ataxingmatter

Tax Breaks for Millionaires

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  It could be repealed tomorrow without anyone suffering an increase in taxes, since no part of the phaseout has begun.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.

New Ideas

Ted Seto, a tax professor at Loyola-LA, has written an interesting article that is posted on the Social Science Research Network, here.  Many of the pieces written about gay marriage are focused on discrimination against gays and the claim that gays should be treated in the same way as heterosexuals, including being able to enjoy the legal benefits of state-sanctioned union that heterosexual couples enjoy.  Professor Seto's article calls to our attention that discrimination against gays may sometimes actually work to their benefit, and the tax Code provides some examples. 

The article looks at the effect of the Defense of Marriage Act (DOMA), the federal statute that recognizes only marriages between a man and a woman for all federal statutory purposes.  It studies how that act and the tax Code interact to give special advantages to gay couples.  The tax Code includes various provisions that treat persons differently based on their status as married or single, such as the section providing the rates at which income will be taxed.  For all those purposes, the DOMA definition of marriage applies, and none of the provisions applying to married persons can be considered to apply to gay couples, even if they are living in a committed relationship and even if that committed relationship has been blessed by a state like Massachusetts that permits gay marriages.

DOMA applies, but, as a direct consequence, many  provisions in the Code that guard against abusive transfers between related parties do not!  For example, transfers between spouses are essentially disregarded for tax purposes, preventing an interspousal transfer of a loss asset from providing an opportunity for the transferring spouse to recognize a loss without actually transferring the asset outside the family unit.  But that provision wouldn't apply to prevent a gay couple from engaging in the same gambit.  In other words, Seto argues, by cutting gay couples out of marriage and the relationship-based provisions of the Code, DOMA effectively created a two-tier tax system--one for married couples and one for gay couples.  On balance, he says, the married couples are the losers.

Seto's solution, as stated in the abstract for the article, will unsettle some, but it seems to follow logically from the coherent structure of the anti-abuse provisions of the Code that prevent individuals from using their close relationships with others to arbitrage the system.

"Ultimately, the paper concludes that the only way to ensure that gay couples will be taxed no more favorably than heterosexual married couples is to list gay marriage as one of the proxy relationships that automatically invokes pertinent anti-abuse rules - in other words, to treat gay marriage as marriage for federal income tax purposes. Even this by itself, however, will not be enough. A formal spousal relationship must be made available to gays, and it must be attractive enough to induce gay couples to undertake it voluntarily - just as heterosexual couples marry despite the tax costs. In the absence of an attractive formal status that then invokes related-party anti-abuse rules, well-advised gay couples are, and will continue to be, permitted to pay systematically lower federal income taxes than heterosexual married couples - a result unlikely to be acceptable to a majority of Americans in the long run."

The Senate and House on the AMT

The Senate and House tax cut packages differ in various ways, but two major differences are noteworthy.  The Senate bill, passed a few weeks ago, provides a one-year patch for the AMT that costs about one-half of the total cost of the tax cut bill.   The House bill, not yet passed, would not include any relief for the AMT.  Instead, it would extend the Bush tax cuts for capital gains and dividends for two more years (2009-2010) beyond their current expiration date of 2008.  So the Senate is trying to help the upper middle class that might be hit by the AMT (especially those families earning more than $75,000 and with two or more dependent children), and the House is trying to help the very rich who earn a hugely disproportionate share of capital gains and dividend income. 

Edmund L. Andrews describes the two positions in his "inside the news" piece in the Sunday times (BU 3) entitled "Hmmm.  What's This Alternative Tax? Hey, Wait! Ouch!"  He reports, as we have previously discussed, that both bills favor the wealthy, though the Senate bill "not nearly as much."  He speculates about the rationale for House Republicans supporting "tax changes that seem like a recipe for political self-destruction."  Taxpayers paying the AMT would "shoot from 3.5 million this year to 18.9 million in 2006."  At the same time, "51.3 percent of the House bill's tax package would flow to the top 1 percent of filers, people with average annual incomes of $1.1 million.  Put another way: half the entire tax cut would go to about 1.4 million households."   

His conclusion is that House Republicans are not just seeking revenge against Democratic-leaning states (though the "blue states" will suffer most from no AMT provision because they have higher tax burdens and higher concentrations of wealthy people).  Instead, he notes it is all just tactics.  Leaving out the capital gains break for the wealthy got the tax bill through an otherwise recalcitrant Senate.  Passing it in the House will permit a reconciliation process that has the capital gains cut in it and will require only a simple majority rather than the 60 votes otherwise needed to stop a filibuster.  So the Republicans plan to pass the capital gains and dividends break for the wealthy no matter what.

