CHAPTER TWO
\nExcerpt from \\’The Great American Tax Shift\\’ Chapter 2
\nThe War at Home: Corporate Offensives from Reagan to Bush
\nCopyright 2004 Jack Rasmus<\/p>\n
(For the evolution of US tax policy from 1913 to 1978, see the book)<\/p>\n
The Coming Tax Storm: 1978<\/p>\n
While Carter essentially did nothing about bracket creep and rising income taxes on workers and then turned and raised payroll taxes, two important tax events occurred on his watch that would have importance in the years to come. One was the \u00e2\u20ac\u02dcshadow\u00e2\u20ac\u2122 tax challenge to his policies that was growing in the US Congress, driven by a coalition of right wing Republicans. This challenge became known as the Kemp-Roth bill. The other important event with historic import was the State and Local level tax revolt in California embodied in that state\u00e2\u20ac\u2122s \u00e2\u20ac\u02dcProposition 13\u00e2\u20ac\u2122 Initiative. Prop 13 targeted the roll back of property taxes and provided an example for countless \u00e2\u20ac\u02dcme too\u00e2\u20ac\u2122 efforts that followed thereafter elsewhere in the country.<\/p>\n
The 1977 Kemp-Roth bill proposed a radical reduction in the top rate of the federal income tax, from the 70% level it had been at since 1964 to a new sharply lowered rate of 50%. It also proposed a three year 30% overall reduction in the federal income tax plus indexing of the tax brackets for inflation to deal with \u00e2\u20ac\u02dcbracket creep\u00e2\u20ac\u2122. Kemp-Roth didn\u00e2\u20ac\u2122t pass that year but it did become the tax policy centerpiece for Reagan\u00e2\u20ac\u2122s 1980 Presidential election campaign. It later became the core idea for Reagan\u00e2\u20ac\u2122s even more dramatic tax cuts for the rich in his first term. <\/p>\n
While Kemp-Roth (and Reagan\u00e2\u20ac\u2122s subsequent 1981-82 tax cuts) claimed to cut taxes for the middle class, in reality \u00e2\u20ac\u0153Kemp-Roth was always a Trojan horse to bring down the top rate\u00e2\u20ac\u009d, as Reagan\u00e2\u20ac\u2122s Director of the Budget and his central tax architect, David Stockman, would later admit in 1986 once all the damage had been done. 18 In an act of ideological contrition, Stockman would later describe in his memoir of the period that the Reagan tax cuts of 1981 were simply driven by outright corporate greed. As he put it himself in an exclusive interview, \u00e2\u20ac\u0153The hogs were really feeding. The greed level, the level of opportunism, just got out of control\u00e2\u20ac\u009d. 19 <\/p>\n
The main target of Kemp-Roth was bracket creep. By the late 1970s rising inflation was beginning to significantly increase the federal income tax\u00e2\u20ac\u2122s impact on a growing number of workers, particularly those in the 60%-80% income percentile range. Having begun to flex its new political muscle circa 1978, the nascent Republican radical right sensed the power of the bracket creep-inflation issue even if Carter and the Democrats did not. The origin of what would later be called the \u00e2\u20ac\u02dcReagan Democrats\u00e2\u20ac\u2122\u00e2\u20ac\u201di.e. working class voters who turned to Reagan in 1980\u00e2\u20ac\u201dhad much to do with this bracket creep issue and the increasing tax bite from the federal income and payroll tax hikes under Carter.<\/p>\n
The second warning event was the Prop 13 revolt in California in 1978, which also had its origins in inflation and a kind of bracket creep but this time bracket creep associated with rising property taxes. Rapid increases in property values due to inflation pushed local property taxes to intolerable levels by the late 1970s for many mid and upper income level workers. Corporate and right wing forces grabbed the political initiative here once again.<\/p>\n
The major beneficiaries of Proposition 13 in the long run, however, were business property owners and not working class homeowners. Prop 13 was written such that if a homeowner sold his property the property tax cap would lapse for the new owner who bought it and for the original owner buying another home in California. Given home sales turnover in California, this meant over time home property owners as a group would lose the benefit of Prop 13. In contrast, property values for business property, which seldom turned over, would remain over the long run. Even worse, business property owners could \u00e2\u20ac\u02dcbuy and sell\u00e2\u20ac\u2122 rights to each other if they did turn over property. A feature not extended to the individual homeowner. Efforts to reform or amend this inequity for the past 25 years have failed to pass the legislature or have been defeated by massive lobbying campaigns by business interests targeting the state legislature or financed by business through the Initiative process.<\/p>\n
Proposition 13 was significant in yet another way. It meant California\u00e2\u20ac\u2122s pre-1978 state budget surplus of $6.8 billion would quickly turn into chronic long term deficits, which in fact happened, requiring significant cuts in education and social services and equally significant increases in regressive sales taxes to make up for the revenue losses that resulted from Prop 13. <\/p>\n
California was thus a kind of dress rehearsal for subsequent income tax cuts to follow under Reagan. The similarities were notable in terms of who benefited, in the massive reductions in social services that followed the tax cuts, and in the growing reliance on regressive tax hikes to make up for the losses in revenue from lower income taxes enjoyed by the wealthy and corporations. Parallels exist here too with today, decades later. With taxes on capital incomes having been significantly reduced during George W. Bush\u00e2\u20ac\u2122s first term, the talk has turned increasingly in his second term to how to impose some kind of regressive national sales tax to make up for the income losses and the budget deficits that have resulted from the big tax cuts during Bush\u00e2\u20ac\u2122s first term. <\/p>\n
In summary, the central dynamic of the last half of the 1970s was that inflation and bracket creep\u00e2\u20ac\u201dwhether impacting income taxes at the federal level or property taxes at the state and local levels\u00e2\u20ac\u201dprovided critical political ammunition for the emerging radical right and its corporate allies. They grabbed the issue while Carter, the Democrats, and Labor\u00e2\u20ac\u2122s lobbyists sat idly by. They then creatively turned the real concern with inflation and bracket creep into proposals for tax cuts for the rich and corporations.<\/p>\n
In the early 1950s the median income American family was paying barely 5% of its earnings for federal income taxes, and only 1%-2% of its earnings at most for the payroll tax. Even by the early 1960s the annual tax burden of $700 for a median income family earning $6,000 a year was nearly double, at 11.6%, but not yet especially burdensome. 20 <\/p>\n
\t\tBut by Carter\u00e2\u20ac\u2122s last year in office, 1980, the median
\nincome working family in America was paying a total
\nfederal tax burden (income and payroll tax) equal to
\n24% of that family\u00e2\u20ac\u2122s income.<\/p>\n
The corporate elite and its new radical right allies in 1978 jumped on the new tax discontent and opportunity. Their candidate, Ronald Reagan, made it the centerpiece of his 1980 election campaign, as well as his primary policy objective when first entering office in 1981. In contrast, Carter and the Democrats in 1977-78 chose to ignore the significant political dangers (and corresponding opportunities) posed by the inflation-induced tax burden shift to the working class. The consequences of those strategic choices, for the Democratic party and for workers alike, still reverberate today.<\/p>\n
The Reagan Tax Revolution<\/p>\n
The Reagan Tax Revolution was a double-edged sword: One edge reserved for capital incomes, subsidies and shelters, and still another for payroll taxes. One edge cut taxes for the wealthy; the other cut take home pay for workers. On the one hand a shift occurred within the federal income tax structure under Reagan with capital incomes benefiting at the expense of wages and salary income; on the other a second shift also occurred between taxes on capital incomes (i.e. the personal income tax, corporate income tax, capital gains tax, estate & gift tax, etc.) and the payroll tax levied on workers wages and salaries. <\/p>\n
