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International Socialist Review Issue 18, June-July 2001
A Guide to the Millionaires' Tax Cut
By Amy Muldoon
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."1 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.2 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.3 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.4 What follows is an analysis of Bush's tax plan.
Who gets what?
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. 6
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.7
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.8 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.9 Removing the tax will save lucky heirs about $3.4 million each.10
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.11
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.12
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."134But estate taxes are not breaking up family farms:
Neil Harl of Iowa 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. Al‚ost 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.14
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.15
The average tax cut for the bottom 60 percent of taxpayers (those earning less than $39,000) will equal $22716--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.17
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 than Carrie Villa's yearly salary.18
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.19
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. 20
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.21
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.22
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.23 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.
Percentage of families in each income group whose payroll taxes exceed their income taxes (1999).24
Income group Percentage
Lowest 20 percent 99 percent
Second 20 percent 73 percent
Middle 20 percent 43 percent
Fourth 20 percent 17 percent
Highest 20 percent 4 percent
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 1977.25 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).26
These cuts include:
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:
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 the following sample shows.
Tax breaks for companies with high profits and big layoffs. 29
Company Profit Tax breaks Layoffs
AT&T $20.8billion $3.1 billion 40,000
Eastman Kodak $3.0billion $189 million 14,000
Mobil $1.8billion $434 million 6,000
Allied Signal $2.8 billion $665 million 3,100
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." 30
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.31 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 post-war 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 1990s.32
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."33
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.34 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. 35
Payment of taxes cost the average worker $374 in 1970, and $5,329 in 1992--an increase of 1,325 percent! 36
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.37
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.38
Amy Muldoon is a member of the International Socialist Organization in New York
1 Frank Bruni, "Bush says tax cut would help consumers with energy costs," New York Times, May 12, 2001.
2 Exxon's profits in the last quarter of 2000 were $5.2 billion, the largest quarterly profit in its history. Its 2001 first-quarter profits more than doubled over the previous year. See John J. Byczkowski and Susan Vela, "Oil companies' profits huge," Cincinnati Inquirer, January 25, 2001.
3 "Tax mice," Washington Post, May 15, 2001.
4 Janet Hook, "Bush's tax cut approved by key House committee," Los Angeles Times, May 16, 2001.
5 "Majority of Black, Hispanic families with children would get nothing from tax plan," Center on Budget and Policy Priorities (CBPP), February 15, 2001, available on the Common Dreams Web site at www.commondreams.org.
6 CBPP, "Majority of Black, Hispanic families."
7 David Cay Johnson, "Tax outlook rosiest for the very rich," Chicago Tribune, May 15, 2001.
8 CBPP, "Majority of Black, Hispanic families."
9 Max Sawicky, "Who wants to tax a millionaire? Not the House of Representatives," Los Angeles Times, July 3, 2000.
10 CBPP, "Majority of Black, Hispanic families."
11 Isaac Shapiro, Iris J. Lav, and Jim Sly, "4,500 very large estates would receive as much in annual tax reductions under Bush plan as 140 million Americans," CBPP, February 26, 2001.
12 Shapiro, Lav, and Sly, "4,500 very large estates."
13 Phil Gramm, "Death should not be a taxable event," July 11, 2000, available on his Web page at www.senate.gov.
14 Jane Bryant Quinn, "Estate-tax bill a dead giveaway of pols' crush on billion-heirs," Seattle Post-Intelligencer, August 10, 2000.
15 Isaac Shapiro, "Dollar gains for those in the top bracket would still be dramatically larger than gains for middle class," CBPP, May 10, 2001.
16 Mark Weisbrot, "Beyond tax relief for the prosperous few,"
February 13, 2001, available on the Common Dreams Web site at www.commondreams.org.
17 Timothy Egan, "In Bush stronghold, tax plan helps few," New York Times, April 6, 2001.
18 "Bush tax cuts would save George and Laura almost $100,000 a year," Citizens for Tax Justice (CTJ), available on their Web site at www.ctj.org.
19 CBPP, "Majority of Black, Hispanic families."
20 Molly Ivins "GOP tax break for the rich is redundant," available on the Common Dreams Web site at www.commondreams.org.
21 Joel Friedman and Robert Greenstein, "Reduction of top rate costs $237 billion over ten years, even though fewer than 1% of filers are in the top bracket," CBPP.
22 "Tax cuts," The Daily Brew, February 6, 2001, available on their Web site at www.thedailybrew.com.
23 "Halliburton shares worth $35 million sold, SEC says," Dallas Morning News, September 12, 2000.
24 William G. Gale, "Tax facts," available on the Brookings Institution Web site at www.brook.edu.
25 Donald. L. Bartlett and James B. Steele, America: Who Really Pays the Taxes? (New York: Touchstone, 1993), p. 104.
26 "Corporate welfare rides again: Business giveaways in the 1999 tax bill," CTJ.
27 "Corporate welfare rides again," CTJ.
28 Robert S. McIntyre and T. D. Coo Nguyen, "Corporate income taxes in the 1990s," available on the Institute on Taxation and Economic Policy Web site at www.itepnet.org.
29 "Tax subsidies reward job cutters," CTJ.
30 "Tax subsidies reward job cutters," CTJ.
31 "Making the rich pay their fair share," available on the United Electrical, Radio, and Machine Workers of America (UE) Web site at www.ranknfile-ue.org.
32 Bartlett and Steele, p. 140.
33 Bartlett and Steele, p. 72.
34 McIntyre and Nguyen, "Corporate Income Taxes."
35 "Making the rich pay," UE.
36 "Poll finds U.S. voters favor green taxes," available on the Friends of the Earth Web site at www.foe.org.
37 "Corporate welfare rides again," CTJ.
38 Washington Post/ABC News poll conducted between February 21- 25, 2001.