September 99

Views expressed are those of the authors, not necessarily of the AFSC.

Tax Reform Follies: A Preview of Coming Distractions

Chuck Collins is Codirector of United for a Fair Economy in Boston. John Miller teaches economics at Wheaton College. Both are members of the Dollars & Sense collective.

After ignoring the public's exhaustion with impeachment politics, Republican leaders recently announced they will be holding 150 town meetings on tax cuts, with the ironic title of "Listening to America." The "party of impeachment" needs tax cuts to unify their core constituency of religious conservatives and corporate elites in time for the 2000 presidential race.

Whenever conservatives say "everyone gets a tax cut," look beyond the pretty packaging. The GOP has a fatal attraction for tax cuts for the very rich. Watch for "bait and switch" proposals like those deployed in the 1997 Tax Reform Act, when a very regressive tax package was sold as "middle class tax reform." Buried inside were a cut in the capital gains tax rate, reductions in estate taxes, and corporate tax breaks, ensuring that almost half of all savings went to the richest 5% of taxpayers.

A preview of coming distractions:

. An "across-the-board" tax cut would reduce each tax rate by 10%. The wealthiest tenth of households would get 62% of the tax givebacks. The 60% of taxpayers who make less than $38,000 a year would get about $99 each.

. Repeal of the so-called "marriage penalty" is a largely symbolic reform that excites social conservatives because it eliminates a tax benefit for unmarried dual-income earners "living in sin." Doing so would cost the government $42 billion and provide a huge tax break for higher income married couples. Most married couples wouldn't get much of a break.

. Cutting capital gains taxes: Since the wealthiest 1% owns 87% of all stock owned by households, such cuts are very regressive. The richest 1% of families got 66% of the benefits of the 1997 capital gains cut, an average of $7680. The bottom 60% of US households got an average of $6 each, enough for half a pizza. Congressional conservatives want to further reduce capital gains taxes to 15%, ensuring that most wage earners will pay higher rates than people whose income comes from investments. This proposal would cost $15.5 billion in lost revenues, with three-quarters of the benefits going to households with over $200,000 of income.

. With Dick Armey (R-TX) remaining as House Majority Leader and Steve Forbes running for president again, the "flat tax" proposal will surface with great bravado. Both of their proposals would dramatically shift the tax burden from wealthy taxpayers and onto working people, because they eliminate all taxes on interest, dividends and capital gains. The Treasury Department's analysis of Armey's 20% flat tax plan shows it would lose about $30 billion in revenue and would increase taxes on everyone except those earning over $200,000 a year, who would get an average tax cut of $31,800.

The Democrats will push targeted tax cuts, with small credits here, there and everywhere-but not the comprehensive overhaul that's needed. After 25 years of tax policies shifting the burden from large wealthholders and global corporations and onto wage earners and smaller businesses, the system needs more than tinkering.

One proposal worth examining, from House Minority Leader Richard Gephardt, would eliminate the distinction between income from wages and from investments, taxing them all at the same rate. This "10% plan" would lower rates for all taxpayers, while raising the same amount of revenue as the current system, mostly by closing loopholes. Three quarters of all taxpayers would pay taxes at a 10% rate. His plan cuts $50 billion in unnecessary corporate welfare, something the conservative proposals are silent about. Since the Republicans will be busy in the coming months listening to America, let's make sure they hear this message: stop giving tax cuts to the stock market sweepstakes winners; and start paying attention to those who aren't sharing the nation's economic boom.

[Copyright Dollars & Sense. Reprinted with permission. For a fuller version of this article, see D&S, March/April 1999. Subscriptions to D&S Magazine are $18.95, from 1 Summer St., Somerville, MA 02143; 1-888-736-7377.]