Reagan\u00e2\u20ac\u2122s Record 1981 Tax Cuts<\/p>\n
The Reagan 1981 Tax Act reduced taxes by $752 billion and provided the single largest tax cut to date. The majority of that $752 billion was targeted for high income groups and corporations. The 1981 cuts dwarfed all the preceding tax cuts in quantitative terms but nevertheless borrowed heavily in terms of ideas from the Kennedy Tax Cut of 1964, the Nixon cuts in 1971, and the Kemp-Roth proposals of 1978. <\/p>\n
From Kennedy and Johnson, Reagan took the idea of reducing the top income tax rates by lowering top rates from 70% to 50%. Taking a page from Nixon, the Reagan cuts increased the Investment Tax Credit, raising it once again back to 10% and then adding even faster business depreciation as well. From Kemp-Roth, it carried over the idea of an additional 25% reduction in total personal income tax rates phased in over two years. From Kemp-Roth it also borrowed the idea of indexing income taxes to offset bracket creep. But there was more. Much more.<\/p>\n
A host of additional measures reduced the tax burden on the richest 5% even further. The capital gains top tax rate was reduced from 49% to 20%. The first 60% of long term capital gains were also made tax free. Estate and Gift taxes were cut. All limits on gifts to spouses were eliminated and ceilings tripled for other recipients of gifts. Estate taxes were eliminated for spouses, and otherwise ended altogether for 99.7% of all families. The remaining 0.3% still subject to Estate taxes had their rates reduced from 70% to 50%. Totally new items like the IRA and the \u00e2\u20ac\u02dcAll Savers Certificates\u00e2\u20ac\u2122 were also introduced, targeted in particular for taxpaying households in the 60%-95% income range.<\/p>\n
In terms of corporate taxation, several generous new loopholes were introduced in 1981. Depreciation of equipment was compressed to just three categories of goods, with autos fully depreciable after only 3 years, business equipment after five, and buildings after fifteen. For small business, some equipment was fully depreciable in the first year. The top tax rate for small business was also reduced from 25% to 15%. <\/p>\n
Oil facilities and railroad cars were also added to the Investment Tax Credit in 1981. Also for the first time, a corporation that didn\u00e2\u20ac\u2122t use the Investment Tax 10% Credit could sell that credit to another corporation (which would now have a 20% credit). Credits could be bought and sold between corporations to avoid paying any tax altogether. This was called \u00e2\u20ac\u02dcSafe Harbor Leasing\u00e2\u20ac\u2122. 21 The General Electric Corporation used \u00e2\u20ac\u02dcSafe Harbor Leasing\u00e2\u20ac\u2122 not only to eliminate all tax liabilities in 1981 but to \u00e2\u20ac\u0153pick up $110 million in refunds for previous years\u00e2\u20ac\u009d. 22 According to one reputable source, <\/p>\n
\t\tThe sum of corporate-claimed depreciation for
\n\t\t1982-1987 was an extraordinary $1.65 trillion.23<\/p>\n
Borrowing a page from Kennedy-Johnson and Nixon, the Reagan tax cut was wrapped in a public relations package promising 13 million more jobs by 1986. 24 However, what followed in 1982-84 was not more but fewer jobs, a recession even worse than that of 1974-75, and the highest unemployment rate since the Great Depression of the 1930s. In the two years immediately following the 1981 tax cuts unemployment shot up more than 10%. It was not until nearly three years later than unemployment started to come down, and then only to the 7%-8% range for much of the mid-decade\u00e2\u20ac\u201dan unusually sluggish \u00e2\u20ac\u02dcjobless recovery\u00e2\u20ac\u2122 by historical comparison to earlier recessions. Reagan\u00e2\u20ac\u2122s recession following his 1981 tax cuts was thus a first in yet another important way: it marked the beginning of jobless recoveries that would become progressively worse in 1990-93 and 2001-04. <\/p>\n
Apart from this failure to produce promised jobs, the nearly $600 billion in personal income tax cuts contained in the 1981 Tax Act did not mean significant tax reduction for the middle and lower income taxpayers. With median family income in 1980 around $25,000 a year, there was virtually no net tax reduction for those with annual incomes of $50,000 or less. Most of the cut in income taxes went to the top 5% of taxpayers, the lion\u00e2\u20ac\u2122s share of which went to those with incomes of $100,000 and more. 25 <\/p>\n
The following Table 2.1 gives a representation of who benefited from the Reagan Tax Act of 1981:<\/p>\n
TABLE 2.1<\/p>\n
Distribution Effects of Reagan 1981 Tax Cuts 26<\/p>\n
Income\t Percent of All Taxpayers\t Net Change in\tPercent of Tax
\n($0000)\t (in 1981)\t\t Tax Liability\tLiability Changes<\/p>\n
< $10K\/Year\t 33.3%\t\t $125\t\t 27.7%\n $10K-$15K\t 14.9\t\t 83\t\t 4.7\n $15K-$20K\t 12.2\t\t 18\t\t 0.6\n $20K-$30K \t 19.1\t\t -26\t\t -0.6\n $30K-$50K\t 15.4\t\t -84\t\t -1.1\n $50K-$100K\t 4.1\t\t -756\t\t -4.9\n $100K-$200K\t 0.7\t\t -4408\t\t -11.4\n >$200K\t 0.2\t\t -19427\t\t -15.1
\n (Source: R. Lekachman, Greed Is Not Enough, p. 66)<\/p>\n
If $84 a year was the most a worker at the median income level got from the 1981 Reagan tax cuts, that paltry amount was soon more than offset by payroll tax increases beginning in 1984.<\/p>\n
The Payroll Tax Revolution of 1983-84<\/p>\n
In 1983-84 a major change in the payroll tax for Social Security and Medicare was enacted. This change would have momentous impact not only over the remainder of the decade of the 1980s but through the 1990s and up to the present. A special commission chaired by Alan Greenspan, later appointed his chief of the Federal Reserve system by Reagan, recommended a payroll tax hike to \u00e2\u20ac\u02dcsave\u00e2\u20ac\u2122 the Social Security System in 1983 and make it financially sound until the second half of the 21st century. Or so it was promised. A rise in the payroll tax would save Social Security for another century, Greenspan argued, avoiding the need for any additional \u00e2\u20ac\u02dcreform\u00e2\u20ac\u2122 for another fifty years at least. Congress followed Greenspan\u00e2\u20ac\u2122s recommendations and passed legislation and started raising the payroll tax effective 1984. Both payroll tax rates and the amount of annual income on which they were collected rose steadily thereafter. Two decades later, under George W. Bush the payroll tax would amount to a bigger deduction from many workers\u00e2\u20ac\u2122 paychecks than the income tax. <\/p>\n
One might logically argue that the payroll tax hikes were really deferred income that workers would collect after retirement. But not so. The surplus generated from the payroll tax hike over the next 20 years, 1984-2004, amounted to more than $1.6 trillion dollars. 27 But all of that $1.6 trillion would be spent by Congress during the 20 years to help cover the U.S. general budget deficit (caused to a significant degree, ironically, by the same huge tax cut of 1981-83 for the rich and corporations). <\/p>\n
The following Table 2.2 illustrates the increases in the payroll tax rate and its taxable income base during the Reagan years, and includes the maximum payroll tax payment required by workers for the given rate and base. <\/p>\n
TABLE 2.2<\/p>\n
The Social Security Payroll Tax Increase, 1980-1989 <\/p>\n
Year\t\tTax Rate\t\tTax Base\tMaximum Payment<\/p>\n
1980\t\t5.80%\t\t\t$25,900\t\t$1,502
\n1981\t\t6.65\t\t\t 29,700\t\t 1,975
\n1982\t\t6.70\t\t\t 32,400\t\t 2,170
\n1983\t\t6.70\t\t\t 35,700\t\t 2,391
\n1984\t\t7.00\t\t\t 37,800\t\t 2,646
\n1985\t\t7.05\t\t\t 39,000\t\t 2,749
\n1986\t\t7.15\t\t\t 42,000\t\t 3,003
\n1987\t\t7.15\t\t\t 43,800\t\t 3,131
\n1988\t\t7.51\t\t\t 45,000\t\t 3,379
\n1989\t\t7.51\t\t\t 48,000\t\t 3,604
\n(Source: Social Security Administration)<\/p>\n
The record rise in the payroll tax after 1983\u00e2\u20ac\u201dcombined with the equally record cut in income and other taxes for the rich\u00e2\u20ac\u201dmeant that forces shifting the share of total federal taxes from the wealthy to workers occurred from two directions during the Reagan years.<\/p>\n
The combined federal tax rate (income and payroll tax) for a median income worker in the early 1950s was only 6%-7%. By the mid-1960s, 11%. Under Carter 24%. <\/p>\n
\t\tBy the mid-1980s the total federal tax burden for
\n\t\tthe same median income family had risen to 28%.