Note that this comes when a flood of dividends and share buybacks from record corporate profits have enriched the wealthy investor class enormously.  See Ian McDonald, Dividends, Buybacks Set New Benchmark for Largess, Wall St. Journal, Nov. 28, 2005, at A1.  (The same story notes that the big driver of these huge corporate profits isn't new entreprenuerialism that promises long-term economic growth for everybody; instead, it is further cost-cutting.)  The average payout is $1700 for every person in the United States, but of course most of that doesn't go to anyone in the lower four quintiles of the income distribution, so the actual payout to each wealthy investor is substantial.  And this Congress wants to make those payouts (often out of untaxed corporate profits) continue to be preferentially taxed at very low rates into the future.

Congress should let the capital gains and dividends tax cut die a natural death.  It is a boon for the wealthiest of the wealthy and will only increase the chasm between the well-to-do and ordinary Americans.  It is poor policy and has nothing to do with stimulating economic growth.  If anything, it rewards the kinds of activities (job cuts and benefits reductions) that allow companies like Wal-Mart to build up immense company profits and pay their executives lordly salaries while their ordinary employees struggle to make ends meet on starting salaries of less than $7 an hour, with no benefits. 

Poverty in America: Older Americans

In order to consider tax policies for the future, it is helpful to look at some of the information that has been produced by the Congressional Research Service for Congress about the current status of elderly in America.  A recent report by Debra Whitman and Patrick Purcell looked at Topics in Aging: Income and Poverty Among Older Americans in 2004 (Nov. 7, 2005).  A few of the statistics from the report are worth noting.

• Median income of individuals 65 and over is only $15,199
• For the 65 and older set, the advantage men have in the work world during their working years continues to hold true during old age: men had a median income of $21,200 while women had a median income of only $12,079
• The same is true for African Americans:  older African Americans have only 71% of the total income that older white Americans have.
• 28% of individuals 65 and over made less than $10,000 in 2004
• Only 10% of those 65 and over made more than $50,000 in 2004
• Social Security is the largest single income source among the aged
• For 69% of those recipients, Social Security constitutes more than half their income
• For 39% of those recipients, Social Security constitutes more than 90% of their income
• For elderly in the bottom income quartile with less than $9,390 in total income, 86% of that income is from Social Security, less than 5% is from savings and only 2% from pensions
• The median private pension benefit received in 2004 was only $6,720
• Most elderly Americans receive only small amounts of income from investment assets that they have saved:  half received less than $952 from interest, dividends and other investment income
• For workers 65 and over, media earned income was $15,000
• Poverty has declined for the elderly, though one in ten elderly persons still have income below the poverty threshold (defined for couples at least one member of which is 65 or older as $11,418). 
• Women, minorities, less-educated and elderly over the age of 80 are more likely to be poor
• The eldest of the elderly are also the worst off:  compared to those 65-69, persons 80 and over have bout $9,000 less in earnings, $6,000 less in public pensions, $3888 less in private pensions and $100 less in asset income, $336 less in Social Security income 

The fact that fewer elderly have incomes below the official poverty level should not give us much solace.  Many of these are the "near-poor" who have incomes just barely above the poverty threshold.  One quarter of American elderly had family incomes below 150% of the thresholds, and 38% had less than twice the poverty thresholds ($18,120 for a single person, $22,836 for a couple).  It is hard to imagine how a typical elderly couple, with increasing medical bills and generally increasing costs that have to be paid out of fixed incomes, manage at all on just over the official poverty rate of $11,418.  Rent for even a small apartment, food, transportation, clothing, and medical needs could easily gobble up that entire income, leaving precious little to sustain a medical or other emergency.

As this Congress contemplates its budget cuts for the poor and tax cuts for the wealthy and upper middle class, it would do well to reflect on the importance to a good society of an elderly population that is integrated into the community, has access to health care that permits life-extending and life-expanding possibilities, and has a supportive network of family, friends and government agencies to ensure that no one is left behind.  This is the essence of what democratic egalitarianism requires--that each individual in society be treated with respect and have available for support the  means to live a decent life.

Ultimately, the need to ensure that elderly Americans are adequately provided for, like the need to provide health care for the one in four American children that are outside the safety net, must take more prominence in the national debate than it has to date.  That means that it may be necessary to increase the Social Security tax by raising the cap (perhaps including all capital gains as well as labor income) so that those millions of senior citizens who depend primarily on their Social Security check can have enough to meet their basic needs, including health care.  That means that we should cut back on excessive military spending supporting a global network of military bases in order to have the resources to care for ordinary American citizens at home.  That means that we should enact pension reforms that ensure that pensions created during a worker's working life are there when he retires.  If it demands requiring increased funding of pension plans, then by all means let us do so.  That means that we should recognize the importance of tax as a collection system for supporting community projects.  We cannot switch to a tax system that "starves the government" but feeds the wealthy, which is what the proposal for budget cuts accompanied by tax cuts for the investor class will do.  We should, in short, reconfirm our commitment to a progressive tax system that generates enough funds to help those at the bottom of the income scale.

