PAGE 2
We should increase taxes on inheritance substantially
after allowng a reasonably generous exemption of, say,
$500,000
Capital Gains Tax
WELFARE REFORM
FOR THE RICH
BY HARRY JOHNSON
"First there was the War on Poverty Then there
was the war on the poor "
-Chuck Wilder
As Gingrich and Clinton try to outdo each other in
blaming the poor for the decline of America, they set about
"reforming" the system of supports for poor children built up
since LBJ’s War on Poverty, by punishing the poor Even the
most liberal of reform measures continue to blame poor
individuals for not 'making it' No one questions the economic
system which, without checks, eliminates jobs, benefits, security
and well-being for American workers Even fewer questions are
raised about the system of direct benefits and tax breaks which
constitute welfare for the rich
Newt Gingrich's home district is Cobb County, Georgia,
a wealthy Atlanta suburb which is notoriously inhospitable to
blacks. Noam Chomsky notes that Cobb County receives more
federal subsidies than any other suburban county in the U.S.,
except for Arlington, Virginia, vtftich is effectively part of the
federal government, and Brevard County, Florida, home of the
Kennedy Space Center "Cobb County's largest employer is
Lockheed Aeronautical Systems, which is designing the F-22
advance tactical fighter and other military aircraft. Seventy-,vo
percent of the (Cobb County) workforce are in white collar jobs
in expanding areas of the economy like insurance, electronics,
computers and trade -- all carefully tended by the 'nanny state'.
It is remarkably easy for conservative entrepreneurial values to
flourish while one is feeding happily a, the public trough."
If economics is "the dismal science", tax policy seems to
be the most bleak of its elements. I, is, however, imperative that
we understand some of its elements if we are to reform welfare
for the rich. A recent book by Ralph Estes, resident fellow of the
Institute for Policy Studies, called Who Pays? Who Profits?: The
^Truth About the American Tax System, is helpful
•
First, a couple of definitions:
-Progressive Tax One that is fair and is proportionate
Jto ability to pay People in lower income brackets pay lower
¡rates and those in higher brackets pay higher rates. Those who
♦can pay more should pay more. The pain of the tax bite should
♦be felt equally
-Regressive Tax: ". takes a higher percentage of a
•taxpayer's income a, lower income levels. Sales taxes, for
¡example, are generally regressive. People with low incomes
¡have to spend most or all of their income on living expenses, so
¡they pay sales taxes on nearly everything they spend (unless
♦exemptions for food or medicine are allowed)." (Estes)
Example — A family wth income of $15,000, all of wrfiich
• is spent on living expenses subject to 6% sales tax. They pay
I $900, or 6% of their income in sale tax.
i
- A family with income of $500,000, which
•2 spends $100,000 on living expenses (and are living pretty high
;J on the hog). They pay $6,000 in sales tax, 1.2% of their income
The rate (percentage) goes up as the income goes
£down; that's regressive taxation.
Income Tax on Individuals
The federal income tax used to be more fair, more pro
gressive. Through the 1950s to 1964, the highest income
bracket was taxed at 91%. In 1964 i, was dropped to 77%, and
stayed around 70% until 1981. In 1986 the top rate was still 50%
The Tax Reform Act of 1986 (spearheaded by Oregon Senator
Bob Packwood) cut the top rate to only 28%, for all income
above $50,000. In 1995 the top rate is up to 39% for income
above $250,000
So, the first step in welfare reform for the rich is to
restore some progressivity to the income tax. Raise income
taxes on the wealthy
Income Tax on Corporations
Another thing we need to realize is that tax breaks to
one group increase the burden on the rest of us. When corpo
rations get a tax break, that money must be made up by middle
and low income taxpayers.
Corporations are heavy users of public services. Estes
lists estimates of the costs to the public of corporate activity:
1. Injuries, accidents, illness, harassment, discrimi
nation...
2. Price fixing, monopolies, deceptive advertising,
product injuries and illness - cancer...
3. Air pollution - acid rain, damage, health costs...
4 Water pollution - damage to fishing, recreation,
health. .
5. Hazardous waste - disposal, cleanup...
6. Defense contract overcharges...
7. Income tax fraud...
8. Violations of federal regulations...
9. Bribery, extortion, kickbacks, other crimes...
Estes' estimate of the total cost to the public of private
corporate activity is $2.5 trillion per year This doesn't include
the billions we are spending bailing out failed savings & loans
and banks. These costs are borne by workers, consumers, com
munities and taxpayers.
In spite of these increasing costs to individual citizens,
the burden of taxes has been shifting from corporations to indivi
duals. In 1950 corporations paid 39% of U S. income taxes and
individuals paid 61%. This year corporations will pay about 10%
and individuals 90% Many corporations are able, with clever
accounting, to avoid paying income tax at all, even though they
control billions of dollars of assets and pay their executives
millions of dollars in compensation.
Step 2 Raise the income tax on corporations. We
should raise these individual and corporate income tax rates
back to where they were before the 1980s, when the income tax
was more fair to everyone and did not noticeably inhibit incen
tive and business was overall more healthy.
Wealth Tax
An annual tax of individuals and corporations on the
value of their assets - real estate, securities and business
assets above liabilities. Eight of the industrial countries have a
wealth tax Japan and Switzerland raise the largest part of their
tax revenue from wealth taxes. With an exemption of $500,000
per person to allow for home equity, savings for kids' education
and a fair amount for a rainy day, a 4% wealth tax would,
according to Estes, raise about $225 billion per year (about one-
half of income tax revenues). This would make it more difficult
for individuals and corporations to pay no taxes in a given year,
as some continue to do
Inheritance Tax
Most of the wealthy got that way by luck or by inheriting
money, not by harder work or superior talent. Inheriting large
sums of money can be worse for the character than being raised
by a single mother on ADC Studies show that people w4io
inherit money are generally less productive than those vtfio earn
it.