\n\t\tFor taxpayers with annual incomes over $500,000
\n\t\tthe total burden had fallen to 28%. 28<\/p>\n
In addition to the combined federal tax rate, it is estimated the middle income family\u00e2\u20ac\u2122s burden for state and local taxes in 1985 amounted to another 9.1% of the family\u00e2\u20ac\u2122s income. 29 For federal and state together that\u00e2\u20ac\u2122s a total tax burden of almost 40% of income for a median or average working class family. <\/p>\n
Tax Reform Act of 1986<\/p>\n
The third major tax event closing out the Reagan tax revolution of the 1980s was the so-called Tax \u00e2\u20ac\u02dcReform\u00e2\u20ac\u2122 Act of 1986. But reform in this case was certainly a misnomer. <\/p>\n
The 1986 Act reduced the top income tax bracket further, from 50% to 28%, and included more than 650 special provisions\u00e2\u20ac\u201di.e. loopholes and shelters. Another remarkable feature of the 1986 Act is that it created what was called at the time the \u00e2\u20ac\u02dcbubble\u00e2\u20ac\u2122. This meant that the very wealthiest households had their top income tax rate reduced to the 28% rate, but the income group just below them, households in the $70,000 to $170,000 range, actually were left with a higher top rate of 33%. The \u00e2\u20ac\u02dcAlternate Minimum Tax\u00e2\u20ac\u2122 (AMT) designed to make sure even the richest paid some kind of tax despite all their loopholes and shelters was also changed to soften its impact on wealthier taxpayers. In addition, the corporate income tax top rate was further reduced from 46% to 34% and there were other reductions in taxes on capital incomes in the 1986 Act. <\/p>\n
By 1986 a median working class family earning in the $30,000-$40,000 annual income range received a total annual income tax cut of $467 while a millionaire received a cut of $281,033. 30 But much of that $467 cut in taxes was largely offset by rising payroll taxes. What little the American worker got in the way of income tax cuts in Reagan\u00e2\u20ac\u2122s first term was taken away by payroll tax hikes and other tax increases in Reagan\u00e2\u20ac\u2122s second term.<\/p>\n
Republicans and Democrats, Liberals and Conservatives alike, hailed the passage of the 1986 Act as legislation that would make tax \u00e2\u20ac\u0153unfairness a thing of the past\u00e2\u20ac\u009d and permit \u00e2\u20ac\u0153the American people to move once again to trust their federal government\u00e2\u20ac\u009d. 31 The Democratic National Convention refused to actively take up the question of raising top tax rates or closing loopholes for the rich in the 1988 election year. And its Presidential candidate, Michael Dukakis, said virtually nothing about the issue during the election campaign of that year.<\/p>\n
Perhaps the best summary of the effects of the Reagan tax cuts by mid-decade was expressed by Nobel Prize winning economist, James Tobin, who wrote that the Reagan program would neither stimulate productivity nor revive jobs. \u00e2\u20ac\u0153What it is sure to do is redistribute wealth, power and opportunity to the wealthy and powerful and their heirs. That is the legacy of Reaganomics.\u00e2\u20ac\u009d 32 <\/p>\n
It was claimed that the Tax Reform Act of 1986 redressed some of the worse excesses of the preceding Reagan tax cut legislation. But that view conveniently ignores the huge cuts in the top marginal income tax rate for the wealthy and the ever growing tax bite on workers from the rising payroll tax. The view also ignores the proliferating tax shelters and other avoidance schemes at the time. The 1986 Act was a good example of the \u00e2\u20ac\u02dctax reform shell game\u00e2\u20ac\u2122 mentioned earlier, in which periodically top tax rates were raised (or lowered) while tax shelters, loopholes, and legalized tax avoidance schemes were eliminated (or restored) so that, in the end, the top 5% households and corporations continued to have their net taxes reduced from one source or the other. <\/p>\n
To cite just a few examples of the loopholes and shelters introduced or expanded in Reagan\u00e2\u20ac\u2122s second term and the 1986 Tax Act: <\/p>\n
Among the more notable was the interest on loans deduction for corporations. With the boom in corporate borrowing in the 1980s, this loophole resulted in more than $100 billion a year loss to the US Treasury. Then there was the Net Operating Loss (NOL) deduction, which allowed corporations to reduce current year taxes and carry forward what was not used in the current year as tax deductions to future years. That loophole also cost at least $100 billion. Write offs for intangible property, for incorporation of shipping companies offshore, and hundreds of similar special interest tax breaks for individual companies and entire industries resulted in a cut in corporate Capital income tax revenues which more than offset any temporary increases in other taxes in 1986 affecting corporations and personal income taxes of the top 5% households. <\/p>\n
George Bush Senior Targets the Middle Class<\/p>\n
Under George H.W. Bush and Clinton the shift in taxes continued but at a slower pace.
\nThe Reagan tax and defense spending policies of the 1980s had produced huge, record U.S. budget deficits. A second critical legacy of Reagan was the Savings & Loan scandal and the widespread bankruptcies of S&Ls throughout the country. The federal government had the burden of cleaning up that debacle, at a cost to the taxpayer of $500 billion to $1 trillion, depending on the estimates. 33 The onset of another recession in 1990-92 still further exacerbated the deficit problem. Bush senior\u00e2\u20ac\u2122s administration was left to task of trying to cope with the growing deficit crisis. It turned to raising taxes.<\/p>\n
But the focus and target of George Bush senior\u00e2\u20ac\u2122s tax increases was not on the wealthy 1%. It was on those in 60% to 90% incomes ranges\u00e2\u20ac\u201dfamilies earning annually between $58,000 and $150,000 at the time. Their effective top income tax rate was raised to 33% to 37%, actually higher than the top rate for the wealthiest 1%. They would now also have to pay an additional 1.45% for the Medicare tax, which previously had a ceiling of $53,400 but now was raised to a $125,000 income base. Bush senior clearly avoided taxing his super-wealthy friends and instead went after professionals, mid-level managers, self-employed small business, and upper income level workers. <\/p>\n
On the other hand, while tax rates were raised for some, between 1990 and 1993 tax loopholes and tax shelters were added back in by the dozens as amendments to various bills in Congress. <\/p>\n
Bill Clinton\u00e2\u20ac\u2122s \u00e2\u20ac\u02dcRepublican Lite\u00e2\u20ac\u2122 Tax Policy<\/p>\n
For the Clinton period, 1992-2000, three further notable tax events took place. <\/p>\n
The first was the diversion of the huge surpluses then beginning to appear in the Social Security fund as a result of the major hike in Social Security payroll taxes in 1983-84. Throughout the 1990s under both Bush senior and Clinton, payroll tax rates and the taxable income base were permitted to rise further. Larger and larger surpluses began to occur in the Social Security Trust Fund. During the 1992 election campaign both parties, Democrat and Republican, promised that the Social Security surplus would be reserved in a \u00e2\u20ac\u02dclock box\u00e2\u20ac\u2122 and not opened or diverted to other federal uses\u00e2\u20ac\u201dsuch as covering the chronic and growing yearly U.S. general budget deficits.<\/p>\n
But the \u00e2\u20ac\u02dclock box\u00e2\u20ac\u2122 was broken into every year during Clinton\u00e2\u20ac\u2122s eight year term in office and the more than $1 trillion surplus it generated by 2000 was diverted to offset federal budget deficits. <\/p>\n
The second notable tax event under Clinton was his decision in 1993 to provide some modest tax cuts in order to stimulate recovery from the Bush recession and the slow jobless recovery. When Clinton took office in 1993, modest tax rebates were given to workers with this intention. However, as rebates they were one time events and never structured in as permanent cuts and changes to the tax system\u00e2\u20ac\u201din contrast to that done for tax cuts for the wealthy under Reagan. At the same time taxes were increased for upper income levels of workers, professionals, and those in the 60%-90% income ranges. They were not raised, on the other hand, for those in the wealthiest 5%-10% category. <\/p>\n
The third tax event occurred in Clinton\u00e2\u20ac\u2122s second term. In 1997 yet a third benchmark tax bill called the Taxpayer Relief Act of 1997 was passed. This amounted to yet another, and in this case the largest, personal income tax cut for the rich and wealthy during the decade. It focused primarily on changing the capital gains tax. <\/p>\n
