by Terry Enright
George Bush is preparing to revamp the tax system with bipartisan support, with only tame opposition from Democrats in congress. It's all too likely his tax plan will pass with only modest, cosmetic changes. These changes are poorly understood, since our current tax system is shrouded in mystery. As such, it seems appropriate to examine our current tax system and to analyze the changes Bush's proposal will bring.
It's a common misperception that the US tax system is progressive, in reality, it's markedly regressive and actively shifts the tax burden away from accumulated wealth and towards the earned income of working people. Levied only on earned income and capped at an income of $65,400, the Social Security tax is the most extreme example. Throughout most of the last 68 years, capital gains have been taxed at lower rate than earned income -- benefitting the rich, since almost 30% of all capital gains accrue to those making $1,000,000 or more a year. On top of this fundamental inequity, corporate lobbiests have riddled the tax code with loopholes designed to benefit certain individuals and corporations...
Social Security is one of the best examples of our regressive tax system. Begun in 1935 as a supplement to inadequate pensions, it must have at first appeared to the lower classes as a triumph of labor, proof that the system works. The program was never the trust fund people believed it was-- Barlett and Steele, in America: Who Really Pays the Taxes, tell us payments to retired workers began when the tax did. Even so, workers paying for the current generation of retirees could feel safe that future workers would pay their (the current generation of workers') Social Security. By 1967, the intake had begun to exceed money paid and Social Security recorded yearly surpluses. At the same time, the Vietnam war had caused the annual deficit to swell to over 15 billion. President Johnson, scared of public dissent over the war, rolled Social Security into the budget. While raising no extra money, this appeared to reduce the deficit.
To this day, the idea of a unified budget disguises the true annual deficit. In 1992 the Houston Post, the Los Angeles Times, USA Today and the New York Times all ran stories announcing an annual deficit of $290.2 billion. If the media and the treasury department subtracted Social Security and other trust fund revenue, they would have reported the deficit as $386.2. This might be without consequence for retiring workers if it was merely a numbers game. Unfortunately, it's not.
The government does not treat Social Security as tax money in press releases alone. They spend the excess, and place an IOU in the fund for every Social Security dollar taken. Despite tax hikes in 1977 and 1983 ostensibly designed to save Social Security, IOUs now amount to over a trillion dollars. The oldest members of the generation that produced most of that spent surplus--the baby boomers--are now less than ten years from retirement. For the first time since its inception Social Security will pay out more than it receives. (The point where Social Security grows its own annual deficit may even be closer than that. No one is sure how widespread AIDS is and Social Security payments have already increased because of patients receiving payments.) A trillion dollars would be more than enough to offset the imbalance. Unfortunately, unless something changes, the only thing awaiting future retirees are IOUs.
The tax has exceptions, even though its lack of funds may results in millions of starving senior citizens. Income over $65,400, or from Capital Gains, goes untaxed. This means that a person whose income is $70,000 pays the same amount--and a much bigger percentage of their taxes--than a person who makes $700,000 or even $7,000,000. Removing the cap would add an extra $52.8 billion to Social Security revenue. Note that this is not progressive taxation. This is changing the tax rate so it is not quite as regressive. Even under our premise, Social Security taxes would still be regressive--because capital gains income is untaxed.
Capital Gains, income derived by selling something for more than the cost to originally acquire it, has been taxed at a smaller rate than normal income for all but four of the last 78 years. (Even during those four years, 86-90, income above the $65,400 mark faced no tax..) The highest tax rate for capital gains in 1996 was 28%; for income, 39.6%. This benefits anyone who sells something for a larger amount than they paid. So while not progressive, the tax would seem to be at least not regressive. It works for everyone who uses it. Who actually uses it, though?
