 35 percent. Other anti-growth changes are also made.
  • While Kerry’s campaign has been relatively silent on federal estate and gift taxes, the study assumes the senator will propose a halt to plans to expand the estate tax exemption amount and reduce the estate and gift tax rates, as well as repeal of the estate tax in 2010.
  • For individually filing taxpayers with incomes below $200,000, Kerry proposes to make several of the Bush tax cuts permanent. The senator would keep the 10 percent tax rate and the expanded tax bracket. He would make permanent marriage penalty reforms. And he would permit taxpayers earning less than $200,000 to keep the $1,000 per child tax credit.
  • The senator provides additional tax cuts to cover health care costs. For taxpayers with incomes below $200,000, Kerry proposes a health care tax credit for those who retire early and for those who are between jobs.

The net effect of these tax policy changes, not counting the negative economic feedback they would cause, is a net tax increase of $609 billion over the 10-year period beginning January 1, 2005.

Weak Approach
While these economic estimates are likely to change as Kerry announces more details about his tax plan, they strongly indicate the weakness of his current approach. Raising taxes on high-income taxpayers to cover budget shortfalls may make political sense, but it is not the right move to encourage economic growth.

“So even as he talks of breaking down class walls, Kerry is reinforcing those walls,” Shlaes concludes. “Even as he talks of growth, he is laying plans that would slow it. It doesn’t get more inconsistent than that.”

William W. Beach is director of the Center for Data Analysis at The Heritage Foundation. His email address is [email protected].