A Guide to the Millionaires' Tax Cut
by Amy Muldoon
International Socialist Review, June/July 2001
George W. Bush's $1.6 trillion 10-year tax cut plan is a massive
giveaway to the rich. It is part of an effort by big business
and the government to shift the burden of balancing the federal
budget onto the shoulders of working-class men and women.
Bush has given a number of rationalizations for the tax cut-from
saying that it would stimulate the economy (even though most of
its provisions won't kick in for several years) to arguing that
it would help ordinary people pay their credit card debts. Now
he is claiming that the cuts will make it easier for people to
pay for rising gas costs.
"I am deeply concerned about consumers," Bush gushed.
"I'm deeply concerned about gas prices. To anybody who wants
to figure out how to help the consumers, pass the tax relief package
as quickly as possible."' At best, this represents a commitment
by Bush to do nothing to lower inflated gas prices that are helping
his friends in the oil and gas industries rake in profits. The
reality is this: Bush will grasp at any excuse to hand out money
to his rich corporate friends.
The final version of the bill, recently passed by the Senate,
conforms to a revised plan that cuts taxes by $1.35 trillion over
11 years. The bill, which includes the core elements of the Bush
plan, was passed by the Senate Finance Committee 14 to 6, with
the acquiescence of four Democrats. It cuts the top rate from
39.6 percent to 36 percent (Bush wanted 33 percent), but this
plan still gives a third of the tax cuts to the top 1 percent
of all taxpayers and about 70 percent to the top fifth. The Senate
is apparently only slightly less enthusiastic than Bush about
helping the very rich to stay very rich. The Senate Finance Committee
voted 18 to 2 to reject a windfall profit tax that would prevent
energy companies from earning more than a 20 percent profit rate.
The Senate tax cut is about the same size as the tax cut that
Bush pushed during his election campaign. But the Senate plan
postpones when some of the tax cut provisions take effect.
For example, the marriage tax break wouldn't take effect until
2006; the estate tax wouldn't be completely wiped out until 2011
(instead of 2009); and a full, across-the-board income tax cut
wouldn't take effect until 2007. More than $500 billion in cuts
would be made in the first five years. The Center on Budget and
Policy Priorities (CBPP) has calculated that the Senate tax plan
would cost $4.1 trillion in the 10 years after all of the tax
plan's provisions took effect. What follows is an analysis of
Bush's tax plan.
Who gets what?
* The income tax cuts are heavily weighted to the very rich,
with 43 percent going to the richest 1 percent of the country,
amounting to about $45,000 each. This 1 percent would receive
more than the bottom 80 percent of taxpayers combined.
* The top 1 percent of wage earners (those earning more than
$319,000 a year) pay 20 percent of taxes, but will receive 40
percent of the cuts.
* The richest 400 Americans-whose individual incomes averaged
$110 million in 1998-will save more than $1 million under the
House plan, and $622,000 under the Senate plan, according to Joel
Slemrod, a tax specialist at the University of Michigan.
* The Bush plan will reduce, and by 2009 eliminate, the tax
that is levied on inheritance, known as the estate or "death"
tax. Currently, no tax is paid on inheritance left to spouses
or estates worth less than $675,000 ($1.35 million for couples).
This tax, therefore, only affects 2 percent of the population,
and two-thirds of its revenue comes from the wealthiest 2 percent.
There is a myth that inheritance taxes eat up half or more of
big estates, but the largest are taxed at 19 percent, and smaller
ones are levied at 13 percent.' Removing the tax will save lucky
heirs about $3.4 million each."'
* According to the CBPP, an estimated 64,000 estates would
benefit from a $55 billion tax reduction as a result of the elimination
of the estate tax by 2010. This cut is equal to the total tax
cut of the Bush plan if it were shared among the bottom 74 percent
of families (ranked by income). That's 103 million families, or
approximately 192 million people.
* Just 4,500 estates would receive $28 billion of the tax
cut, an amount equal to the tax cut that 81 million families,
or about 140 million people, would receive.
* Right-wing Texas senator Phil Gramm claims that, "It's
not right to make people break up their family business or family
farm to pay taxes just because the person who built it died."
But estate taxes are not breaking up family farms:
Neil Harl of lowa State University, who specializes in tax
law for farmers, says that he has never seen a farm sold for this
reason. Farmers, he says, are being used as shills for people
who've grown rich on stocks. Family farms already enjoy generous
estate-tax breaks. Farms can be valued at perhaps only half of
their fair market price. Any taxes due can be paid over nearly
15 years, at interest rates as low as 2 percent. And unlike most
couples, farm couples can shelter up to $2.6 million from tax.
Almost all farms already pass estate-tax free, Harl says. Of the
properties taxed, a significant portion belongs to absentee owners-say,
a Wall Street guy with an Idaho ranch.
