Two studies by Citizens for Tax Justice merit attention, as Congress comes back to Washington after the Thanksgiving break to try to pass its budget legislation and perhaps, another major tax cut bill. If both the takeaways-from-the-needy budget bills and the giveaways-for-the-wealthy tax bills are passed, this Congress will have earned its "let them eat tax cuts" sobriquet.
The first study, here, points out a little-noticed tax cut that will kick in for the first time in 2006 to provide a benefit just for the wealthiest taxpayers. Back in 1991, Congress enacted legislation that phased out various deductions, such as the personal and dependency exemptions, for the highest income taxpayers. Those phaseouts help to increase the overall progressivity of the tax system, in spite of the fact that the wealthiest taxpayers receive the majority of preferentially taxed types of income that are subject to low or no tax (e.g., capital gains and dividend income and tax-exempt interest on municipal bonds). In 2001, the Bush Administration and Congress enacted a major tax bill that included among its provisions a gradual repeal of the income phaseouts. The repeal begins to apply in 2006.
Since the phaseout affects deductions allowable to the wealthiest taxpayers, the repeal of the phaseout is a tax break almost exclusively for the very upper crust. The Citizens for Tax Justice report notes that 97% of the break, which will amount to $2.7 billion in 2006, will go to the wealthiest 1% of income recipients!
It would be reasonable to say this is one not-yet-in-place tax cut for the wealthy that need not be finalized. It could be repealed tomorrow without anyone suffering an increase in taxes, since no part of the phaseout has begun. Illinois Senator Durbin has proposed a bill to do exactly that. I say "Good for you, Senator Durbin."
The phaseouts are a complication to the tax code, but only for the very wealthiest of taxpayers. Those wealthy taxpayers ordinarily have their taxes done by tax preparers anyway, so that the complication is not really a burden on them. As noted before on this blog, the concerns underlying a drive for statutory simplification apply primarily to "ordinary" taxpayers in the lower four quintiles of the income distribution. Although there are transaction costs due to more complicated provisions affecting the wealthy and there is always the possibility that a complicated set of provisions will be more susceptible to tax arbitrage, complication is a much less important factor in determining tax policy that predominantly affects wealthier taxpayers.
Much more important, especially at this juncture where government infrastructure in support of working class families is crumbling is the income distribution that is affected by the phaseouts. With the phaseouts, higher income Americans pay a fairer share of the tax burden. Without the phaseouts, those same Americans are effectively given another tax windfall that will likely be invested in some tax haven country that will not produce a single additional American job.
To permit the repeal of the phaseouts to take hold and provide a multi-billion dollar tax break to the wealthy while cutting food stamps and medical care for lower-income families is simply another example of this Republican majority's penchant for letting the needy, of this generation or the next, pay for tax breaks for the wealthy. We simply do not need any more millionaire tax cuts paid for by taking bread off the plate of a hungry child.
The second study, here, points to the high cost of providing the wealthiest taxpayers yet another tax windfall by extending the special low capital gains and dividend rates beyond the current final year of 2008. Just one year's cost of the millionaires' tax cut would increase the federal budget deficit for 2009 by about $31 billion. (This, remember, after this Congress decided to cut food stamps and medicare so that it could claim a "deficit reduction" budget bill, even though it didn't take account of planned tax cuts or the uncharted costs for our continuing occupation of Iraq.)
Is it unreasonable to object to this expensive tax cut as a tax cut just for millionaire's? Not at all. Millionaires with average annual incomes of $1.3 million or more will get most of the cuts--53%; and the average amount of the tax cut for each of those millionaires would be about $12,000. Id. Not chicken feed, even for a millionaire. Almost every taxpayer in the bottom four quintiles of income will get zilch! That's right--78% of taxpayers would have no benefit from the extension of the millionaire's tax cut, and another 10% of taxpayers would get an average cut of less than $100. Id. That's because, as I've commented before, the bulk of the investment assets are owned by the wealthiest Americans at the top of the distributional chart.
Congress should pay careful attention to the arguments for extending this capital income windfall for the rich. The original rationale for lowering the tax rate on dividends and capital gains was that it would be a powerful stimulus for the economy that would benefit the stock market and ultimately benefit everybody, not just the wealthy ownership class that would be the primary recipient. See Karen Richardson, "Did the Dividend-Tax Cut Work?", Wall St. J., Dec. 6, 2005, at C5. And White House officials have been busy lobbying the Senate (which didn't include the cut in its tax bill) and the House (which at this point still intends to include the cut in its bill) for extension through at least 2010. Id. The Bush Administration says the cuts are "necessary to provide certainty for investors and business and are essential to sustaining long-term economic growth." Id. See also this story in the Washington Post.
The facts, however, have not borne out that claim. Richardson (see above) reports on a study that concluded that slashing the capital gains/dividends rate "was a dud when it came to boosting the stock market when it was announced," didn't leave an imprint at the later test period, and didn't "increase the amount of money companies paid out to investors as a proportion of their earnings." Id. What the cuts have done and will do, however, is save investors a total of $114 billion from 2003 to 2008. Id. That money comes right out of the deficit hole that the 2001-2004 tax cut packages have dug and that Congress wants to fill back up with money stripped from programs like food stamps, child support enforcement, and health care for lower-income Americans. See, e.g., Jane Zhang, States' Food-Stamp Fight Intensifies, Wall St. J., Dec. 5, 2005, at A5 (noting that states' efforts to broaden the reach of food stamps to help the working poor are on a collision course with Congress's drive to cut the budget in order to make room for new tax cuts, leading to a $700 million cut to food stamps in the House bill and resulting in Oregon alone in cancellation of benefits for 16,000 families with 12,000 schoolchildren).
Given the evidence against the claims in support of capital gains cuts and dividends cuts, what must be the real reason that this Congress and White House are so intent on permanently extending this profligate tax break for millionaires? What is at stake is ultimately the end of the New Deal and the beginning of an era when "robber baron" corporations hold sway, their owners and their heirs pay little or no tax on their enormous economic incomes from capital, and ordinary Americans work without benefits for low wages subject to high consumption taxes.
Proof of sorts lies in various recent articles about wages, growth and the social compact. Consider the headline of a recent article by Teresa Rivas: "Economy Grows, but Raises Won't," Wall St. J., Dec. 6, 2005, at B14. Why are wealthy Americans jetsetting around the globe, while ordinary Americans are settling in to a long winter of discontented worry about economic security, health care, education expenses, and their child's well-being off in Iraq? Ordinary Americans suffer slowing wage growth, while millionaire investors enjoy higher returns. Ordinary Americans face reductions of benefits, while CEOs and other top management rake in bigger and bigger compensation packages. See, e.g., Steve Lohr, How is the Game Played Now?, New York Times, Dec. 5, 2005, at C1 (recounting the rewriting of the implied social contract between employers and employees, with IBM's example of caps on retiree medical benefits and elimination of traditional pensions for new hires) and Dylan Loeb McClain, Richer than Ever, New York Times, Dec. 5, 2005, at C6 ("Households in the top quintile had more than two-thirds of overall net worth in 2004, up from less than 64 percent in 1995. The overall improvement in household wealth also did little to make a dent in ... poverty and lack of health insurance. ...[N]early 46 million people lacked health insurance and 37 million people lived below the poverty line.") Remembering how low we set the line for officially being treated as above the poverty level (see the previous posting on poverty among the aged--an elderly couple with more than $12,000 is not considered to live in poverty), you realize just how bad things can be in the richest country in the world. Congress should pay attention to solving that problem, and quit trying to extend a tax windfall for millionaires.