The main features of the 1997 Clinton Act were a reduction in the top rate for capital gains from 28% to 20%, with a further reduction after 2001 (to 18%) for long term gains. The Estate tax minimum level was raised from $600,000 to $1 million, plus small business was provided with an Estate tax exemption for the first $1.3 million value of a business passed on to heirs. Gift taxes were also allowed to rise and the Alternative Minimum Tax for small businesses was also repealed. There were also other tax rules included in the 1977 legislation that were decidedly favorable to business. For example, the Corporate Alternate Minimum Tax, which would have raised taxes paid by corporations as their profits grew in the 1990s, was changed in 1993 and again in 1997 in order to prevent its impact on businesses. 34 Capping off the 1997 Act the following year was an addendum tax bill called the IRS Restructuring and Reform Act of 1998. It made it highly difficult for the IRS to challenge and collect back taxes in cases where the estate and gift tax provisions of the 1997 Act were involved. <\/p>\n
To get these reductions through Congress various provisions were added to the 1997 Act that provided some benefit for working class taxpayers. The child tax credit was raised modestly and tuition tax credits were introduced, along with modest changes in IRAs. Individual company and industry tax breaks and shelters were also part of the legislation. In all, more than 800 changes to the tax code were included in the 1997 Act, a large number of them special interest company and industry changes. <\/p>\n
George W. Bush\u00e2\u20ac\u2122s tax cuts would look very much like the Clinton cuts in some ways. Minor concessions to working families in the form of credits and modest one time rebates, which collectively made up less than a third of the total tax cut, were similarly offered by Bush in his tax bills. But the overwhelming weight of the cuts went to the wealthiest taxpayers and to corporations. Bush\u00e2\u20ac\u2122s 2004 corporate tax cuts also followed the Clinton trend set in 1977 by providing hundreds of pages (literally 600) containing specific tax cuts for individual companies and industries.<\/p>\n
As with Bush, tax cuts for business and the wealthy were at the heart of the 1997 Clinton tax proposals. It was estimated the 1997 Act reduced taxes by an amount of $100 for every upper income household compared to only $5 for median income households.<\/p>\n
With the passage of the 1997 Tax Act the wealthiest 1%-5%, who owned most of the publicly traded stock in the country, were now well poised to reap the benefits of the boom of 1996-2000. Clinton\u00e2\u20ac\u2122s focusing in 1977 primarily on capital gains was not a mere coincidence. From 1996 on the stock markets began their record march upward, driven by the new technology industries where compensation to CEOs, executives, and top shareholders came not in the form of salaries but in stock options and shares. It would soon be time to \u00e2\u20ac\u02dccash in\u00e2\u20ac\u2122 on the speculative gains in stock prices. In addition, the latter half of the 1990s was a period of major real estate profits. The significantly reduced 1977 capital gains tax would allow realization of record gains from real estate as well.<\/p>\n
Those within the Clinton administration maintained at the time that the impetus for the 1997 capital gains cuts was the desire to increase federal revenues. In the short run, they argued, a capital gains cut meant stockholders would \u00e2\u20ac\u02dccash in\u00e2\u20ac\u2122 and thus pay more taxes. This was true\u00e2\u20ac\u201dbut only over the very short run. And at the expense of eventually less revenues later in the longer run, which is what in fact occurred after 2000. In a way, Clinton tax policy in the area of capital gains contributed in a delayed fashion to the sharp fall in U.S. government revenues that would later occur under George W. Bush. <\/p>\n
The true total estimate of the cost of collective tax cuts during the 1990s is even higher than official estimates. Not just the reductions in top rates for capital gains, estate and other income taxes on the wealthy were involved, but countless new tax loopholes and new tax shelters were passed during the decade as well. Due to the shelters and loopholes, <\/p>\n
\t\tThe number of individuals who filed income\ttaxes
\nbut did not pay a penny increased from 24 million
\nin 1990 to 29 million in 1997. This trend was the
\nopposite of the years 1950 to 1970 when those who
\nfiled but paid no taxes declined by 3 million. 35<\/p>\n
As Joseph Stiglitz, Nobel economist and head of Clinton\u00e2\u20ac\u2122s Council of Economic Advisers in the 1990s, would admit much later that Clinton \u00e2\u20ac\u0153raised taxes on upper-middle-income individuals who worked for a living, but he had lowered taxes on very rich individuals who made their money from speculation, and on CEO\u00e2\u20ac\u2122s who were making millions from stock options\u00e2\u20ac\u00a6It was a pure gift to the rich\u00e2\u20ac\u009d. 36 <\/p>\n
In a number of other ways Clinton\u00e2\u20ac\u2122s 1997 Tax Relief Act was also a forerunner of Bush\u00e2\u20ac\u2122s 2001 tax cut legislation. In particular, the Clinton Act introduced the idea of a major restructuring of Estate and Gift Taxes even before George W. Bush, producing huge tax savings for the richest 1% taxpayers. \u00e2\u20ac\u02dcSelling\u00e2\u20ac\u2122 the Tax Act with sweeteners for the general public in the form of tuition credits and token IRA improvements was also a Clinton \u00e2\u20ac\u02dcfirst\u00e2\u20ac\u2122, adopted later by George W. Bush. It might even be argued that Bush\u00e2\u20ac\u2122s subsequent 2001 tax cut proposals were Clinton\u00e2\u20ac\u2122s 1997 Tax Cuts simply \u00e2\u20ac\u0153writ large\u00e2\u20ac\u009d.<\/p>\n
By the end of Clinton\u00e2\u20ac\u2122s second term tax avoidance, both individual and corporate, as a result of spreading shelters and loopholes had become a scandal. According to IRS data <\/p>\n
\t\tIn 2000, 63% of all companies in the U.S. reported
\n\t\tthey paid no corporate income tax from 1996
\n\t\tthrough 2000 on revenues totaling $2.5 trillion.<\/p>\n
And the effective tax rate for the 37% of companies that did pay some taxes in 2002 was only 12%, compared to 18% as recently as 1995. Clinton\u00e2\u20ac\u2122s 1997 tax bill and the many gifts it provided to the wealthy and to corporations had much to do with this dramatic tax avoidance trend.<\/p>\n
George W. Bush 2001-2004: The Tax Revolution in High Gear<\/p>\n
In each of the four years of George W. Bush\u00e2\u20ac\u2122s first term major tax cut legislation was passed that overwhelmingly benefited the richest households, corporations, and capital incomes in general. The total dollar value of Bush\u00e2\u20ac\u2122s first three tax cuts enacted between 2001-03 was initially estimated at more than $3.3 trillion. However, that $3.3 billion does not include the costs of interest payments due to the budget deficits created by the tax cuts. When interest on the deficit caused by the cuts and other indirect costs are included, the full cost of the Bush tax cuts rises to $4.5 trillion. 37 <\/p>\n
The Bush Plan Year One (2001): Slash Taxes on Personal Capital Incomes <\/p>\n
Like Reagan before him, tax cuts were Bush\u00e2\u20ac\u2122s first policy priority if elected. There were many other issues and programs discussed in the course of the 2000 elections campaign, but tax cuts were at the top. Once in office, major tax legislation was proposed by Bush within days of his inauguration in January 2001.<\/p>\n
Bush\u00e2\u20ac\u2122s first tax bill was called the Economic Growth and Tax Relief & Reconciliation Act of 2001, or EGTRRA for short. But as in the case of Reagan\u00e2\u20ac\u2122s tax cuts in 1981-82 and promises of job creation twenty years earlier, the recession continued to deepen following the passage of Bush\u00e2\u20ac\u2122s first tax cut in June 2001. Three years later jobs were still millions short of January 2001 levels when Bush first took office. 38 <\/p>\n
Both conservative and liberal think tanks alike estimate the lost revenue due to the 2001 tax cuts at approximately $1.35 trillion. 39 The $1.35 trillion does not include, moreover, interest costs of $383 billion due to increased debt service payments. <\/p>\n
The total revenue loss and costs associated with the
\n\t\tBush 2001 tax cut alone amount to more than $1.7
\n\t\ttrillion through 2011, and $2.2 trillion if the cuts
\nwere made permanent after that. \u00e2\u20ac\u0153The funds that
\nfinance the tax cut would be more than sufficient to
\ncompletely resolve the Social Security financing
\nproblem through 2075\u00e2\u20ac\u009d. 40 <\/p>\n
