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September 1997

President's Message (Grace Furukawa)
Consensus on Gambling Study
Tax Reduction -- For Whom? (Astrid Monson)
Women's Coalition Package Update (Ina Percival)
League Testifies at the Public Hearing on One Archer Lane
League Monitors Domestic Violence Cases (Suzanne Meisenzahl)
Orientation Meeting (Grace Furukawa)
Campaign Finance
Making Democracy Work

Tax Reduction -- For Whom?

Everybody in Washington seems to favor tax reductions, but on what and how much and for whom are yet to be settled. The Senate and the House have each passed their own bill. The President says some aspects of both are unacceptable to him. There will have to be conferencing, negotiating, compromising, and dealing.

It is no wonder the public is confused as hundreds of billions of dollars are kicked around in different proposed amendments. Who will benefit, who won't? Some say their proposals will "put more money into the pockets of ordinary American families", that the plan they propose will benefit primarily the "middle class". Others claim that well over half the $135 billion proposed tax savings will accrue to only the richest 2%, or 5%, or whatever. Who is right?

A wealth of data is available from the Census Bureau, the Internal Revenue Service, the Bureau of Labor Statistics, the Congressional Budget Office, and other sources. I will try to provide our members with some of the highlights of the available data. Unfortunately, different agencies use different definitions of incomes and other concepts, and often the latest available data are from 1993 or 1994.

To provide a general frame of reference, here is the L.W.V. U.S. position on fiscal policy:

"Support adequate and flexible funding of federal government programs through an equitable tax system that is progressive over-all and that relies primarily on a broad-based income tax; promote responsible deficit policies; support a Federal role in providing mandatory, universal, old-age, survivors, disability and health insurance."

Some background information will be useful. The Census Bureau reports that in 1992 Federal government revenues totaled $1,259 billion. Of this, individual income taxes brought in $477 billion (37.9%), corporate income taxes $100 billion (8.0%); death and gift taxes $11 billion (1%); insurance trust revenues (Social Security, etc.) $405 billion (32.1%); customs and commodity taxes (cigarettes, liquor, gasoline, etc.) $64 billion (5.1%); current charges (postal service, natural resources, interest, etc.) $90 billion (7.1%); other general revenues $112 billion (8.9%). I am trying to get later data on this.

A year ago Congresswoman Patsy Mink sent out a report on how the Federal government spent our tax dollars in 1995. Out of the total $1, 514 billion spent, $232 billion (15%) was interest on the national debt; $333 billion Social Security (22%); $249 billion Medicare and Medicaid (17%); and $151 billion (10%) other mandatory expenses, such as Federal civilian and military retirement payments, veterans' benefits, etc. – a total so far of $965 billion (64%). Of the remaining $549 billion (36%), national defense took $273 billion (18%) and discretionary programs such as education, crime prevention and prisons, highways and mass transit, national parks, foreign aid, housing, etc, required $276 billion (18%).

The tax reduction agreement recently made between the President and Congressional leaders called for a gross reduction of $135 billion in the next five years, partially offset by $50 billion in selected tax increases (cigarettes) or the elimination or reduction of selected exemptions – resulting in a net tax reduction of $85 billion, or an average of $17 billion a year – between 1 and 2% of gross revenues or expenditures. This indicates that the underlying issue is not the reduction itself but how it is distributed among the various income groups.

From the masses of available data, I have extracted some which I think shed light on four widely discussed tax reform measures- a flat tax, reducing the capital gains tax, increasing the inheritance tax exemption, and the $500 tax credit per child.

1. The Flat Tax

Though not a part of the current proposals before Congress, this illustrates the attempt common to many proposals to shift more of the tax burden from higher to lower income groups and thus reduce the progressiveness of the present system. It is most commonly described as a 17% or higher tax on wage, salary, and pension income only – with no income tax on interest, dividends, other investment income, or capital gains. A standard exemption would be allowed per person – $9,000 has been suggested – but there would be no deductions for mortgage interest payments, medical expenditures, etc

Data The IRS reports that for the 1993 fiscal year the average adjusted gross income reported per return was $32,487 This excludes interest on tax-exempt bonds, amounts placed in IRA, Keough, or other retirement accounts, interest on deferred annuities, and other special classes of income Social Security payments received by individuals and families with total incomes less than $25,000 and $32,000, respectively, are also tax-free.

The following table is a summary of material from various 1993 IRS tabulations, and is useful for evaluating a number of pending tax proposals as well as the flat tax.

From the above it can be seen that a 17% flat tax, even if applied to all kinds of income instead of only to wages, salaries, and pensions, would benefit the 3.6% of tax-payers with adjusted gross incomes over $100,000 who now pay a higher percentage, and would harm those in the lower income groups, who now pay less. The higher exemptions proposed would be partially off-set by the elimination of existing deductions – even the earned income credit is being proposed for elimination. Existing deductions in 1993 totaled $517 billion, an average of $4,511 per return. Those with lower incomes would receive higher exemptions than now, but would be paying at a rate double or triple their present rate on the remaining income. Those whose income is all from investments would see their taxes slashed.

