MM JULY/AUGUST 1997

JULY/AUGUST 1997 · VOLUME 18 · NUMBERS 7 & 8

E D I T O R I A L

A Tax Disaster

"BASICALLY, JUST ABOUT ANYTHING that has been discussed that's positive for investors, and thereby positive for Wall Street, has happened," Lee Grohman, executive vice president and director of taxes for the investment firm Smith Barney, told the Washington Post in late July.

Anytime Wall Street is that jubilant, it is a good bet the rest of the United States (if not the world) has been had.

The 1997 Clinton-Republican tax package is no exception. Do not be fooled by the provision of health insurance to poor children, or the handful of beneficial or palatable changes in the tax bill. The Clinton administration's support of this tax bill is the most recent shameful act of an administration that has compiled a long record of favoring the rich at the expense of the poor.

At a time when Wall Street stocks are skyrocketing and investors are profiting as they rarely have, the Clinton administration -- in tandem with Congressional Republicans -- has tailored yet another transfer of wealth, from the poor to the rich.

The Washington, D.C.-based Citizens for Tax Justice (CTJ), one of the few trustworthy sources on tax matters, concludes that the vaunted "middle-class" tax cut is in fact a substantial tax cut for the rich only. Almost one third of the value of the tax cuts will accrue to the richest one percent of the U.S. population. The top 5 percent will take almost half of the tax cut; the richest 20 percent will get over 75 percent of the benefits.

This bonus for the rich follows a massive concentration of wealth and income in the United States over the past two decades. New data from the Congressional Budget Office show that, from 1977 to 1994, the after-tax income of the wealthiest 1 percent of families grew an inflation-adjusted average of 72 percent. The middle 20 percent of families saw a slight decline in after-tax income. The poorest 20 percent of families saw their income levels drop 16 percent.

The Clinton-Republican plan will exacerbate this disgraceful trend. The richest 1 percent will see a more than $16,000 reduction in their tax bill; the average tax cut for the middle class will be less than $200; the lowest 20 percent will actually be hit with a tax hike.

Three of the key components of the gift to the rich are the cuts in taxes on capital gains and estates and corporations.

The capital gains tax cut is good news for Wall Street and George Bush alike. Mocked for forcefully advocating capital gains tax breaks, Bush can smile now. Capital gains are earned when property, such as a stock or real estate, is sold for profit.
The argument for reducing the capital gains tax rate is that the tax discourages holders of wealth from investing, because they must pay taxes at the time of each shift in investment. There is little evidence to support this claim; and it is preposterous to contend investors need new incentives at a time when Wall Street investments are yielding such dramatic returns.
Citizens for Tax Justice estimates that the richest 1 percent will obtain more than 90 percent of the benefits of the capital gains tax cut.
The tax package exempts estates of up to $1 million from paying taxes (the current level is $600,000). By definition, the beneficiaries of this break will be only the nation's richest.
The corporate tax breaks in the tax agreement are legion. "The tax plans make a mockery of House Budget Committee Chair John Kasich's pledge earlier this year to crack down on corporate welfare," says CTJ director Robert McIntyre.

Among the most egregious of the corporate tax giveaways is the partial elimination of the corporate Alternative Minimum Tax (AMT). The minimum tax acts as a back-up to the regular corporate income tax, and is designed to assure that profitable corporations pay at least some income tax even if they can otherwise take advantage of a plethora of loopholes. The tax package eliminates the corporate Alternative Minimum Tax for small business, and partially cuts it back for big business -- paving the way for a subsequent total rollback.

Prior to the imposition of an effective corporate Alternative Minimum Tax in 1986, many corporations were able to get away with paying no, or minuscule, taxes. CTJ analyzed the tax payments of 16 of the 26 corporate members of the AMT Working Group, a corporate lobby for reducing the corporate minimum tax, from 1982 to 1986. During this period, the effective federal income tax rate on the 16 companies was 1.4 percent, according to CTJ.

In addition to the rollback of the AMT, the Clinton-Republican tax package includes targeted tax giveaways to dozens of corporations and industries. One of the most notable is actually a tax imposition: the 15 cent-per-pack cigarette tax will be offset against the tobacco companies' liability if Congress approves the proposed tobacco settlement.

If ever there is a time when tax and budget policy should be crafted to address poverty and repair economic inequality, it is at a time like the present, when corporations are raking in record profits and the rich are flying high. Instead, the Clinton-Republican tax package stuffs more money into the already-overflowing coffers of Big Business and the wealthy.

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