$875 billion of this $1.35 trillion was the result of cuts in personal income tax rates, especially for those taxpayers in the four top rates of 39.6% to 28%. These rates were reduced 1% each year for the next three. According even to the conservative think tank, The Heritage Foundation, this reduction in the top tax rates would affect at most only 4.7% of the 131 million taxpaying households at the time in 2001. 41 In contrast, more than 72% of tax households (95 million taxpayers) received no tax cut benefit at all from the rate reduction feature of the 2001 Bush Act. The 95 million taxpayers include not only virtually all working class taxpayers, but 70% of all small businesses and the self employed as well. 42 <\/p>\n
A second major tax cut element favoring capital incomes in the 2001 Act was a $138 billion further reduction in the Estate Tax. Once called the \u00e2\u20ac\u02dcInheritance Tax\u00e2\u20ac\u2122, then \u00e2\u20ac\u02dcEstate Tax\u00e2\u20ac\u2122, and since 2001 the Bush spin has been to refer to is as the \u00e2\u20ac\u02dcDeath Tax\u00e2\u20ac\u2122. But of the roughly 2.5 million taxpaying heads of households who die each year in the U.S., barely 2400 families, or less than 0.1% of all families, were subject to the Estate tax prior to 2001. That\u00e2\u20ac\u2122s before Bush\u00e2\u20ac\u2122s further reduction in the Estate Tax. With 99.9 of families exempt today after the Bush cuts, it is nonetheless still called the \u00e2\u20ac\u02dcDeath\u00e2\u20ac\u2122 tax by radical tax cutters in Congress. <\/p>\n
The trend toward eliminating the Estate Tax was begun in 1997 under Clinton. Bush merely took up where Clinton left off and accelerated the process of phasing out the Estate tax. Whereas Clinton raised the exclusion for the Estate Tax from $600,000 to $1 million and exempted small businesses with estates less than $1.3 million, Bush simply went one step further. He raised the exclusion to $3.5 million ($7 million per couple) and lowered rates on estate values above $7 million from 55% to 45%. What Clinton therefore began in terms of reducing Estate and Gift taxation, Bush finished by virtually eliminating Estate and Gift taxes altogether, providing another $138 billion windfall for the wealthiest 1% of taxpaying households.<\/p>\n
To ensure the 2001 tax handout was supported by the public the 2001 tax act provided for a token $100 increase in the childcare credit, minor adjustments to education tax credits and a temporary reduction in the marriage penalty. Altogether these three elements amounted to around $265 billion over the decade, or about one-fourth of the total tax cut. This compares to the $1.013 trillion for income tax rate reduction, the estate and gift tax cuts which the top income group benefited from almost exclusively. The remainder of the $1.35 trillion in the 2001 Tax cuts were for minor changes in IRAs, adjustments to the alternative minimum tax, and other measures.<\/p>\n
Nearly all sources admit the 2001 tax cut was skewed strongly toward the wealthiest taxpayers. The top 5% richest households\u00e2\u20ac\u201dthose with annual incomes on average of more than $373,000\u00e2\u20ac\u201dreceived 47% of the total $1.35 trillion cut. The next richest 15% households received an additional 24% of the $1.35 trillion. That\u00e2\u20ac\u2122s a total of approximately 6 million out of 132 million households. The remaining 126 million taxpaying households\u00e2\u20ac\u201dthe lower 80% of which are predominantly working class and earn less than $76,000 in annual incomes on average\u00e2\u20ac\u201dwere left to share the remaining 29% of the 2001 tax cuts. And much of that 29% would be absorbed by rising payroll taxes and major increases in state and local income, sales and residential property taxes.<\/p>\n
\t\tThe wealthiest taxpayers earning more than $147,000
\n\t\ta year in annual income will receive 71% of the total
\n\t\t2001 Bush tax cut, or nearly $1 trillion. 43<\/p>\n
As a well-known tax economist summed up, \u00e2\u20ac\u0153by a variety of reasonable measures, the (2001) tax cut is disproportionately tilted toward high income households\u00e2\u20ac\u009d. 44 <\/p>\n
The following Table 2.3 summarizes the skewed distributional character favoring the wealthiest taxpayers in Bush\u00e2\u20ac\u2122s first 2001 tax cut, the EG&TRRA.<\/p>\n
TABLE 2.3<\/p>\n
Distributional Effects of Bush 2001 Tax Cuts 45<\/p>\n
\tIncome Group\tIncome Range Ave. Value of 2001 Share of
\n\t Percentile\t\t Ending At\t Tax Change\t Tax Cut<\/p>\n
\t Top 1%\t —\t -$45,715\t\t 36.7%
\n \t Next 4%\t\t$373,000\t -$3,326\t\t 10.7%
\n\t Next 15%\t\t$147,000\t -$1,978\t\t 23.8%
\n\t Fourth 20%\t\t $72,000\t -$951\t\t 15.3%
\n \t Third 20%\t\t $44,000\t -$570\t\t 9.2%
\n \t Second 20%\t $27,000\t -$368\t\t 5.9%
\n\t First 20%\t\t $15,000\t -$67\t\t 1.1%<\/p>\n
Source: William Gale and Samara Potter, \u00e2\u20ac\u0153An Economic Evaluation of the Economic
\nGrowth & Tax Relief Reconciliation Act of 2001, National Tax Journal, March 2002,
\nTables 4 and 5.<\/p>\n
The Bush Plan Year Two (2002): Expand Corporate Tax Subsidies<\/p>\n
One of the largest areas of tax subsidy in the U.S. tax code involves what\u00e2\u20ac\u2122s called corporate depreciation write-offs. The 2001 Tax Cuts focused primarily on capital incomes associated with the personal income tax, but it was quickly followed the next year with the Job Creation and Worker Assistance Act of 2002. <\/p>\n
As in the case of its 2001 predecessor, the 2002 tax cuts created jobs in name only. Job losses accelerated in 2002 compared to 2001, even though the recession of 2001 officially ended by November 2001. 2002 may have been a recovery for those earning capital incomes, but not for workers who earn virtually all their income from wages and salaries and for whom jobs were continuing to disappear at a faster rate in 2002 and 2003 than in 2001 during the \u00e2\u20ac\u02dcofficial\u00e2\u20ac\u2122 recession. <\/p>\n
The jobless economic recovery phenomenon that began under Reagan and was repeated under Bush senior was once again underway by 2002. This time, under George W. Bush, it was an even slower jobs recovery than occurred during the two prior recessions. Jobless recoveries were becoming progressively more drawn out, with Bush\u00e2\u20ac\u2122s 2001-03 the worst of the three recessions since 1980. Despite the jobless recovery in progress, Bush linked tax cuts with jobs once again in 2002. It was not the first time such a false claim had been made since 1980; nor would it be the last. <\/p>\n
The 2002 Tax Act provided a new bonus depreciation deduction equal to 30% of the cost of new equipment. Now businesses could take the regular depreciation write off, plus 30% more. But even this was not all. In addition to the regular and the 30% bonus, there was an additional \u00e2\u20ac\u02dcSection 179\u00e2\u20ac\u2122 expense deduction which permitted the full write off in the first year of the first $24,000-$59,000 of equipment costs. In other words, three layers of depreciation were now available to companies as a consequence of the 2002 Tax Act. Businesses in general and corporations in particular could now immediately write off\u00e2\u20ac\u201dthat is deduct the cost from their taxes owed\u00e2\u20ac\u201dof up to two-thirds or more of the cost of equipment in the very first year. That compared with depreciation rules prior to 2002 that permitted writing off equipment over 15 years, not one year, with only one simple depreciation opportunity. Another huge change in 2002 allowed full depreciation on commercial buildings within five years instead of what was previously 39 years. 46 <\/p>\n
The 2002 Act also increased the amount of depreciation claimable on luxury SUVs by $4,600 in the first year. How this particular provision related to job creation is, of course, even more questionable.<\/p>\n
Still another major element of the 2002 act benefiting corporations was a significant change in \u00e2\u20ac\u0153Net Operating Loss\u00e2\u20ac\u2122 rules. A loophole originally expanded under Reagan in the 1980s, NOL allows a company to re-file taxes and get refunds if its losses in a current year exceeded its tax claims in that same year. NOL means a company can \u00e2\u20ac\u02dcgo back\u00e2\u20ac\u2122, re-file tax returns for past years, and claim further refunds for those past years based on current year losses. It\u00e2\u20ac\u2122s like allowing a worker who is unemployed in a current year to re-file his back taxes and get refunds on taxes paid in the past equal to the drop in his normal income in the current year due to unemployment. Of course, that\u00e2\u20ac\u2122s not allowed for workers. But it is for corporations and businesses. This provision constitutes a \u00e2\u20ac\u02dctax subsidy\u00e2\u20ac\u2122 pure and simple.<\/p>\n
In the 2002 Act the NOL provision was expanded, increasing from two to five the years over which a company could carry its losses backward to get refunds for previous taxes paid. The NOL carry back provision of the 2002 Act resulted in many corporations avoiding having to pay any taxes at all, despite attaining significant profits growth in that year.<\/p>\n