More important in understanding the flat tax approach, however, is the effect of eliminating from taxation all income from interest, dividends, and capital gains. In 1993 income from these sources amounted to $131 billion, 80 billion, and 144 billion, respectively – a total of $355 billion. Eliminating this amount from taxable income could cost the Treasury between $70 and 100 billion a year

Even without this, reducing the tax to 17% on those reporting incomes of $100,000 or more – $901 billion – could cost the Treasury the difference between 1993's $215 billion now paid by these groups and $153 billion – a difference of $62 billion a year It should also be remembered that since 1993 the stock market's unprecedented gains have in all probability increased investment income and capital gains by a factor of two or more.

2 The Capital Gains Tax

The most frequently heard proposal is to reduce it from its present rate of 28% to 20%. Other variants are to exempt, say, half the gain from taxation, particularly for start-up businesses or other "struggling" tax-payers.

Data An 8% tax loss on 1993's reported $144 billion in capital gains would cost the Treasury $11.5 billion, with no demonstrable effects on economic growth or jobs. If it is true that the market boom has doubled or tripled capital gains, the loss could amount to $20 or even $30 billion.

It is sometimes argued that a capital gains tax reduction would benefit a large majority of taxpayers, since many moderate-income people dabble in the stock market a little and may have some capital gains. The 1993 IRS figures show that of the capital gains reported, 72.9% were received by those with incomes of $100,000 or more, and another 14.2% by the $50,000 – 100,000 group. Only 3.6% of capital gains reported were earned by those with incomes under $20,000, and 9.4% by those between $20,000 and 50,000.

It is often claimed that eliminating this tax will help small home owners, especially the elderly, upon sale of their residences. However, gains from the sale of one's own home are already exempt from taxation if, within two years, one buys another home of the same or greater value For tax-payers 65 and older, the gain up to $125,000 is also entirely exempted. One of the bills currently before Congress proposes increasing this to $500,000.

3. Increasing the Inheritance Tax Exemption

It has been proposed that the present $600,000 exemption be raised to $1,000,000 and even to $2,000,000. Various proposals also involve exempting the inheritance of family farms or small businesses.

Data Estate taxes are not paid as a part of income taxes, but involve a separate computation. They are applied on a graded scale ranging from 37% to 55% of the amount over the exemption. The 1994 Statistical Abstract shows approximately $12 billion reported revenue from this source in 1992 – only a little more than 2% of all tax revenue. Common sense tells us that only a small percentage of our families can amass estates of over $600,000 – to say nothing of a million or two. The 1996 Statistical Abstract cites 1994 Census figures indicating that only 13.6% of the nation's households had annual money incomes of $75,000 or more. Only the top 5% had $120,000 or more.

Thus it is evident that this proposal would benefit only a small high-income group and would work against the intent of the inheritance tax to prevent the increasing concentration of wealth at the top of the economic scale A smaller exemption, as used to be the case, is arguable but not likely to be adopted by this Congress, at least.

4. The $500 Tax Credit per Child

This is described as intended to benefit the lower and middle income groups, and is less open to the complaint that it benefits primarily the rich. The upper income limit is not clear – $75,000, 100,000, even $125,000 have been proposed at various times. Many propose that it be given only as an off set to income tax paid, so that those paying less income tax that $500 times the number of their children would not be eligible to receive it. It has also been proposed that a family would not receive both the low income credit and the child credit.

Data In 1995 there were about 68,740,000 children in the U.S. aged 17 or less. At $500 credit per child, this would cost the Treasury $35 billion a year if all children receive it. If the top limit were $75,000 (and children distributed in proportion to the income range), all but 7.7% of these children would be eligible. If, as is likely, children tend to be found more often at the lower income levels, about 95% of all children would be eligible. At a $100,000 cut-off, all but 3.6%, as low as 2.5% if adjusted, would be eligible.

There have been reports on television and in the press that if the $500 tax credit is given only as an off set against income tax payable, as many as 40% of all children could not receive it – a total of some 27,500.000 of the poorest children in the land On the other hand, some 12,400,000 children in the 18% of families with incomes over $50,000 should receive the credit – a cost to the Treasury of $6.2 billion

1f it is really desired to give a tax break to families with children in the "middle class", one can divide the tax-payers into three groups by incomes. The lowest one-third, the 1996 Statistical Abstract shows, in 1993 reported incomes below $15,000, the middle third between approximately $15,000 and 35,000, and the upper third, $35,000 and over. The Census Bureau has defined the "middle class" as having incomes between $15,000 and 50,000 – 43.7% of the total. A cut-off at $50,000 would mean about 30,000,000 children if calculated proportionately, in addition to 24,400,000 in the lowest third (both of these figures are low, as the number of children in these group is likely to be disproportionately higher than in the upper income third). At a minimum, 55,000,000 children – 80.0% of all children – would be covered, but some 14,000,000 in families in the upper income third, would not, saving the Treasury $7 billion.

If, however, the tax credit is not given to families except as an offset to income taxes due, the majority of low-income families could not receive it. The lowest income third – those with incomes below $15,000 – are shown in 1993 IRS figures to average little more than $200 income tax each. Including the 57% reporting $25,000 or less, the average tax was only $569 – about enough for a credit covering one child on the average.

The question has also been raised that a family should not get both the present low-income tax credit (for working families) and the proposed child tax credit. This, again, would cut millions of children in lower-middle income families off the list.

League's national position was quoted above. Though the data above are incomplete and not up-to-date, they should be of some help in evaluating various tax proposals. There is also their effect on various public services and facilities – health, welfare, education, housing, etc... – which would have to be cut. But that is for a later Voter.

Astrid Monson

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