Almost all capital gains come from the sale of stocks
and nonresidential real estate. 93% of the people don't have any
capital gains. 72% of capital gains go to the wealthiest 1% of the
population.
Capital gains taxes, taxes on profits from investments,
are drastically different from taxes on wages. If you are employ
ed, taxes are wthheld before you ever see the money you earn
ed. A person with capital gains can control when they will be
taxed by deciding if and wrfien to sell stocks and property. This is
a decided advantage for earnings on investments over earnings
from wages.
In the 1960s, when the income tax rate for the top
bracket was 91%, capital gains were taxed at only 25%. In 1981
the capital gains tax went down to 20%, while the top income tax
rate went down to 50%. The capital gains tax rate was raised to
the level of ordinary income in 1986. In 1995 the capital gains
rate remains at 28%, while the top income tax bracket is 39%. I
burden you with this brief history because it gives us a real life
laboratory for evaluating the effects of raising and lowering the
capital gains tax.
Gingrich, Dole & Co., as well as Bill Clinton, want to cut
the capital gains tax rate. They claim that a cut would stimulate
investment, create jobs, encourage savings and revive the
economy. Some even argue that a cut would actually raise
revenue as investors are encouraged to sell assets wth accrued
capital gains.
Would a capital gains tax cut stimulate investment and
job creation? The Congressional Research Service reports that,
"the effect (of the proposed capital gains tax cut) on the rate of
return to new investments would be extremely small and the
effect on output in the economy would be negligible." Business
Week magazine, citing a study by the chief economist of the
House Budget Committee, reports that "investment in business
equipment rose after capital gains tax increases and fell after
capital gains tax decreases.
During the two years after the 1981 capital gains cut to
20%, "the annual growth rate (of the economy) was only 1% -
2.5 percentage points below prior growth...(and) unemployment
ballooned from 7.3% to 9.3%....In fact, improved economic
growth has typically followed hikes - not cuts - in the capital
gains tax." (Business Week)
How about encouraging savings and investment?
Professor Alan Blinder, writing in Business Week: 'Tax
incentives for saving and investment proliferated in the 1980s,
and almost all failed....There was no substantial rise in the share
of gross domestic product saved or invested, and there was no
burst of productivity growth."
Estes again, in an Institute for Policy Studies briefing
paper (October 1992):
'The capital gains tax is largely irrelevant to a business
decision to invest in new equipment, since business rarely
realizes gains on disposal of such assets.
"Business will not invest in productive facilities if
demand does not exist for its products, no matter what the level
of capital gains taxes."
If a capital gains tax cut would not lead to more jobs,
more investment, stimulate the economy or increase savings
significantly, what would it do?
Estes:
"A capital gains tax cut would increase the inequality of
income distribution in the U.S. that has seen the rich getting
richer and the poor getting poorer, and now places our nation
20th out of 21 industrialized nations in rankings of income
equality.
"...would mean taxing the fruits of labor (even) more
heavily than the fruits of wealth.
"...would send a message that investments in capital
should be encourage over investments in people."
A capital gains tax cut is simply an increase in welfare
for the very rich. This income should be taxed just like any other
income; special treatment for the rich is unjustifiable.
Corporate Foreign Tax Credit
This jewel in the welfare crown works as follows:
A corporation based in San Diego pays taxes to the
state of California. These taxes are considered deductions on
the tax form just like other costs of doing business. A deduction
is a subtraction from the amount of income on wiiich the tax bill
is calculated.
Now if this corporation moves across the border to
Tijuana and pays taxes to Mexico, these taxes have turned into
tax credits which are deducted from the bill itself. Corporations
are thus encouraged by foreign tax credits to move out of the
country. This should be stopped.
Some other jewels in the crown:
Earnings ceiling on Social Security withholding:
This ceiling of $60,000 ruthlessly increases the regres
sivity of our tax system. For 1994, 6.2% of your income is
withheld for Social Security taxes. (Your employer also pays
6.2% for you. Self-employed people must pay the wiiole 12.4%.)
This tax is withheld on earnings up to $60,000. Anything earned
above that amount is not taxed for Social Security at all. All
income should be ta/ed for Social Security.
Social Security and Medicare are paid to all retirees,
regardless of their other income. Many retirees feel that they
"have it coming," that they are only receiving what they put into
the system over their working years. The truth is that retirees get
back everything they paid in, plus interest, in seven years. After
that they are on welfare. Social Security and Medicare benefits
should be means-tested. The rich don't need them.
Deductions for mortgage Interest.
This also is sharply regressive. Buyers of expensive
homes, including second and third homes, receive much more
of a benefit than buyers of less expensive homes, working
people. Renters get no benefit at all. This deduction should be
eliminated.
Deductions for business meals and entertainment
Allowing business people to deduct 50% of the cost of
business meals at expensive restaurants, wrfiile eliminating
school lunches for poor children and milk and formula for poor
infants, seems to exemplify the Republican agenda. This
deduction should be eliminated.
These changes in the tax system to make it more
progressive and in line wth the rest of the industrialized world,
are the necessary first steps in reforming welfare for the rich.
Hany Johnson lives in Astoria. He is a frequent
contributor to the NCTE.