Theoretically, depreciation tax cuts are supposed to generate investment in replacement plant and equipment faster than otherwise would be the case. In practice, depreciation is seldom linked to actual job creation. But that doesn\u00e2\u20ac\u2122t stop businesses from claiming the tax write off since proof of job creation is not required and, in fact, proof of investment by the IRS is not even demanded in many cases. The benefits of faster write-off of equipment go directly to the corporate bottom line. When depreciation does result in actual equipment replacement, the greater productivity that results often eliminates the need to hire and create new additional jobs. Thus depreciation often means the destruction of jobs, not the creation of net new employment. <\/p>\n
The focus on depreciation in the 2002 tax cuts was part of a long tradition of expanding depreciation write-offs since the 1960s and the Kennedy tax cuts. Every major tax cut over the past three decades has expanded the depreciation loophole for corporations. The result has been huge tax reductions for corporations and business in general and greater corporate net income as a result. <\/p>\n
The Bush Plan Year Three (2003): Dividends, Capital Gains, & Accelerated Write Offs <\/p>\n
Once more with the political spin machine in gear, Bush named the 2003 tax cut the Jobs and Growth Tax Relief and Reconciliation Act of 2003. But no sooner was the bill signed in June 2003 that the much heralded jobs recovery, predicted by Bush to create 300,000 jobs a month, began to stall. The Bush jobs recovery once again aborted in the second half of 2003 for a second time in three years.<\/p>\n
The third year of the Bush Tax offensive revisited the 2001 and 2002 tax cuts and went even further in expanding tax cuts for the rich and for corporations by combining even more generous personal income tax reductions and corporate depreciation write-offs.<\/p>\n
At the heart of the 2003 Bush tax cut were even more radical reductions in dividend and capital gains taxes, nearly all of which accrued to those with the highest incomes, plus a speeding up of the 2001 reduction in top individual income tax rates for the wealthy. On the corporate side, depreciation write offs and other tax subsidies were also accelerated. <\/p>\n
Reductions in the top income tax rates scheduled for 2003 were now also made retroactive to 2001. The tax rate on dividend income, previously at 39.5%, was dramatically reduced to a maximum 15% rate. And the Capital Gains top rate was lowered further from 20% to 15% as well. When combined with the cuts in the estate tax, these measures reduced taxes on capital incomes and provided a record windfall for the top 5% of taxpaying households. As recently as1990 the top rate for the capital gains tax was 28%, nearly twice that in effect today. <\/p>\n
On the corporate side of the 2003 tax cuts, the \u00e2\u20ac\u02dcSection 179\u00e2\u20ac\u2122 depreciation-deduction allowance for businesses was raised from $25,000 to $100,000. A business could now deduct off the top in the first year $100,000 in spending on equipment, including software. In addition, the 30% \u00e2\u20ac\u02dcbonus\u00e2\u20ac\u2122 depreciation write-off passed in 2002 was also raised significantly in 2003, to 50%. After the first $100,000 in write-offs, half of all remaining expenditures on business equipment could now also be written off. And after these two special write-offs, normal depreciation could also be taken on whatever cost of equipment purchases remained. These further expanded write-offs were estimated alone at around $30 billion in savings every year for businesses. 47 <\/p>\n
For the remaining 100 million taxpayers unable to enjoy such tax largesse, the 2003 tax cuts slightly improved the child credit, marriage penalty, and 10% bracket eligibility\u00e2\u20ac\u201dbut only temporarily. In contrast to the 2003 tax cuts\u00e2\u20ac\u2122 huge reductions for dividends and capital gains, the provisions for child care, marriage penalty, and similar consumer elements of Bush\u00e2\u20ac\u2122s 2003 proposals were made temporary for only two years in order to make the total cost of the 2003 tax legislation appear lower (and thereby no doubt to help sell the package to holdouts in Congress and to the public). <\/p>\n
The child credit was raised from $600 to $1000 for 2003-04 but was set to revert back to $700 levels thereafter. The marriage penalty was improved, but also for 2003-05 only,
\nreverting back to previous levels in 2005. Similarly, the low income bracket was improved but only for two years. In contrast, tax cuts involving dividends, capital gains, top tax rates for the rich, and corporate write-offs and tax subsidies were etched in stone for the life of the tax act, until 2013.<\/p>\n
\t\tThe Bush tax cuts of 2002 and 2003 will result in a
\n\t\treduction in corporate taxes amounting to at least
\n\t\t$414 billion for the period 2002 through 2013. 48<\/p>\n
The official estimate of the revenue loss due to the 2003 personal income tax cut provisions (Dividends, Estate Tax, Capital Gains Tax) in the 2003 Act was $350 billion. But if provisions are made permanent through 2013, which is highly likely given the composition of the 2005 Congress, the personal income tax reductions are estimated at $800 billion. <\/p>\n
Distributional Effects of the 2001-03 Tax Cuts<\/p>\n
In terms of income distribution the 2003 tax cuts were even more generous to capital incomes than were the 2001 and 2002 tax cuts combined.<\/p>\n
According to the Institute on Taxation and Economic Policy\u00e2\u20ac\u2122s Tax Model the cumulative three years of Bush tax cuts (2001-2003) mean the top 20% richest taxpayers get more than 70% of the combined tax cuts in 2004. The wealthiest 1% of taxpayers do even better than the top 20%. They get 30% of the total tax cuts in 2004 and their share of the cuts rises to 39% by 2010. 49 In contrast, the bottom 80% income groups\u00e2\u20ac\u201dmostly workers with average annual incomes no higher than $76,400 a year\u00e2\u20ac\u201dget only 14% of the three years\u00e2\u20ac\u2122 of tax cuts by 2004. And their share of the cuts not only do not grow by 2010 but drop from 14% to 10%. 50 <\/p>\n
In 2005 it is projected that of the more than $100 billion of the tax cuts taking effect that year, 73% will go to the top 20% of tax payers. Those with incomes over $1 million a year in 2005 will receive a tax cut of $135,000 a year. All those with incomes less than $76,400 will get about $350 on average with millions receiving no tax cuts at all.<\/p>\n
Stated another way, as skewed and biased the Bush tax cuts are, this skew and bias grows worse over time between 2003-2013. Tax cuts for corporations and the super rich are \u00e2\u20ac\u02dcback loaded\u00e2\u20ac\u2122 in the Bush cuts. The worse is yet to come.<\/p>\n
The following two tables show this highly skewed character of the Bush personal income tax cuts, 2001-2003. Table 2.4 illustrates the \u00e2\u20ac\u02dcShares of the Tax Cuts by Income Groups\u00e2\u20ac\u2122 for three select years. Table 2.5 shows the \u00e2\u20ac\u02dcEffect of the Tax Cuts on After-Tax Incomes\u00e2\u20ac\u2122 of the different income groups. <\/p>\n
TABLE 2.4<\/p>\n
Shares of Tax Cuts 2001-03 by Income Groups 51<\/p>\n
\t Income Average Average Share Share Share
\nIncome Group\t Range Income Tax Cut 2004 2007 2010<\/p>\n
Lowest 20% <$16K $9,800 -$61 0.9% 0.9% 0.7%\nSecond 20% $16-$28K $21,400 -$327 4.6% 4.0% 3.6%\nMiddle 20% $28-$48K $35,300 -$586 8.7% 6.6% 5.9%\nFourth 20% $45-$73K $57,400 -$967 15.5% 11.9% 10.6%\nNext 15% $73-$145K $97,500 -$1,538 25.4% 22.1% 19.2%\nNext 4% $145-$337K $200,100 -$2,907 15.0% 18.9% 21.2%\nTop 1% $337K or more $938,000 -$66,601 29.8% 35.5% 38.9%\n\nSource: Institute on Taxation and Economic Policy Tax Model, June 2003\n\n\nThe above table 2.4 shows that while the richest 20% will get just over 70% of the tax cut share in 2004, their share will rise considerably by 2010 to nearly 80% of the total cuts. The data also illustrate that the approximately 71% share going to the wealthiest 71% in the 2001 tax cuts, noted previously above, continued in roughly the same distributional mix in the combined tax cuts from 2001 through 2003.\n\n\nTABLE 2.5\n\n Percent Total After-Tax Income 52\n(Before & After 2001-03 Tax Cuts)\n\nIncome Group\t\tBefore\t\tAfter\t\tPercent Change\n\nLowest 20%\t\t4.0%\t\t3.9%\t\t\t-0.1%\nSecond 20%\t\t7.8%\t\t7.7%\t\t\t-0.1%\nMiddle 20%\t 12.1%\t 12.0%\t\t \t-0.1%\nFourth 20%\t 19.3%\t 19.2%\t\t\t-0.1%\nNext 15%\t 24.3%\t 24.1%\t\t\t-0.2%\nNext 4%\t 13.8% 13.6%\t\t\t-0.1%\nTop 1% 18.8% 19.6%\t\t\t+0.8%\n\nSource: Institute on Taxation and Economic Policy Tax Model, June 2003. Figures \ndo not include corporate taxes, payroll taxes or state and local income taxes.\n\n\nTable 2.5 shows it is clear that only the richest 1% have a significant gain in after tax income due to the Bush tax cuts. That top 1% wealthiest taxpayers +0.8% gain is equivalent in dollar terms to $1.078 Trillion in tax cuts from 2001 to 2010 alone. 