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The Tax-Cutting Groundswell

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7/27/00 11:20 a.m.
The Tax-Cutting Groundswell
Some evidence of a major political shift in America.

By Victor A. Canto, La Jolla Economics

t's interesting that at a time when the gap between the rich and poor is wider than it's been in decades, public concern about the disparity appears to be on the wane. Those who argue that the changing fortune of the estate-tax reflects a clever lobbying and public relations campaign appear to be wrong. The political success of Bush's Social Security proposal, the House passage of bills eliminating the inheritance tax and the marriage penalty, and the bill expanding savings options, reflect a fundamental change in the attitude of the American electorate towards tax rates.

The fact that 65 Democrats defied party leaders and voted with the Republican majority in the vote to eliminate the estate tax, and that 182 Democrats voted for the bill expanding the maximum IRA to $5000 from $2000 and 401(k) contributions to $15,000 from $10,500, suggests that there is more than public relations at work. The evidence is mounting that there is major political shift in the attitude towards taxes broadly defined.

Static thinkers rationalize estate taxes as a way to create a fairer economy, a way to create a more level intergenerational playing field. The interesting thing is that the majority of Americans do not share those views. In fact, they're being repudiated by people with no chance of getting hit by the tax. The Wall Street Journal reported a few days ago on a focus group study conducted by a small business coalition. According to the story, the focus group organizers were dumbfounded to find out that people making under $30,000 thought that the tax was unfair and that it amounted to double taxation-that government is taking still more from a person's income that it has already skimmed. The counter-argument was also articulated in the article. It was posited that the double taxation was not entirely accurate:

For example, stocks and houses, which account for a sizable portion of many of today's estates, often escape capital-gains taxes on their appreciated value when they pass to an heir. If an investor buys a share of stock at $10, holds it as it appreciates to $100, then dies and passes that stock on to his or her children, tax law treats the heirs as if they had bought the stock at $100. That saves them the $18 capital gains tax other shareholders would face on such a stock if they sold it.

This statement is in error because the stocks and houses mentioned are being bought with money that has already been taxed-when it was in the form of income. The only exceptions to that are regular IRAs and 401(k)s, which are taxed once at personal-income-tax rates at retirement. Since the argument above does not really refer to IRAs, analysis suggests that the double-taxation argument is a correct one. What's remarkable here is that the average American understands what the "professionals" do not. A recent Gallup poll showed that 60% of Americans favor eliminating the estate tax even though only 17% feel they would personally benefit from its elimination. The most common response in the survey was that we pay taxes on earnings once and that should be enough.

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