Our Congress is preparing to vote again on the Bush Tax Cuts. After a two year extension the cuts are set to expire on December 31, 2012. When paired with the planned across-the-board cuts to military and domestic spending (called sequestration) scheduled to take place in January of 2013, the debate is likely to play out before during and after the votes of the next week.
The Bush Tax Cuts, passed in 2001 and 2003, are a form of political junk food. They almost sell themselves and they are good for absolutely no one (except the people who sell them, i.e. right-wing politicians).
The practice of using the tax code to hand out money didn’t start during the presidency of George W. Bush. This particular fiscal tool, called tax expenditures, has been around at least since the Federal Income Tax was created in 1913. In 1973 Secretary of the Treasury Stanley Surrey not only coined the phrase ‘tax expenditure’ but laid the groundwork for the requirement that they be reported as part of the federal budget process. That report, though initially resisted, was signed into law by President Richard Nixon in the Congressional Budget and Impoundment Control Act of 1974. The event that kickstarted this tax expenditure backlash was a revelation in a 1969 Congressional Hearing that 21 American millionaires paid… you guessed it… $0 in federal income taxes.
Forty years later, The $0 in Taxes Club has grown to 1470. The Bush Tax Cuts are one of the exclusive passes to membership.
In a short series of blog posts this week, we are going to take apart the top three Bush Tax handouts that benefit the rich. Today, we’ll dig into income tax breaks. Second, we’ll do capital gains rate cuts; then, we’ll tackle the estate tax. Finally, if you are wondering who wants to give the richest 2% more money, we’ll cover that too.
Tax expenditures are like a hammer. When applied to a nail, they can build something up. When applied to drywall, they can tear something down. Their use in the Bush Tax Cuts provides a few examples of both. The top four brackets of the Individual Income Tax were lowered between 3% and 4% and the lowest bracket was dropped 5% (and merged with a new 10% bracket). In other words, the lowering of rates applied to everyone who pays federal income taxes. Still, there are two key things to note:
1) Reductions by a percentage benefit those at the top the most. Paying 3% less on your $10,000,000 of taxable income is a way bigger benefit than a 3% reduction on your $10,000 of taxable income. (It’s a $299,700 difference.)
2) Middle class tax cuts benefit those at the top the most too. When you make enough to reach a higher tax bracket, the higher rate only applies to the first dollar in the new bracket, your 379,151st dollar but not the first $379,150. Those dollars are taxed at the rates of the lower brackets. (In fact, if you make between $200,000 and $300,000, the ‘middle class tax break’ in the Bush Tax Cuts will give you roughly $6743 per year. At the same time someone making between $20,000 and $30,000 will get $771.)
This was fiscal junk food in 2001 and 2003. In 2012, it’s a Twinkie laced with botulism.
We can no longer afford to lavish tax gifts on those who don’t need them. Asking everyone else to work harder and pay more in order to keep up tax perks for the rich is a road to fiscal and national ruin.
Think of it this way: if Medicare costs a dollar and we let the ultra-rich pay 4 cents less, who makes up the rest? Either the middle class pays in higher taxes or seniors pay in higher health care costs.
To take the argument a step farther: a targeted middle class cut would actually require two things: 1) the expiration of Bush Tax Cuts for those making over $250,000 and 2) the increase of the Individual Income Tax for the richest tax brackets. This is not only do-able. It’s been done before in a time very much like ours.
The income tax landed in the national debate in 1892 when the Populist Party (led by a Minnesotan, Ignatius Donnelly) demanded a graduated income tax as part of its national party platform. At that time, the top 9% of Americans owned 71% of the country’s wealth. In our own time, 2007, shortly before Occupy Wall Street demanded the rich pay their fair share, our level of wealth inequality was virtually identical: the top 10% had 70.5% of the wealth.
America in the 1890s was barely thirty years past the Civil War. It was starting to implement a new form of racial segregation, Jim Crow. Scores of indigenous Americans were being forcibly relocated or killed. Its financial institutions were untrustworthy and unstable. The Pullman Strike of 1894 was brewing. At that point in history America was a former British colony that was still ripping apart at the seams.
Then too the rich opposed the income tax. The New York Chamber of Commerce in an 1894 resolution requested its state’s Members of Congress “strenuously oppose all attempts to reimpose an income tax upon the people of this country” because it “…is purely class legislation, which is socialistic and vicious in its tendency, and contrary to the traditions and principles of republican government.” The income tax not only didn’t ruin America, America grew to be a world leader.
Clearly, we should strenuously oppose all attempts to preserve the Bush Tax Cuts for the rich. Likewise, we should stand up for a targeted middle class tax break. The richest Americans can and should pay the rates outlined in H.F. 1124, Rep. Jan Schakowsky’s bill to raise income tax rates on millionaires and billionaires exclusively.
It’s time to put down the fiscal junk food and start working together to rebuild our country. It’s time for those who have done well in America to do once again well by America.
Chris Conry is TakeAction Minnesota’s Economy Program Manager.