Bigger Slices Or A Bigger Pie?
By J.D. Foster
Tax relief to the taxpayers! It is the sense of the United States Senate that only those citizens who pay personal income tax should get tax relief under the bill currently before Congress. Such a motion was offered by Senator Rick Santorum (R-Pa.) and adopted by the U.S. Senate by voice vote.
The working poor pay little or no income tax by virtue of the personal exemption, standard deduction, and the Dependent Care Tax Credit, among other provisions. Some even get a check from the Feds thanks to the Earned Income Tax Credit.
Just how would Congress provide tax relief to those who pay no income tax? One way is to expand the welfare state through the tax code. How? By effectively making the new child credit refundable as the president suggests. The president doesn't like calling this welfare. But that's what it is. If it's time for another welfare debate, then so be it, but let's not sneak it in through the back door under the cloak of tax relief or tax fairness.
Another way to give the working poor tax relief is to cut the Social Security payroll tax. On the whole, Social Security is already both highly progressive and in deep financial trouble. Making it even more progressive is unjustifiable, and worsening its finances would be foolish.
If your concern is the working poor, then you should be quite exercised about the Senate provision to increase the cigarette excise by 20 cents per pack. Whether you approve of smoking or not, the fact remains that individuals with incomes of less than $30,000 annually pay almost 60 percent of the cigarette excise taxes in the United States. It's hard to find any notion of tax fairness that squares with hitting any lower-income Americans with a tax increase.
Indeed, all the major federal excises -- tobacco, gasoline, and alcohol -- burden lower-income taxpayers disproportionately. According to the president's own report, families with incomes between $20,000 and $30,000 pay 1.54 percent of their income in excise taxes. One sensible way to lower taxes on lower-income Americans, without jeopardizing Social Security and without expanding the welfare state, would be to pare back some of these excises, rather than increasing one of them for temporary political advantage.
Anyway, the clear winners in the 1997 tax relief derby are middle-income taxpayers: almost all of the major tax relief provisions in both bills target middle class families.
The $500-per-child tax credit provides almost $150 billion in tax relief over the next ten years, but only to families with children, and only to couples and individuals whose incomes are less than $110,000 and $75,000, respectively. The education incentives and the expansion of the Individual Retirement Accounts provide another $88 billion in middle-class tax relief. In both cases, upper-income taxpayers need not apply.
The Senate and House bills both include capital gains and estate tax relief, which have been criticized as being unduly beneficial to the wealthy. But President Clinton has himself proposed capital gains relief and estate tax relief.
Specifically, whereas the Senate and House call for a 40 percent reduction in the tax rate on long-term capital gains, the president calls for a 30 percent exclusion. He also calls for a $500,000 exclusion for capital gains on home sales. Few low-income taxpayers live in half million dollar homes. President Clinton, at least, doesn't seem to think cutting capital gains taxes is entirely unfair.
The estate tax relief in the Senate and House bills is also somewhat more generous than the president's proposals. Clinton targets his relief by increasing to $2.12 million the exclusion for qualified family-owned businesses. Congress wants to increase the more general exclusion from $600,000 to $1 million over the next five to ten years. Either way, though, the Ted Turners and Michael Jordan's of the world won't see much relief -- just middle and upper-middle income families.
To be sure, the working poor in America need help. What they need most of all is to become middle- and upper-income taxpayers through better and more numerous jobs, higher wages, and greater opportunities. In short, they need Uncle Sam to rid the tax code of provisions that stifle our economic spirit. They need Congress to shed its fairness phobia and to focus on growing the economy by getting government out of the way. The bills before the Congress, flawed as they may be, take a few baby steps in that direction.
Foster is executive director and chief economist for the Tax Foundation.
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