Class war defense of tax bill called wrong

Lisa Troshinsky, United Press International, May 23, 2003

WASHINGTON, May 23 (UPI) -- Class differences should have been taken into account in the debate over President George W. Bush's tax cut proposal, says a recent report from a liberal New York City think tank.

The paper, "Class Warfare: Fact and Fiction," published by The Century Foundation, debunks what it calls "myths" that fuel the rhetoric of the "class warfare" argument used by defenders of the Bush tax cut bill.

On Friday, Vice President Dick Cheney cast the tie-breaking vote in the Senate on a compromise version of the 0 billion tax cut. One of the bill's most expensive provisions -- a 0 billion cut that would primarily affect the rich -- would reduce taxes on capital gains and dividends to 15 percent through 2008. Currently, dividends are taxed the same way as ordinary income, or by as much as 38.6 percent for taxpayers in the highest tax bracket.

Bush said Thursday that he will sign the bill.

"Compounding the public's difficulty in comprehending the complex (tax) proposal has been the introduction of the incendiary phrase 'class warfare' to attack opponents ... rhetoric (that) implies that it is inappropriate to assess who would benefit the most and least under the plan because we must not think about our society along economic lines," said Bernard Wasow, author of Century Foundation's paper.

"We like to think we're a classless society, it's part of the mythology we have as a country," said Isabel Sawhill, senior fellow in economic studies at the liberal-centrist Brookings Institution. "This is the land of opportunity. But we're not any more the land of opportunity than other industrialized countries."

Wasow's paper attacks five so-called myths invoked by defenders of the tax cut.

First, it disputes the "myth" that the rich deserve most of the tax cuts because they pay most of the taxes. He says those in the top income brackets pay most of the federal taxes, but that the argument ignores personal income tax and payroll tax.

"For most households, the payroll tax takes a bigger bite out of their income than any other federal tax," Wasow said. "Though the federal income tax is quite progressive, collecting a smaller share of the income of the middle class than of the rich, the remainder of the federal tax system is regressive, for incomes above about ,000 per year. And average state and local taxes are steadily regressive, with the tax burden declining uniformly with income."

"The rich pay more in taxes, but the payroll tax favors the wealthy -- they only get taxed on income up to ,000 a year," Sawhill said. "I would agree that the rich in this tax-cut bill are getting more than they deserve. It depends on what you define as fair, but if the criteria for fair is that the rich don't get a tax cut that is higher in proportion than the percentage of federal taxes they pay, I'm pretty sure this tax cut will exceed that percentage."

"More than three-quarters of the tax break would go to the top 10 percent of taxpayers," Wasow said.

Dean Baker, co-director for the Center for Economic and Policy Research, agreed with Wasow and Sawhill.

"Only half of all households will be getting a tax cut," Baker said.

But Kevin Hassett, a resident scholar at the conservative American Enterprise Institute, says that the percentage reduction in the new tax bill would be bigger for lower-income people.

"The proportion of taxes paid by low-income people goes down with this deal," Hassett said. "There are middle class-friendly provisions in this deal, like expansion of the child credit tax, acceleration of the income tax rate reduction and the marriage penalty relief. You have to remember that the wealthy pay so much more in taxes, that a large reduction will only result in small savings."

"Most families that make under ,000 a year don't pay a dime of federal tax because of the child tax credit, earned income tax credit, standard deductions and personal exemptions," said Chris Edwards, director of fiscal policy at the libertarian Cato Institute. "And though the lower income earners pay a high burden in payroll tax for social security and Medicare, they get a higher proportion of their wages in retirement benefits than do the wealthy."

Wasow's report also argues against the "myth" that cutting taxes on dividends and other capital income will generate new investment essential for economic growth -- an argument given by proponents of the tax bill, but a concept upon which think tank experts are divided.

"Looking at the historical record, there is almost no connection between economic growth and tax cuts or tax increases," Wasow said. "Tax cuts can increase the rewards to investment and innovation, but they also can increase the federal deficit, creating uncertainty about the future and forcing the government to compete with private investors to borrow domestic and foreign saving."

Matt Sawicky, a senior economist at the Economic Policy Institute, agrees that "some companies will retain more earnings and have more to invest, but the problem is that other companies will have less to borrow from the government which will go deeper in debt."

"We haven't seen any increase in investments as a result of lowering investment income taxes," Baker said.

Cato's Edwards calls this notion "absurd." "Dividends affect the cost of borrowing money. If a business can invest in a project that pays back 15 percent and can borrow money at 10 percent, then that project is worthwhile," he said. "These tax cuts will cause American businesses to expand and buy more machinery and equipment," he said.

Wasow's report also argues against the "myths" that stock ownership is more evenly distributed today than in the past, that Americans are likely to enjoy upward economic mobility, and that good economic times benefit all strata of society.

"Many families receive dividends and capital gains, but most of these families have small stakes in capital markets. Also, there is a lot of year-to-year income variation over a worker's lifetime, but averaged over the years, the recent analysis suggests that lifetime earnings of fathers and their children are three times as highly correlated as earlier suggested," he said.