POPE LEO XIII, GEORGE W. BUSH AND GRAY DAVIS

NATIONAL CATHOLIC REGISTER

FEBRUARY 23, 2003

Many Catholics instinctively vote Democratic, because of traditional differences between the parties on economic issues. "Democrats are for the working man; Republicans are for the rich people," quoth my father, a Polish-American working class Catholic. However true this distinction between the parties might have once been, Catholics need to be aware that they are not required to vote for every tax or spending policy that purports to help the poor. Catholic social teaching lays down a few general principles, but allows a lot of flexibility in actual policy design.

At the end of the nineteenth century, Pope Leo XIII carved out a moderate path on the question of income inequality. In Rerum Novarum, the first of the modern Catholic social encyclicals, Leo allowed that in some cases, income inequality was morally unacceptable. At the same time, he argued that some income inequality was inevitable, and that attempting eliminate all inequality would be disastrous. We can see the wisdom of a moderate, non-ideological course, by looking at two tax plans, from opposite ends of the country, by opposite ends of the ideological spectrum.

In Washington, President Bush introduced a massive tax cut. In California, Governor Gray Davis introduced a massive tax hike. Catholics can in good conscience, support or oppose either one. What are some of the prudential considerations involved in evaluating these proposals?

One of the most controversial is the impact of these proposals on the distribution of income. Will the proposals help the little guy, or the rich guy? Since the Bush tax cut gives a large proportion of its cuts to the upper end of the income distribution, it gives some credence to my daddy’s claim that the Republicans are for big people.

But that is not the end of the story. The rich get most of the tax cut, because they pay most of the taxes. According to the Tax Foundation, the top 10% of U.S. taxpayers earned over 46% of the adjusted gross income in 2000. These same top 10% of households paid 67% of the federal personal income taxes. Sliding down the income scale a bit, we find that the top half of those filing tax returns paid 96% of the income taxes. The bottom half of the taxpaying public pays a mere 4% of the income taxes. That doesn’t even consider the fact that the very, very, poor may not even file returns at all.

So, any time the government wants to cut taxes, the largest dollar amounts of those cuts will go to the upper end of the income scale, simply because that is where most revenue comes from in the first place.

Can there ever be good reasons to cut taxes? After all, taxes pay for many programs, some of which are helpful to the poor. Are there reasons, on balance, why cutting taxes could be a good thing? Put it another way, what are the limits to taxing the rich to help the poor?

We can see one kind of answer to this question, by looking at the opposite end of the country, both geographically and ideologically. Gray Davis, Democratic governor of California, proposed tax increases as part of a plan to close a $35 billion budget deficit. Davis’ plan for closing the gap includes a percentage point increase in the sales tax, two new income tax brackets for the highest income earners, as well as $20 billion in budget cuts.

This plan will surely be tough on low and middle income families. Sales taxes hit hardest on lower income families, since there is no practical way to avoid paying sales taxes. The budget cuts will have an impact on programs that benefit lower and middle class people.

So how did California get itself into this situation? The state’s treasury did very well during the dot.com boom of the nineties, precisely because that boom put so much money into the hands of the richest people. Between capital gains on stock, and incentive stock options, the state of California collected an unprecedented amount of revenue in 1999. When the state was flush with cash, Davis spent it: he added some 44,000 new employees to the state payroll.

California’s treasury is even more dependent on the rich than the federal. California taxpayers with incomes over $500,000 account for less than 1% of total tax returns filed, but pay about 40% of the state personal income taxes, while the top 11% paid 80% of the state’s income taxes.

California’s tax revenue has been volatile because the income of the very rich has been volatile. This means that the safety net for the poor is not really safe: it is dependent on the good fortune of the richest handful of Californians.

Some commentators are unimpressed by these facts. They argue that even after paying 80% of all state income taxes, the rich are still richer than everyone else. But Catholic social teaching tells us that envy of the rich is not a legitimate motivation for public policy; charity for the poor is.

California’s bugdet crisis shows that there are limits to the benefits of "soaking the rich." By taxing rich people, the government hitches its wagon to their star. If the rich flourish, the government can do well. If the rich flush, the government is tanked too.

In my judgement, California has come to the end of the tax and spend road. Whether the U.S. treasury has reached the practical limit of income redistribution through the tax code is an open question. But Catholics can support or oppose the Bush plan without feeling that they have betrayed their obligation to serve the poor.