In an average tax year, 7% of those who send in tax returns report Capital Gains income. Of that 7%, 8% made less than $50,000, 23 % made between $50,000 and $100,000 and the other 62% went to people making over $100,000. Of that 62%, almost half went to people who make over $1,000,000, or 30% of those who report Capital Gains income. Almost a third of the people reporting Capital Gains made over $1,000,000. Since that one-third made much larger gains, however, they accounted for a much greater share of the total dollars from Capital Gains. In all, 97% of the benefits from a reduced Capital Gains tax went to the richest 1%. Taxing Capital Gains at the same rate as income would bring in an extra $37 billion a year. (A book published in 1997, Take the Rich Off Welfare, by Mark Zepezauer & Arthur Naiman, provided all Capital Gains estimates.) However, that same year, the Clinton- and Congress-supported a Balanced Budget Amendment that lowered the Capital Gains tax to 20%, a smaller percentage than the tax rate on income for someone who lives below the poverty line. While Capital Gains still benefits the same people--97% to the richest 1%--taxing it as normal income would be bring in an even greater revenue. While figures are not available, a few extra billion added to our total of $37 billion seems modest.
As unfair as the tax rate for Capital Gains appears, it is not without proponents. Those who wisely eschew the easily dismissed "it works for everyone" standard usually choose one of two paths of argument. Most will say capital gains are necessary for jobs and growth. However, in the last 20 years, each year Capital Gains tax rates were increased (1976 and 1987) preceded a two year increase in both growth and job rates. Similarly, each year Capital Gains tax rates decreased (1978 and 1981) preceded a two year decrease in the growth rate and jobs. These statistics do not prove a proportional relationship between Capital Gains tax rates and the rate of employment and growth--after all, the economy is complex and many things influence it. They do disprove, however, the idea of an inversely proportional relationship between the tax rate for Capital Gains and the rate for jobs and growth.
Another argument says that increasing the rate will just make the rich find better tax shelter. Few laws are easy to enforce, but should that be a consideration when writing them? By the logic of this argument, there should be no speed limits since motorists speed despite the laws. It seems extremely unlikely that taxing Capital Gains at a rate proportional to actual income will result in less revenue.
The boondoggle exists outside the federal tax system, too. Examining only state and local taxes, Citizens for Tax Justice found that as the income for New York family increases, its tax rate decreases. People making less than $28,000 pay 16.2% of their income to local taxes, while people who make over $425,000 pay 12.6%, with the gradient steadily declining as income rises. However, after Federal Deductions are calculated, the rate for the top income bracket drops further, to 5.7%, but the rate for the poor, who rarely utilize (or understand) deductions, drops only marginally, to 16.1%.
As if taxing the poor at a greater percentage than the rich in almost every possible way wasn't enough, some tax laws benefit one corporation or individual exclusively, as research by Barlett and Steele shows. Consider section 543(b) of the Internal Revenue Code: "In the case of a broker- dealer which is part of an affiliated group which files a consolidated Federal income tax return, the common parent of which was incorporated in Nevada on January 27, 1972, the personal holding income shall not include interest received after ..." Consider these paragraphs from the Tax Reform Act of 1986: "(3) Special rule for the beneficiary of a trust--In the case of an individual--(A) who is beneficiary of a trust which was established on December 7, 1979, under the laws of foreign jurisdiction, and (B) who was not a citizen of the United States on the date the trust was established amounts which are included in the gross income ... with respect to stock held by the trust ... shall be treated as the first amounts which are distributed by the trust ..." If those aren't explicit enough, consider Section 168(I) of the Internal Revenue Code: "(38) The amendments made by section 201 shall not apply to (G) the expansion of the capacity of an oil refining facility in Rosemont, Minnesota, from 137,000 to 200,000 barrels per day which is expected to be completed by December 31, 1990." (My italics.) These are specific and glaring examples of how the tax system rewards rich individuals. Their impact on the rest of the citizenry is minimal. The real problems are structural, and the effects of their unfair transfer of burden from the rich minority to the poor and middle class majority is significant.