* According to the Treasury Department, taxpayers, on average,
would receive a tax cut of $ 1,117 from the entire Bush income
tax package, including the child tax-credit expansion, marriage
penalty relief, and the rate reductions, if the plan went into
effect starting in 2002. This is less than one-ninth of the more
than $ 10,000 in tax cuts that those in the top bracket would
receive.
* The average tax cut for the bottom 60 percent of taxpayers
(those earning less than $39,000) will equal $227 - hardly enough
to make a dent in most people's credit card debt.
* Some will get no tax cut at all. Carrie Villa, a 40-year-old
single mother with two children who works as a secretary for a
state agency in Helena, Montana, makes $ 17,800 a year, an amount
that puts her in an income bracket too low to pay federal income
tax. Carrie is part of the 85 percent of households in Montana
that do not qualify for the $ 1,600 tax rebate Bush is promising
to families that make more than $40,000 a year.
* The Bushes, on the other hand, will be well served by the
tax cut. Based on their reported 1999 tax returns, plus the $400,000
presidential salary, the Bush's can expect a reduction in their
federal income tax bill of almost $ 100,000 a year-a sum almost
six times more
* Among Black and Hispanic taxpayers, 53 percent will see
no relief at all under the new plan-a total of 12 million families
and 24 million children are left behind.
* Even for married couples, tax relief is only for the rich.
The lowest wage earners will be penalized up to $3,000 for filing
jointly as a married couple. About 3 percent of the breaks go
to couples earning less than $20,000, and 68 percent go to those
making between $75,000 and $200,000. t,
Who pays what?
There are a number of different taxes. Following are descriptions
of the most important:
* INCOME TAX: This is a tax on net income, including work
and profit from investments, and is rated progressively higher
the more money someone earns. However, by taxing profits, the
government is simply skimming off some of the wealth that employers
have made by exploiting workers' labor. In a sense, both the tax
on wages and the tax on profits comes from wealth that working
people created. Income taxes bring in about 50 percent of all
federal tax revenue collected.
The rate at which someone is taxed is called the "marginal
rate" and is divided into five margins, from 15 percent to
39.6 percent. However, the sliding scale is applied the same on
all income, so the first $50,000 of income is taxed at 15 percent
whether you earn $40,000 or $400,000. But the money earned above
$50,000, in the next margin, is taxed at 28 percent. The highest
earners therefore have all five marginal rates applied to their
incomes successively with the 39.6 percent rate applying only
to income greater than $288,000. That means that those who make
enough money to pay the top rate of 39.6 percent don't actually
have to pay a tax of 39.6 percent. Overall, their effective tax
rate is 27.4 percent-assuming they don't use tax loopholes to
reduce that figure even further. The great majority of taxpayers-more
than 72 percent-either pay only the 15 percent marginal rate or
don't pay any federal taxes. About one-fifth of all taxpayers
make enough income to pay the 28 percent rate. Less than 5 percent
of all taxpayers will pay at a marginal federal income tax rate
above 28 percent in 2001, and less than 1 percent will pay at
the top marginal rate of 39.6 percent.
The income tax cut is the largest component of Bush's tax
cut plan, accounting for $560 billion over ten years. Of this
amount, $237 billion will go to the less than 1 percent of the
population who pay the top rate, which will be cut from 39.6 percent
to 33 percent.
* PAYROLL TAX: Also called the Federal Insurance Contribution
Act (FICA), this tax funds Medicare and Social Security and is
derived from wages. Both employers and employees each pay this
tax on wages at a rate of 1.45 percent for Medicare and 6.2 percent
for Social Security (for a total tax of 15.3 percent). Payroll
taxes account for about 7 percent of taxes collected. For many
working-class people, this tax is higher than their income tax.
It is also a regressive tax, meaning that those who make the least
amount of money pay a greater proportion of their income than
do those who make the most. So, if Dick Cheney makes $ 15 million
working at Halliburton, he pays $9,450 in Social Security taxes,
or about .06 of 1 percent of his income."
* ESTATE TAX: Often referred to as the death tax by President
Bush and other wealthy people seeking sympathy for their plight,
the estate tax is a tax on inheritance (whether given while alive
or dead). The reality is easy to distort because so few people
have personal experience with it. Levied at a rate below 20 percent
for even the largest estates, it applies only to inheritances
above $675,000 for an individual and $1.3 million for a couple.
Less than 2 percent of federal tax revenue comes from this tax.
* SALES TAX: Sales tax is a flat rate on goods and services
that generates money for states and cities. Some places have no
sales tax, as in New Hampshire, or have waived some kinds of sales
tax-for instance, New York City residents pay no tax on clothes
priced up to $500. Sales taxes are regressive, since the same
tax applies to all people, whether they collect an unemployment
check or own Microsoft.
