Businessweek Archives

Commentary: Lower Taxes? Oh, No Thanks


News: Analysis & Commentary

Commentary: Lower Taxes? Oh, No Thanks

This should be the ideal time for congressional Republicans to push a big tax cut. With the Apr. 15 deadline looming, Americans are acutely aware of just how much money they're handing over to Uncle Sam. What's more, a growing budget surplus--which could total $3 trillion by 2010--gives lawmakers a huge pot to dip into. So how come the latest GOP plan, to cut taxes by nearly $800 billion over 10 years, is getting such a tepid response?

Hard as it may be to believe, most taxpayers don't feel they need a big cut right now. And they're right: The federal tax burden for most Americans is the lowest in more than two decades. Sure, tax revenues are streaming into the U.S. Treasury at a record rate. But the windfall reflects an explosion in executive compensation and gains on stocks and real estate--most going to the top 1%. And those taxpayers are shouldering an increasing share of the load.

Yet even the rich aren't clamoring for relief--even though a 1993 tax hike and cap on deductions put the top marginal rate at 43%. "They're too busy enjoying their gains to complain that their taxes are too high," says former Labor Secretary Robert B. Reich. He estimates that the wealthiest 1% has reaped 40% of the market's capital gains during the 1990s.LOW PRIORITY. So it only seems fair that this elite group is paying at least a third of the $829 billion in personal income taxes the Treasury expects to collect for the '98 tax year. That's almost half again as large as their share in 1985. The top 1%--families with incomes above $300,000--on average are paying nearly a third of their earnings in federal income, Social Security, and Medicare taxes, about the same as in 1985. But their average income during those 13 years has roughly doubled.

Over the same period, middle-income families have seen their federal burden shrink. In 1998, reports the Treasury Dept., a family of four with an income of $53,720 paid 15.5% to Uncle Sam. Thanks to recent breaks, such as a child credit, that's down from 17.4% in 1985, and the smallest bite in 22 years. Meanwhile, the bottom 50%--households making $42,000 or less--are paying just 4% in income taxes, half their '85 share.

Little wonder that GOP calls for tax cuts aren't resonating with the public. In a Feb. 12 CBS/New York Times poll that asked 1,058 adults to name their top priority for the surplus, just 12% wanted a tax cut, while 64% said Social Security should be preserved and 14% called for reducing the national debt.

Such surveys should stiffen President Clinton's resistance to a rate cut. And he will have a potent argument: Since the rich pay a bigger share, they would be the chief beneficiaries of a cut. "Republicans are going to have a tough time explaining why people who've made so much from the market need a break," notes Ross K. Baker, a Rutgers University political science professor.

Congressional Republicans are mindful of the political risk. "The Democrats will pull out the economic class-warfare card," concedes Representative Bill Archer (R-Tex.), chairman of the House Ways & Means Committee. But he insists that with 1998 federal revenues at a peacetime high of 20.5% of gross domestic product, tax relief is needed: "The more money that leaves the private sector, the less productive the economy."

Treasury Secretary Robert E. Rubin counters that the last thing the economy needs is a tax cut to further stimulate consumer spending. "We already have extraordinarily robust demand," he says. Instead, Rubin says the surplus should be used to save Social Security and pay down the federal debt.BOOM ROOM. Rubin gets support from lots of economists, including Federal Reserve Chairman Alan Greenspan. With consumers unwilling to save, Greenspan argues, Washington should become the saver by reducing the national debt and shunning tax cuts. The result would be more private investment, lower interest rates, and a new lease on life for the long-running economic boom.

With Clinton, Greenspan, and the public lining up against tax cuts, the GOP should retreat. Lower interest rates mean more to the average Americans than a tax cut. And if lower rates give Wall Street another boost, even the rich won't squawk.By Owen UllmannReturn to top


Toyota's Hydrogen Man
LIMITED-TIME OFFER SUBSCRIBE NOW
 
blog comments powered by Disqus