Emblematic of this transfer is the fall of corporate taxes at the same time individual taxes have risen. In the 1940s, 33% of federal revenue came from corporate taxes and 44% came from individuals. According to 1994 figures, individuals accounted for 71% while corporations accounted for only 15%. (The missing percentage points come from excise taxes and miscellaneous revenue, such as the profit made selling postage stamps.) The ways in which corporations have lowered their tax rates--foreign tax breaks, master limited partnerships, accelerated deprecations, etc.--are too numerous and complex to go into here. However, assuming that corporations make as much as they claim (the figure is almost certainly higher), taxing them at the corporate tax rate of the 1950s (52%) would bring in an extra $250 billion a year. By itself, restoring the corporate tax rate to previous levels would severely reduce the national debt. To completely eliminate the national debt, however, you'd have to tax the richest individuals at previous levels as well.
At one time, the wealthiest individuals (defined then as anyone who made over $400,000) paid 91% of their income to the Treasury. In 1999, those same wealthy individuals would pay 39.6%. The greatest reduction for the highest income bracket occurred during the Reagan years, when tax rates were lowered from 70% to 50% to 28%. Clinton has since raised it to 39.5%, a figure barely above half of the pre-Reagan level. Tax rates for poor and middle class income-earners, during the same period, stagnated or lowered slightly. Besides an increasing National Debt, how has the Fed compensated for this loss of revenue? It's privatized the public sector: billboards on scenic stretches of highway, commercial advertising in schools and even a proposal by NASA to allow corporations to rent astral space to display corporate logos. It has cut funding to the National Endowment for the Arts. It's given up on the idea of joining the rest of the industrialized world in recognizing health care as a basic public need. It's dismantling welfare. Welfare for the rich, however, will remain intact.
McDonalds, one of the richest corporations on the planet, received $1.6 million to promote Chicken MgNuggets in Singapore. Pillsbury received $11 million dollars to promote the Doughboy overseas. Exxon was allowed to deduct the $300 million dollars it paid to settle the oil spill of the Exxon Valdez. Perhaps most ostentatiously, Lockheed Martin received $1 billion dollars to pay for plant shutdowns. In other words, they were paid to lay off workers. Michael Moore, who compiled this list of welfare cheats, points out that the nation spends three times as much subsidizing corporations as keeping poor people from starving or freezing. (He was writing before Clinton and the 104th Congress signed the Welfare Reform Bill, so that figure may now be higher.) By giving that money away, the government almost certainly increased the load on the back of the poor and the middle class, and definitely lost an opportunity to lighten it.
The current state of taxes in this country would whither it if saw public light. Unfortunately, most Americans do not understand how the system works. It's hard to care about anything relevant when all media emphasize frivolities like OJ and Jon Binet and Monica. The media have their reasons to distract us with inanities. Noam Chomsky, in What Uncle Sam Really Wants, describes the media as captives of corporations which are intertwined with other corporations and who work to present a portrait of the world beneficial to the rich. For now, the media present the world in a way that best serves the rich, and will work to hide relevant issues like these.
It's unsurprising, then, that Bush's claim that "the Bush tax cuts benefit all Americans, but reserve the greatest percentage reduction for the lowest income families" has received little critical attention. While Bush's plan does reduce the taxes for everyone making above $10,000 (the federal tax rate those below $10,000 is negative, meaning they'll make more after taxes), the vast majority go to the wealthy. According Citizens for Tax Justice, estimates that 43% of Bush's plans go the top 1 percent. In fact, Bush's family alone will save over $100,000. In contrast, the typical single payer would save only $249 and anyone unfortunate enough to make less than $18,000 would receive no federal tax break at all. The bottom 40% account for only 4.8% of the cuts.
Put succinctly, our regressive tax system is the result of bipartisan effort and the outright swindling of working people. It's clandestine because that is the only way it can survive. The people it serves know it would wither in public light. There lies our hope: we only need to be made aware. This is not a complex issue, nor is it one whose solution isn't apparent to all but a tiny minority. People must know about it first, which is why anyone who reads this should tell everyone he or she can. It is the duty of everyone who understands this to work to change it. Otherwise, the weight on the shoulders of the rich lightens at our expense.