* CAPITAL GAINS: The capital gains tax is placed on income
derived from selling something-a house, a business, a rare painting,
a tract of land, stocks and bonds-for more than the amount the
person paid for it. For example, when former oil executive Dick
Cheney sold 300,000 shares of Halliburton stock on August 21,
2000, valued at about 60 percent higher than when he purchased
(or was given) them, he had to pay a capital gains tax on the
$15.7 million he made from the trade. ~ Stocks and bonds are not
taxed until they are sold, despite their helpful effect on the
financial assets of the owner. Bill Gates, worth more than $90
billion and counting, pays no tax on any of his holdings if they
are not sold. Fiscal hawk Bill Clinton slashed the top rate on
capital gains from 28 percent to 20 percent in 1997.
The tax code in the U.S. is set up to tax the rich at a higher
rate than the poor, based on the principle that it is easier to
pay more when you have more. But some taxes-and therefore tax
cuts-are targeted at specific groups. Estate taxes are the obvious
example. But income tax cuts are a shell game favoring the rich.
Of American taxpayers, 74 percent pay more in payroll taxes (Medicare
and Social Security) than in income taxes. In fact, the further
you travel down the income ladder, the higher the percentage the
government takes in payroll taxes.
As a result, the poorer you are, the less likely you are to
benefit from income tax cuts. Yet, conservative tax slashers never
take aim at the payroll tax rate or suggest that it be levied
at a higher rate on the rich to relieve the burden on millions
of lower-income families. While the top tax rate for the rich
was slashed from 70 percent in 1977 to 39.6 percent (and is about
to be lowered even further), the payroll tax has increased by
31 percent since 1977. Put simply, taxes for ordinary people have
increased, and for the rich they have drastically declined.
Tax evasion, the bosses' national pastime
Billions of dollars disappear every year from the tax coffers
because of large loopholes and breaks that favor the rich. The
last big tax package, signed by then-President Clinton in 1999,
cut tax revenue by a total of $792 billion-including $82 billion
over 10 years in new subsidies for corporations, according to
Citizens for Tax Justice (CTJ).
These cuts include:
* $36.8 billion to multinational companies-banks, weapons
manufacturers, automakers, etc.-to allow interest paid overseas
to be deducted from the amount of domestic profit that could be
taxed. This act also gives a big break to Lockheed Martin for
profits on overseas weapons sales. The other needy corporation
that benefits is General Motors.
* $ 13.1 billion to extend the corporate research and development
tax credit. A credit means that the government actually pays companies
to invest in certain areas of the economy to encourage rapid development
of new products. The main benefactor of this cut is a little operation
called Microsoft.
* $2.6 billion for oil and gas companies to increase exploration.
If the cost of the exploration is reimbursed by finding oil, the
"loss" can bring the taxable income of a company down
to zero-or less. Meaning, once again, that the government pays
some of the largest companies to do what they would have done
anyway. Another provision of this break makes foreign pipelines
a tax shelter, which extends a helping hand to the politically
powerful Enron Corporation-the single largest contributor to President
George W. Bush's campaign."
According to the law, corporations are supposed to pay 35
percent of profits in taxes. Very few pay this amount. Loopholes
like the ones listed above rob the budget of billions of dollars
a year. An Institute on taxation and Economic Policy study from
October 2000 found that:
* Of 250 highly profitable U.S. companies, the average tax
paid was about 23 percent between 1996 and 1998 (the last year
statistics are available on corporate taxes).
* 41 companies raked in rebates totaling $3.2 billion- that
is, they paid negative income taxes-for at least one of the three
years of the study (1996-98). Texaco, which earned $3.4 billion
in profits, received $304 million back. Eleven companies-including
Goodyear (9.9 percent), Texaco (-8.8 percent), Kmart (-0.2 percent),
MCI Worldcom (-1.7 percent), and Ryder (-6.2 percent)-enjoyed
negative income taxes for the entire three-year period.
* 133 of the top 250 companies, paid less than half of the
35 percent rate at least one of the three years of the study.
Tax breaks cut General Electric's taxes by 77 percent, Ford's
by 47 percent, Microsoft's by 43 percent, and AT&T's by 28
percent.
* The top 12 defense contractors paid only 11.8 percent of
their profits in federal income taxes in 1998.
* The gas and oil industries paid on average 12.3 percent
of their profits in taxes, with the largest 12 paying only 5.7
percent in 1998. In other words, the nation's biggest energy producers
paid taxes at a lower rate than a single worker earning $10 per
hour paying FICA taxes, at 7.65 percent.
* Over the three years of the study, these breaks cost an
accumulated $98 billion.