53 In other words, the wealthiest 1% gain at the relative expense of the other 99%. \n\nThe Brookings and Urban Institute\u00e2\u20ac\u2122s Tax Policy Center estimates the annual transfer in income to the rich and super rich flowing from the Bush 2001-2003 tax cuts is $113 billion a year from 2003 through 2013. And this does not even include the Corporate Tax cuts of 2004.\n\nThe cost of the 2001-03 tax cuts is estimated at $3.4 trillion for the first decade, while the total impact of the Bush 2001-2003 tax cuts when made permanent through 2075 is $11.6 trillion\u00e2\u20ac\u201d45% of which will go to the wealthiest 5% of taxpayers and 70% to the wealthiest 20%. Once again, these numbers reflecting after-tax income redistribution do not include the corporate tax cut provisions in the 2004 tax act passed in late fall 2004. Nor do they address the income redistribution occurring before taxation even begins. As two highly respected economists in the field of tax policy, William Gale and Peter Orszag, have recently noted, \u00e2\u20ac\u0153all the proposed tax changes are taking place against a backdrop of increasingly unequal pretax income that has continued largely unabated since the late 1970s.\u00e2\u20ac\u009d 54\n\nShelters: Reducing Taxes Before the IRS Gets To See\n\nMost assessments of the distributional effects of taxes and relative tax burdens do not consider the amount of taxable income that the wealthy and corporations \u00e2\u20ac\u02dcput aside\u00e2\u20ac\u2122 (i.e. shield) as a result of tax subsidies and tax shelters. In recent decades more and more pre-tax income is shielded and never allowed to enter the tax system and tax determination process.\n\nThe cost of the Bush tax cuts above do not include the proliferation of countless tax shelters building up over the last two decades prior to 2004, and the new shelter provisions contained in the 2004 Act, all of which skim pre-tax income off the top before IRS tax rules and procedures even come into play. Like a mafia-run casino, a certain percentage of revenues, especially those earned offshore in subsidiary operations or foreign branches of a corporation, are put aside. They may even be run through the corporate calculating machine in a back-room in Bermuda, or some Caribbean bank. Whichever the case, they are not even considered in the process of determining a company\u00e2\u20ac\u2122s taxation. Not even the US government has an accurate estimate of how much is shielded in pre-tax income, especially for corporate income generated or held offshore. A similar difficulty exists for estimating accurate corporate depreciation claims when companies \u00e2\u20ac\u02dcmix\u00e2\u20ac\u2122 their U.S. and foreign business. \n\nThe scope and magnitude of the pre-tax skimming is indicated in that relatively small portion of foreign tax shelters for U.S. companies and wealthy individuals that get reported. 55 \n\nOne of the biggest scandals of Bush\u00e2\u20ac\u2122s first term was how big U.S. accounting companies advised and urged their corporate clients to deny their U.S. citizenship and relocate, on paper, to Bermuda. In other words to become a foreign company in order to shelter and avoid U.S. taxes. Yet the Bermuda connection represents only \u00e2\u20ac\u0153a tip of a vast iceberg of corporate offshore tax sheltering\u00e2\u20ac\u201dall designed to shift U.S. profits, on paper, outside the United States\u00e2\u20ac\u009d. 56 Estimated at more than $50 billion a year in Bermuda-based tax losses to the U.S. Treasury in 2002, corporate tax sheltering extends well beyond Bermuda and has gone global. \n\n\t\tIn 1983 offshore tax havens sheltered $200 billion.\n\t\tToday that total has grown to more than $5 trillion.\n\n\nOf 370,000 corporations registered in Panama, only 340 bothered to file income tax reports in the US. And according to a study by the Federal Reserve Bank of New York, U.S. deposits in the Cayman Islands tax haven amount to more than $1 trillion and are growing by $120 billion a year. \n\nInstead of working to reduce tax shelters, the Bush tax radicals in the U.S. House of Representatives have been doing all they can to expand them. In 2003 the Chairman of the Ways and Means Committee, Bill Thomas, for example, publicly declared he favored an expansion of offshore tax sheltering and proposed amendments that would promote $83 billion in additional offshore tax avoidance in the corporate income tax cut bill introduced at the end of that year. 57 \n\nWhy Have Payroll Taxes Not Been Cut?\n\nWith all the broad cuts in taxes on personal incomes and the corporate income tax, it is perhaps at least curious why cuts in the payroll tax have been so assiduously avoided by Bush and his radical friends in Congress? The answer, however, is not so difficult. There are at least three major reasons why payroll taxes are not reduced.\n\nFirst, payroll taxes have created trillion dollar surpluses in the Social Security Trust fund since 1984. Those surpluses are politically convenient for Bush, as they have been for all his predecessors since Reagan. That Trust Fund surplus amounts to $1.6 trillion since 1984 through 2004, not counting several trillions more in interest earned. That surplus has been \u00e2\u20ac\u02dcpermanently borrowed\u00e2\u20ac\u2122 by the U.S. government every year to help offset the chronic U.S. general budget deficits that have averaged hundreds of billions each year since 1981. Cutting payroll taxes would mean less to borrow and therefore even greater budget deficits each year than now occur.\n\nSecond, the continued growth of payroll tax revenues is necessary for Bush to implement his plan to privatize Social Security over the next decade. The Social Security Trust fund is expected to generate another $1.1 trillion surplus between now and 2018. Cutting payroll taxes would require Bush to propose even more borrowing from bond markets to finance his Private Investment Accounts for Social Security or cutting benefits for retirees to cover the transition costs for the privatization of Social Security. These issues are addressed in more detail in Chapter Ten on Social Security in this book. For the moment, it is sufficient to note that, in all likelihood, payroll taxes will be raised by some amount as part of a political settlement in Congress should Bush\u00e2\u20ac\u2122s plan pass. \n\nThird, payroll taxes include 12.4% for Social Security plus another 2.9% for Medicare funding. Within Medicare there are two plans, \u00e2\u20ac\u02dcPlan A\u00e2\u20ac\u2122 which covers hospitalization expenses, and \u00e2\u20ac\u02dcPlan B\u00e2\u20ac\u2122 which covers non-hospitalization medical costs. At present, funds are transferred every year in large amounts from Plan A where there is a surplus to Plan B where there is a major deficit. Growing payroll tax revenues allow this transfer to continue. It allows Congress not to have to address raising taxes to properly finance Plan B. If it did, there would be less available for income and corporate tax cuts. Were the 2.9% Medicare tax reduced, in other words, the transfer of funds from Plan A to Plan B would no longer be possible and tax increases would be necessary. Congressional tax radicals would face an untenable political situation of permitting tax cuts for their rich friends and corporations while they refused to provide funds for elderly Americans\u00e2\u20ac\u2122 doctor visits. Allowing Medicare payroll tax revenues to rise conveniently allows with game to continue. Cutting the Medicare payroll tax rate would jeopardize it.\n\nThe Bush Plan Year Four (2004): Manufacturers & Multinationals Have Their Turn\n\nConservatives continually rail against \u00e2\u20ac\u02dcdouble taxation\u00e2\u20ac\u2122 of the rich---aimed first at their companies and then at their incomes derived from those same companies. What the Bush record shows, however, is that the U.S. under Bush has been experiencing a new policy of \u00e2\u20ac\u02dcdouble reverse taxation\u00e2\u20ac\u2122\u00e2\u20ac\u201drecord tax cuts for the rich as individuals as well as tax cuts for their companies. \n\nThe first four years of Bush\u00e2\u20ac\u2122s administration witnessed an alternating shift in tax policy focus. Initially, Bush\u00e2\u20ac\u2122s 2001 proposals targeted tax cuts for individuals. In 2002 the focus was primarily on small business and corporate tax cuts. In 2003 once again the tax cuts mostly reduced taxes for wealthy individuals by lowering capital gains, reducing dividends, phasing out estate taxes, and the like. In 2004 the focus shifted back yet again almost exclusively to further tax cuts for corporations\u00e2\u20ac\u201dfor large multinational corporations in particular. \n\nThe corporate tax top rate alone declined from 1988 to 2003 from 27% to 17%. But this was only part of the picture. Total corporate tax revenues were reduced by various other means as well.