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 he
economic stimulus package passed by the House on October 24 is a
mixed bag. On the plus side, it would speed up tax write-offs of
business equipment purchases, raise the small-business expensing
limit, and repeal the corporate alternative minimum tax retroactively
to its enactment in 1986. On the minus side, while offering individuals
some tax relief, the bill doesn't go far enough in cutting tax rates
on personal income and capital gains.
The House did
vote to cut the current 28% tax rate on middle and upper incomes,
trimming it to 25% next year, instead of waiting until 2006, as
specified by the tax bill signed into law by President Bush in June.
The House bill also would award $300 to some 30 million low-income
workers who didn't receive rebate checks this year because they
paid no income tax
Earlier, however,
the House Ways and Means Committee had rejected calls to accelerate
cuts in the top 36% and 39.6% income-tax rates. It also refused
to lower the capital-gains tax to 15% from 20%, preferring to reduce
the rate to only 18% on investments held for a year and a day. That
cap-gains cut to 18% was approved by the full House last Wednesday.
From 1993 to 911
Deeper tax cuts are needed to relieve the uncertainty caused by
the Sept. 11 attacks and subsequent anthrax incidents. What's more,
a top-to-bottom revision of the income-tax code — going beyond
anything requested thus far by the administration — is required
to rectify a serious economic problem that has grown in dimension
since passage of the 1993 tax increase.
Federal tax
payments by individuals have been growing faster than the economy
for the better part of a decade. That's an untenable relationship
for it means that taxation is taking too much earned income to permit
continued strong private-sector spending and investment. What's
more, one-seventh of the nation's households are paying almost three-quarters
of all federal income taxes. The disproportionate growth in federal
taxes relative to the economy, along with its concentrated burden
on upper income households, has been a major cause of this year's
economic contraction.
Nominal GDP
has risen 53% since the 1993 third quarter, while individual income-tax
payments have soared 110% — more than doubling from $510 billion
to an estimated $1.073 trillion. By comparison, corporate income
taxes have risen 81%, and Social Security and other retirement payments
have increased 61%. Individual income taxes now supply more than
50% of total federal revenue (versus 44% in 1993). Corporate income
taxes account for 10% of federal receipts (little changed from 1993),
and retirement payments contribute 32% (versus 37%).
Since the Clinton
tax increase, individual income taxes (excluding Social Security)
have climbed from 7.8% of GDP to more than 10%. That's the highest
rate in U.S. history. Following the Reagan tax cuts of the early
1980s, federal income taxes paid by individuals in fiscal 1984 fell
to 7.8% of GDP and then stayed within a relatively narrow range
of approximately 7.6% to 8.5% of GDP until the 1993 take hike.
At first blush,
higher employment would appear to be the determining factor behind
the rise in income-tax receipts. In the Clinton years, non-farm
payrolls rose 21%, and the employment ratio (civilian employment
as a percentage of the non-institutionalized working-aged population)
hit an all-time high of nearly 65%. A comparison with the Reagan
era, however, tells a different story.
During the
Reagan administration, non-farm jobs rose 18% — nearly as much
in the Clinton years. The employment ratio, which hit a low of 53%
in the first quarter of 1983, was at a then-record 63% when Ronald
Reagan left office. But, as the following chart makes clear, income-tax
receipts responded very differently in the Reagan and Clinton eras,
with revenues remaining fairly flat in the 1980s and soaring in
the 1990s as a percentage of GDP. Factors other than payrolls therefore
must have been at work in boosting tax receipts since the early
1990s.
It's worth
noting that the negative effects on disposable income of both taxation
and inflation have heightened the need for many households to earn
two incomes. Tax brackets have, of course, been indexed for inflation
since the Reagan years. But indexation's introduction failed to
take into account the hyperinflation of the 1970s and its lasting
effect on earners, who saw their real wages plummet. Suffice it
to say that real earnings averaged $7.96 an hour in August of this
year. That was 8% below the high of $8.63 set in October 1972. Amazingly,
August's real average hourly earnings were exactly the same as those
recorded in December 1968.
Indexation
may have averted bracket creep among workers receiving pay increases
at or slightly above the inflation rate. However, this ignores a
significant development. In recent years, there has been a tremendous
rise in earnings among households with upper-middle to upper incomes
— and an even larger increase in the amount of income taxes
they paid to Washington. This shifted a goodly portion of the tax
burden away from those earning less than $75,000 a year toward taxpayers
with incomes of $100,000 or more. The result: As Americans got richer,
the government got richer still.
In 1999, fewer
than 10 million households — or just 7.5% of tax filers —
paid more than three-fifths of all federal income taxes. IRS
data show that from 1993 to 1999 the number of tax returns on
incomes of $100,000 and above more than doubled from 4.1 million
to 9.5 million — and the amount of taxes paid by this group
more than doubled as well, rising to $542 billion from $216 billion.
These top earners accounted for nearly 62% of all income-tax payments
in 1999 compared with 42% in 1993. Millionaire filers (all 205,124
of them, representing 0.2% of taxpayers) paid a whopping 21% of
all federal income taxes in 1999.
Households
with incomes of $100,000 to $200,000, whose ranks swelled from 3.1
million to 7.1 million, also paid an increased share of all income
taxes. The group earned just slightly more total income than the
16.8 million households making $50,000 to $75,000 but paid 43% more
in taxes ($162 billion versus $113 billion).
Taxpayers earning
$75,000 to $100,000 a year didn't escape, either, as their income-tax
liabilities grew much faster than their aggregate income. Their
ranks expanded by 85% to 7.8 million filers in 1999, but their total
taxable income rose by only 8%. Nonetheless, the group paid 69%
more in income tax ($92 billion versus $54 billion) in 1999. As
a percentage of total tax payments, this bracket's contribution
was little changed at 10%.
The 17.3 million
households with incomes of $75,000 or more in 1999 represented about
one-seventh of all tax returns (13.7%), yet they paid over 72% of
all income taxes (almost $634 billion of a total $877 billion).
In other words, upper-middle and upper income households have come
to shoulder a disproportionately large share of the nation's income-tax
burden.
Hitting High
The percentage of total income taxes paid by earners of less than
$75,000, in contrast, fell in the 1990s. These taxpayers handed
over $244 billion in income taxes in 1999, down slightly from $239
billion in 1993. But these payments represented only 28% of all
income-tax receipts in 1999; those making less than $75,000 a year
had contributed 47% of total income taxes in 1993. Again, this percentage
drop corresponded with the significantly larger amount of taxes
paid by earners of $100,000 or more.
The larger
number of upper-income households and higher top margin rates are
the primary reason that the average rate of taxation rose from 14.1%
of total gross adjusted incomes in 1993 to 15.7% in 1999. Higher
marginal rates also help to explain why total tax income-tax obligations
rose faster in the 1990s than taxable income itself. Taxable income
increased by 69% from 1993 to 1999, but income-tax obligations climbed
72%.
In a way, you've
got to admire Bill Clinton's political acumen. He knew precisely
what he was doing in guilefully pushing his tax hike, for the brunt
of the increase hit upper-middle to upper-income taxpayers. This
explains lack of public furor over the 1993 tax increase. Top earners
are relatively few in number, and raising their taxes fed the appetite
to exact more tribute from "the rich" and stoked the fires
of class warfare.
EDITOR'S
NOTE: Click
here for Part II
of Clinton's Untenable Taxation.
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