The current rhetoric is that tax breaks and refunds reward
people and companies that invest in the economy and create jobs.
But some of the largest recipients of tax breaks have turned around
and slashed jobs at record rates.
CTJ analyzed the annual reports of ten major U.S. companies
that took part in the bloodletting of the mid-1990s that resulted
in almost 200,000 lost jobs. While jobs were slashed, profits
rose and tax breaks accelerated.
As workers were packing their bags, bosses were stuffing their
pockets. As the study shows, "The CEOs of these companies
have enjoyed significant salary increases, in many cases as a
direct result of large-scale layoffs they have imposed. In fact,
these ten companies rewarded their CEOs with compensation packages
averaging $5.2 million in 1995. Business Week found that CEOs
of the 20 companies with the largest announced layoffs last year
saw their salaries and bonuses jump by 25 percent."
The rich pay less and less
The first modern tax code, implemented in 1913, exempted 98
percent of the population from paying taxes. Workers were virtually
exempt from taxes right up to the Second World War, and the top
marginal rate was 90 percent for the wealthiest Americans. Of
taxes collected, the rich paid 55 percent, and workers paid 45
percent. Workers' income tax was 4 percent of income, and payroll
deductions weren't added until 1943.
But the 50 years after the war saw a massive shift of the
tax burden away from the rich onto workers. In the pre-war years,
a series of exemptions meant that taxes were levied on only about
16 percent of a workers' income. By 1964, erosion of exemptions
for workers meant that taxes were levied on 54 percent of a workers'
earnings and were eating up 10 percent of take-home pay-more than
twice the 1943 figure of 4 percent.
The postwar boom of the 1950s and 1960s saw a huge increase
in workers' productivity and profits for the American ruling class.
During the 1950s, the rich still paid a maximum tax rate of 91
percent on income over $400,000. But the postwar period saw a
steady decline in the amount of taxes paid by corporations. According
to investigative reporters Donald Bartlett and James Steele:
During the 1940s, corporate taxes accounted for 33 percent
of the federal government's general fund tax collections. The
corporate share slipped to 31 percent in the 1950s and to 27 percent
in the 1960s. Then it plunged to 21 percent in the 1970s, continuing
its free fall in the 1980s to 15 percent, where it remains in
the 1990s22
John F. Kennedy cut the top tax rate from 91 percent to 70
percent, though that rate then applied to incomes over $200,000.
Over the next 20 years, according to Bartlett and Steele, "Congress
would enact tax law after tax law that gutted the progressive
structure of American taxes while throwing the doors of the U.S.
treasury open to those who could pay for access."
The man whose name is synonymous with union busting, Ronald
Reagan, also approved tax cuts that were the biggest giveaways
to the rich in history. Reagan's 1981 tax bill cut the top marginal
rate again from 70 percent to 50 percent. The bill hacked $750
billion from revenue, which led to deficit spending to pay for
Reagan's arms race. The early years of the Reagan administration
were a golden age for ruling-class tax evasion. One study of corporate
tax payments found that of 250 companies studied, half paid nothing
or received money back from the government. While some tax bills
in the mid-1980s closed loopholes, the rate paid by rich individuals
was cut again in 1986 to 28 percent.
The effect of the manipulation of tax law was summed up by
the CBPP:
From 1977 to 1994, the average after tax income of the wealthiest
1 percent of Americans rose 72 percent, after adjustment for inflation
and the average income of the nation's top 20 percent of families
rose 25 percent. But the after tax income of the poorest fifth
of the population dropped 16 percent during this period.
Payment of taxes cost the average worker $374 in 1970, and
$5,329 in 1992-an increase of 1,325 percent!
As class polarization accelerated in the 1990s, the Clinton
administration made it clear that providing tax favors to the
rich was a bipartisan issue. The 1997 and 1999 tax bills gave
huge breaks to corporations notorious for layoffs (see above)
and pollution. In a familiar scenario, the 1997 bill gave the
top 1 percent of earners one-third of the tax cuts, and the top
20 percent got 75 percent of the cuts. Ninety-seven percent of
the reduction of the capital gains tax went to people earning
more than $200,000 a year. In a grotesque give back to a longtime
ally, the 1999 Clinton tax plan included a $534 million break
for companies producing energy from an "alternative source,"
benefiting Arkansas' Tyson Foods for burning chicken manure.
While Bush's tax plan is outrageous in its scope, it is no
departure from the overall changes in tax law that have happened
over the last 30 years. Far from helping working families or helping
to create jobs, tax breaks have been part of the ongoing attack
on poor and working-class Americans. No wonder only 22 percent
polled recently thought an income tax cut was more important than
increasing spending on domestic programs.
Amy Muldoon is a member of the International Socialist Organization
in New York.
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