Is Congress so isolated that it cannot comprehend living without a safety net?

As I consider more closely the budget bills proposed, especially the House bill, and the additional $50 - $70 billion of tax cuts planned by this Congress, it strikes me that many of the people in this current Congress are like George H.W. Bush when he was televised in awe at a digital scanner at a supermarket checkout during his last presidential campaign.  He never needed to shop for himself, and obviously didn't do so.  So this ordinary event in everybody's life was an adventure for him.  At the time, I wondered that a President could keep himself so removed from typical Americans that he was unaware of how groceries are bought.  And then I thought--how could he possibly identify with the poor, when he could not even identify with daily experiences of ordinary Americans.

This type of distancing of the wealthy from the lives of ordinary folk is getting worse.  I remember hearing someone talk recently about the amount by which low-income Americans' cost for government-provided health care might be increased under certain budget provisions, if enacted.  The tone was offhand, along the lines of "senior citizens might end up paying, say, $50 or $70 more each month under this plan."  Said casually, as though it was no big deal.  And apparently actually thought to be no big deal.  After all, most of us are affluent and can dig an extra $50 out of the stack of quarters left on the nightstand over a month's time.

Obviously, the speaker had no comprehension of what it is to live on a fixed income and face constantly mounting costs for items that are essential to your well-being, in fact to your very life.  For seniors making about $14,000 a year and paying for home, clothing, food, heat, phones and television, an increase in their medical expenses of $50 can be catastrophic and frightening.  It can mean cutting pills in half and forgoing half of the medicine that they are supposed to have, or eating even more skimpily to make up.

So it is that the Republican majority in Congress seems hell bent on enacting a budget bill and tax legislation that exploit ordinary Americans in order to provide further tax breaks to corporations and wealthy "investors" that make up the real "ownership society."  Yes, the House did trim back some of its most obscene budgetary cuts of programs aimed at lower income Americans, but not enough to make a real difference.  This report by the Center for Budget and Policy Priorities says it all in its title:  CBO Information Says House Budget Bill Passed Last Night Would Hit the Poor Hard.  As an example, cuts in Medicare will amount to $30 billion dollars over ten years, representing "savings" achieved by not providing important, much-needed health care to "near-poverty" lower-income Americans.   Another report makes clear that the changes made to the initial draconian proposals were de minimis:  Cuts in House Budget Bill Aimed at Low-Income Families Reduced by Only 2%. 

Another area of pitiless legislation in the House is the planned treatment of Temporary Assistance for Needy Families and reduction in enforcement resources for child support.  See this report House Budget Reconciliation Bill Includes Highly Flawed TANF Provisions.    If one didn't know better, one might think this Congress had bought into the unconscionable approach of the Tax Foundation that wears "Family Values" on its sleeve only to fold them into hiding unless the family at issue fits its own image of the right values (an Ozzie and Harriet family of four image--remember my earlier posting about the Tax Foundation's view of the inappropriateness of income distribution as a measure of the middle class?).  The trend seems to be to make invisible all those other families with a female head of household or gay couples with children or grandmom with three or four grandkids. 

Two other reports from the Center are worth mentioning.  The Wall Street Journal editorial page has been busy pushing for making the capital gains and dividends tax cut permanent as an "obvious" engine for economic growth and prosperity.  One might ask "for whom?", since the lion's share of those tax benefits go to the very top of the economic income bracket.  But one should also ask "is that so?"    The Center reports that the Economic Evidence for Extending Capital Gains Tax Cuts is Weak.   It provides a number of arguments against the extension, including the high cost of making the cuts permanent and the likelihood that the cuts will harm economic growth over the long term.

The second report uses IRS data on the distribution of the capital gains preferential rate benefit, to show that 80% of the benefit goes to taxpayers with incomes of $200,000 or more.  Data Show Benefits Sharply Skewed to High Income Filers.  So putting the two reports together, it is clear that extending the capital gains tax cuts would do little to promote economic growth while doing much to increase the income disparity between the haves and the have-nots in America.

I challenge each member of Congress to go home to their districts and states and spend time with ordinary Americans.  Really visit workers in their offices, on construction sites, in their homes.  Talk to them about the worries they have about the future--the insecurity of pensions when companies can leave them high and dry, the concerns about paying for decent health care, the fears that they will not be able to provide what is necessary to feed and clothe and educate their children.  I guarantee that if every member of Congress would turn off their spin machines and really listen to ordinary Americans, the budget and tax bills coming out of Washington would have a very different character.