Tax Cuts and Economic Justice - 2000 elections

Humanist, Nov, 1999 by John Buell

The common wisdom in politics is that a candidate for office never lost an election by promising a tax cut. Nonetheless, if progressive candidates can resist the lure of big campaign contributions, the 2000 elections may provide a challenge to this wisdom.

A recent Wall Street Journal poll indicates that a majority of the public disdains large tax cuts and prefers that future surpluses be devoted to such causes as education and health care. This skepticism about tax cuts is a welcome change in our politics, as proposed reductions would exacerbate social disparities while failing to deliver any long-term benefit to the overall economy.

As of 1995, the last year for which complete figures are available, the top 20 percent of American households held 84 percent of the nation's wealth--meaning stocks, homes, and other forms of wealth. The bottom 80 percent owned 16 percent of the wealth. That figure represents less than half the wealth owned by the wealthiest 1 percent, whose share of national assets equaled nearly 40 percent. These figures amount to disparities that are now greater than at any time since the Depression.

Those at the top of our income pyramid have already benefited from nearly a quarter century of tax cuts targeted primarily at them. Thomas Oliphant reports in a recent editorial in the Boston Globe:

   For the top 1 percent of households, the average tax cut received since '77
   was worth $40,000-plus. That is nine grand above the entire, after-tax
   income for the average household in the middle-fifth of the spectrum today.
   During 1999, in other words, the widened income disparity is such that the
   best-off 1 percent will have as much after-tax income as the bottom 38
   percent combined; that 2.7 million people will have the same combined
   income as 100 million people. The mere rise in income at the top will
   exceed the total income of the bottom 20 percent.

Republican proposals to reduce capital gains and estate taxation would especially benefit the very rich and add more momentum to these trends. The watchdog group Citizens for Tax Justice reports that the plan approved by the U.S. House of Representatives in August 1999 would give 45 percent of its benefits to the wealthiest 1 percent of taxpayers.

Under current estate tax law, a wealthy couple is already allowed to leave in their will $1.2 million to children. In addition, those children may also receive an additional $20,000 each annually while the couple is still alive--all tax-free. Only a small minority of families can even come close to such numbers. These limits seem generous enough to allow parents to provide for the reasonable needs of their children.

Not only are the currently proposed tax cuts unjust, but there is no evidence to suggest that they would make this economy more productive or yield any substantial benefits for the rest of us. I am not familiar with any studies of the incentive effects of estate taxation. I am confident, however, that thorough study of this matter would, as Andrew Carnegie once argued, yield a radical conclusion. Vast inheritances do more to erode the work ethic among children of the wealthy than estate taxation does to quash the entrepreneurial incentives of their parents.

Family businesses can, of course, be affected by estate taxes, as these owners often have the bulk of their assets in their businesses. Children may also be left a business worth up to $1.2 million--tax-free. So if the business is instead worth, say, $2 million and the children need to borrow to pay the estate taxes on the remaining $800,000, that still is a relatively small debt obligation in the world of small business, thus enabling heirs to continue a successful family operation if they have the skill and desire. Without fair estate taxation, equal opportunity for other potential business leaders would become a mere legal fiction.

The "supply side" case for capital gains tax reduction is equally weak. Slashing capital gains taxes may encourage stock market participation. Nonetheless, most of this activity involves purchase of existing shares. Current shareholders benefit, but no new money is made available for modernizing plants and equipment. New York-based economist Doug Henwood reports in his recent book Wall Street that, since 1952, corporations have funded 95 percent of their expansions internally, primarily through retained profits.

Reductions in the capital gains tax will trigger an even more speculative stock market. The escalation in stock prices already encourages, among mutual fund and corporate managers alike, an obsession with short-term profits. Mergers and stock buybacks--which do little for long-run productivity--have become the game of choice.

Not surprisingly, the purported near decade-long "boom" has produced remarkably feeble gains in worker wages, net corporate investment, and worker productivity. Henwood has recently compared this "upswing" with the ten previous expansions of the post-World War II era. He concludes that, despite its length, the current boom is "mediocre at best." Further tax changes along the lines currently proposed will only fuel the worst excesses of the last two decades.