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ECONOMICS -
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Tax Gimmickry

Posted in the database on Monday, April 17th, 2006 @ 21:02:46 MST (1522 views)
from The Washington Post  

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Paying for tax cuts for the wealthy with . . . more tax cuts for the wealthy!

Much to the chagrin of the White House and the GOP leadership, lawmakers didn't get a new round of tax cuts done in time for tax day today. But when Congress comes back from its recess, it's expected to take up a deal to extend President Bush's capital gains and dividend tax cuts. To make their budget-busting tax policy appear less costly than it is, the lawmakers are resorting to a gimmick that is even more egregious than their usual tactics.

This one would, as usual, hide the cost of tax cuts that primarily benefit upper-income Americans. But it would accomplish that budgetary smoke and mirrors with a new tax provision, involving retirement savings accounts, that also benefits the well-to-do. And, to top things off, this new tax provision, while masking the cost of the tax cuts by bringing in more revenue in the short term, would in the long run worsen the fiscal situation by piling on more debt. No one who's serious about controlling the deficit -- whatever one's position on extending the tax cuts -- could support this dishonest approach.

The gimmick is intended to get around a Senate rule that requires 60 votes to approve a tax bill if it's going to deepen the deficit more than five years down the road; if it won't have that long-term impact, a simple majority could suffice for passage. Unfortunately for Senate leaders, a two-year extension of the capital gains and dividend tax cuts, now set to expire in 2008, would cost $20 billion over the next five years -- but $30 billion more in the five years after that. Taxpayers will scramble to take advantage of the lower rates now, thereby lessening tax revenue later. So to pass the cuts with only 51 votes, legislators have to find some way to offset that second five-year revenue loss.

Enter the retirement savings gimmick. As it's being discussed behind the scenes, this would let wealthier Americans use savings plans known as Roth IRAs. With traditional IRAs, taxpayers get to deduct the contributions they make from their income for that year; they pay taxes on the savings once they are withdrawn. Roth IRAs flip that arrangement around: Contributors pay taxes on the income they put into the accounts, but their savings then grow tax-free. So letting more people put money into Roth IRAs would increase tax revenue for a while -- offsetting, at least in theory, the cost of the capital gains cuts. But the Roth change would cost money down the road, as revenue once subject to taxation would grow tax-free.

Bottom line: A Senate rule designed to make it harder to increase the deficit would be circumvented with a maneuver that would end up increasing the deficit. And a tax cut for wealthier Americans that would cost $50 billion over 10 years would be "paid for" in part by another tax cut for the well-off, which would end up costing billions more. That's amazing -- even from this Congress.

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Newport mansions offer needed tax day reminder

By Froma Harrop
The Houston Chronicle

Come to Newport, R.I., and see what America was like before the income tax. The Elms is a Gilded Age mansion graced by a Louis XV ballroom and tapestries from Imperial Russia. Its owner made his tax-free fortune off the coal mines of Pennsylvania and West Virginia. Down the street is Rosecliff, a copy of the Grand Trianon at Versailles and financed by Nevada's Comstock Lode. Steamships and railroads paid for the Vanderbilts' 70-room Breakers and equally lavish Marble House. Like the other Newport mansions, they were used for only a few weeks in the summer.

To the tycoons reveling in their personal splendor, America was about taking, not giving, and the job of the masses was to toil for them cheaply. But by the dawn of the 20th century, American farmers, miners and factory workers started thinking that the Vanderbilts and their ilk should contribute more to the country. And so on Oct. 3, 1913, President Woodrow Wilson signed the bill that created an income tax. It touched only the wealthiest 4 percent.

This piece of history needs remembering as the Bush administration passes around statistics purporting to show that today's wealthiest Americans bear an unreasonable tax burden. The helpers in the Republican base, meanwhile, sing songs of gratitude to the modern moguls. They refer to them as golden geese, who would perish if tax rates returned to the Clinton-era levels — even though the rich did wonderfully well in the '90s.

The Bush people are particularly fond of noting that in 2003 the top 1 percent in incomes paid 34 percent of all federal individual income taxes. That's not terribly surprising when you consider that the richest 1 percent now earn 15 percent of all the money made in America, and that the income tax was designed to be progressive. (In 1913, the top 1 percent were raking in a not-very-different 18 percent of total U.S. income.)

Middle-income families also pay federal income taxes, and some tax-cut crumbs have fallen their way. But do compare the helpings. For 2006, the Bush tax cuts are worth $39,000 to people with incomes above $403,000 (the top 1 percent) and only about $750 to those making around $50,000, according to the Urban Institute-Brookings Institution Tax Policy Center. Put another way, the elite 1 percent enjoy a 5 percent increase in their after-tax income, while folks in the middle see a 2.5 percent gain.

Of course, the administration propaganda totally ignores payroll taxes, which bring in nearly the same amount of revenues as individual income taxes. When you add all the federal taxes, the top 1 percent account for only 23 percent of the total.

The interesting part will come when the federal government is forced to stop borrowing money and start paying its bills honestly. Who is going to finance government then? The Bush camp has been lining up the planets to ensure that any future tax increases fall onto the middle class.

The centerpiece is the lowered tax on investment income, which Republicans are trying to keep at 15 percent. As a result, the idle rich living off their stock portfolios are taxed at 15 percent, while the working husband and wife, each earning $40,000, pay a marginal tax rate of 25 percent. Even Ronald Reagan was content to have dividends and capital gains treated like "sweat" income.

In 1904, Mrs. Hermann Oehlrichs held her famous "Bal Blanc" at Rosecliff. Everything was white -- from the women's gowns to the truckloads of exotic flowers dumped in the gold ballroom. Mrs. Oehlrichs even asked the U.S. Navy to anchor its "White Fleet" just off her property, as a kind of decoration. When the Navy said no, she commissioned an army of carpenters to build a dozen full-size ship models, which were set in the Atlantic Ocean.

Nine years later, the American public felt justified in asking Mrs. Oehlrichs and other fabulously wealthy citizens to help the country that had so enriched them.

Though today's federal income tax covers the middle class, it still asks more of the rich than of others. And that's the way it should be. President Bush clearly regards progressive taxation as a hurdle for the expanding fortunes of our new Gilded Age.

Froma Harrop is a syndicated columnist based in Providence, R.I. She can be e-mailed at froma.harrop@projo.com.



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