\n\nA study done by the Institute on Tax and Economic Policy (ITEP) in September 2004, on the eve of the passage of the 2004 Corporate Tax Cut Act, showed the corporate tax provisions in Bush\u00e2\u20ac\u2122s 2002 and 2003 tax cuts amounted to $75 billion for the period, 2002-04, for the largest 275 corporations in the survey. While pretax profits of these 275 corporations went up 26% between 2001-03, \u00e2\u20ac\u0153over the same period corporate income tax payments to the federal government fell by 21%\u00e2\u20ac\u009d. 58 And this was before the additional major corporate tax breaks in the 2004 tax cut bill were passed.\n\nThe ITEP study focused not only on top tax rates but also on tax subsidies\u00e2\u20ac\u201di.e. the tax rebates these 275 companies received from 2001 through 2003. In at least one of the three years 82 of the 275 corporations paid no taxes at all due to subsidies, and they received significant tax rebates even though these corporations were highly profitable. Some of the more astounding examples of tax rebates received by profitable companies from the U.S. treasury are noted in Table 2.6 below.\n\n\nTABLE 2.6\n\nCorporate Tax Rebates 59\nCompany\t\tProfits\t\tTax Rebates Received \n\nGeneral Electic\t$11.9 billion\t\t-$33 mil.\nPfizer\t\t\t $6.1 bil.\t -$168 mil.\nVerizon\t\t $5.6 bil.\t -$685 mil.\nAT&T\t\t\t $5.6 bil.\t -$1.39 billion\nWachovia Bank\t $4.1 bil.\t -$164 mil.\nMetlife \t\t $2.9 bil.\t -$67 mil.\nJP Morgan Chase $2.5 bil.\t -$1.38 billion\nLehman Brothers $1.8 bil.\t -$39 mil.\nBank of New York $1.7 bil.\t -$29 mil.\nBoeing $1.0 bil.\t -$1.7 billion\n\t\nSource: Robert McIntyre and T.D. Coo Nguyen, \u00e2\u20ac\u0153Corporate Income \nTaxes in the Bush Years\u00e2\u20ac\u009d, Center for Tax Justice, September 2004.\n\nTax rebates, corporate tax subsidies, expansion of offshore tax havens and tax shelters, the foreign tax credit, accelerated depreciation and investment credits, and scores of other special interest tax loopholes by the end of 2003 all played an important part in the freefall in the corporate income tax\u00e2\u20ac\u2122s contribution to total federal taxes. \n\n\t\tThe corporate income tax\u00e2\u20ac\u2122s contribution to total U.S.\n\t\ttax revenues has declined from more than 20% in\n\t\tthe 1960s to 11% in the 1980s under Reagan, and \n\t\tnow to barely 6% under George W. Bush. 60\n\n\nWith the share of corporate income taxes at 6% at the close of 2003, yet another corporate tax cut, the Corporate Tax Reduction bill of 2004, was introduced. It provided a further major business tax cuts that would be called \u00e2\u20ac\u0153the largest business tax relief program in more than a decade\u00e2\u20ac\u009d. 61 \n\nHaving just passed the 2003 tax cuts targeting personal incomes, capital gains, dividends, and estates in June of that year, Bush publicly declared in August 2003 he would seek no \nfurther tax cuts. But within days tax radicals in the House of Representatives immediately proposed an additional $128 billion in corporate tax cuts, which was named once again \u00e2\u20ac\u02dcThe American Jobs Creation Act of 2004\u00e2\u20ac\u2122. The 2004 proposals originated in the need to repeal of U.S. export subsidies that were declared illegal by the World Trade Organization. The illegal U.S. export subsidies resulted in counter-tariffs imposed by European and other nations on the U.S.. This dispute served as an excuse to open corporate tax cut floodgates once again, allegedly to compensate for the eventual repeal of the export subsidies to comply with the WTO. But that compensation would end up a very minor part of the total corporate tax cut bill.\n\nNo fewer than three separate corporate coalitions lobbied for their preferred versions of tax cuts, bidding up a Congress stumbling over itself trying to satisfy all corporate comers.\n\nOne corporate lobbying group, the \u00e2\u20ac\u02dcCoalition for Fair International Taxation\u00e2\u20ac\u2122, led by General Electric, sought to increase the foreign profits tax exemption, which allows US corporations doing business abroad to subtract from their US taxes the amount they pay in foreign taxes. As it would turn out, GE would prove to be one the biggest beneficiaries of the tax bill when passed. 62 A second group, led by Boeing and Microsoft, called the \u00e2\u20ac\u02dcCoalition for U.S. Based Employment\u00e2\u20ac\u2122, lobbied for a $60 billion permanent reduction in the corporate tax rate, from 35% to 32%, to make up for the repeal of the export subsidy. A third, led by Hewlett-Packard, pushed for the one year \u00e2\u20ac\u02dctax holiday\u00e2\u20ac\u2122 on an accumulated $500 billion in profits made abroad that corporations continued to hold offshore to avoid paying US taxes. By mid-year 2004 all three groups ended up with nearly everything they each sought in the combined tax cut legislation that came before the House and Senate for a vote. \n\nThe pork barrel got even larger as other special interests and lobbyists jumped on board over the summer. A parallel $31 billion tax cut for oil and energy companies, which failed to pass in November 2003 by only two votes in Congress, was resurrected as a $19 billion add on to the general corporate tax cut by mid-2004. More than $10 billion was added for the Tobacco companies, to compensate them for tobacco subsidies previously received from the U.S. government and taxpayers. Other special interest provisions were thrown in for the wine industry, aerospace, and the child tax credit extended to families with annual incomes up to $309,000 by right wing tax radicals in the House of Representatives. By summer 2004 the various corporate and special interest tax cuts proposed amounted to $155 to $170 billion, depending on the House or Senate versions.\n\nInitially the Bush legislative strategy in the summer of 2004 was to hold \u00e2\u20ac\u02dchostage\u00e2\u20ac\u2122 those modest provisions (child care, marriage penalty, 10% bracket, etc.) of the 2001 and 2003 laws that would benefit working families. Bush insisted tax cut provisions for the rich and super rich would have to be made permanent for the next 10 years first. Otherwise, he declared, he would veto any bill.\n\nBut as the drums of the November 2004 elections grew louder, in July 2004 Republican leaders in Congress attempted to cut a deal with moderates permitting a two-year extension of the modest provisions. This would have allowed the immediate extension of the child care credit, the marriage penalty, and other relatively minor benefits affecting working families, \n<\/p>\n","protected":false},"excerpt":{"rendered":"
by Jack Rasmus
\ncopyright 2005
\nToday, April 28, 2017, President Trump announced plans for another multi-trillion dollar tax cut for corporations and investors. This is the centerpiece of his policy proposals. This is what Trump is really about, behind all the \\’false right populism\\’ he ran on during the election (from which he is rapidly retreating in his first 100 days). Trump\\’s tax cuts–analyzed in more detail in a subsequent article soon by this writer–are just the most recent in a series of tax cuts for business since 1980. They are the essence of neoliberal economic policy in the US (and elsewhere). What follows is my summary and analysis of the neoliberal corporate tax cutting from Reagan in 1980 through George W. Bush\\’s first term in 2004. It is an excerpt of chapter 2 of my 2005 book, \\’The War at Home: The Corporate Offensive from Ronald Reagan to George W. Bush\\’, by Jack Rasmus, Kyklosproductions, 2005. The book documents the trillions shifted from labor to capital incomes in the quarter century, 1980-2005, which still continues and is accelerating, and central to which are the tax cut policies. (see my blog, jackrasmus.com for the 2006-2016 period continuing shift in taxes that has been central to the growing income inequality in the US). The \\’War at Home\\’ book may be purchased at discount from this website or the blog and is also available on Amazon).<\/p>\n","protected":false},"author":3,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":[],"categories":[3],"tags":[],"_links":{"self":[{"href":"https:\/\/www.kyklosproductions.com\/posts\/wp-json\/wp\/v2\/posts\/323"}],"collection":[{"href":"https:\/\/www.kyklosproductions.com\/posts\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.kyklosproductions.com\/posts\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.kyklosproductions.com\/posts\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/www.kyklosproductions.com\/posts\/wp-json\/wp\/v2\/comments?post=323"}],"version-history":[{"count":0,"href":"https:\/\/www.kyklosproductions.com\/posts\/wp-json\/wp\/v2\/posts\/323\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.kyklosproductions.com\/posts\/wp-json\/wp\/v2\/media?parent=323"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.kyklosproductions.com\/posts\/wp-json\/wp\/v2\/categories?post=323"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.kyklosproductions.com\/posts\/wp-json\/wp\/v2\/tags?post=323"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}