A Costly Tax Package That Benefits the Rich

The tax bills that the House and Senate approved at the end of last month are being sold as a modest tax cut of $85 billion over five years that primarily benefits the middle class. Such claims amount to deceptive advertising on two counts.

First, the tax bills are much more costly than their $85 billion price tag would lead people to believe. The bills have modest costs in the first few years, but then those costs explode. During the 10-year period from 2008 through 2017, these bills would drain $650 billion to $750 billion from the federal treasury.

This revenue hemorrhage would occur in the same years the baby boom generation begins to retire - causing Social Security and Medicare costs to mount rapidly - and budget deficits are expected to return with a vengeance. These exploding tax cuts would deepen the already serious budget problems we face in those years.

Second, these tax cuts are not primarily for the middle class. The tax bills are loaded with tax cuts for wealthy individuals that would be phased in slowly - but eventually would become very expensive. When the plans take full effect, two-thirds of the tax cuts would go to the 20 percent of the population with the highest incomes.

Budget problems galore

These two problems are intertwined. The tax bills explode in cost primarily because Congress used budget gimmicks to design three provisions heavily benefiting people with high incomes - cuts in capital gains and estate taxes and expanded Individual Retirement Accounts - so costs stay artificially low for the first five years. But after that, they mushroom.

There is little doubt who will benefit from the exploding tax cuts. The highest-income 5 percent of the population receives three-quarters of all capital gains income and would garner most of the benefits of the capital-gains tax reduction. And approximately 95 percent of the benefits of the IRA expansion would go to the top fifth of all taxpayers. Estate-tax reductions would benefit heirs of only the wealthiest 2 percent of people who die; estates of all others are exempt from this tax.

While the highest-income taxpayers would benefit handsomely from this tax package, millions of moderate-income families who work and owe federal taxes would receive no tax cut at all - not even from the $500 per child tax credit.

Because of the changes the House and Senate leadership made in recent weeks to shrink the child credit - so larger tax cuts for wealthy investors and large corporations could be included in the bills - millions of working families with incomes in the $15,000 per year to $25,000 per year range would receive no child tax credit.

While many of these families owe no income tax, they pay thousands of dollars each year in payroll taxes. The Contract With America promised them a child tax credit to help reduce these payroll tax bills. But these families would be denied the child credit under the House and Senate tax bills. Many starting police officers, firefighters, nurses, janitors, and others fall into this income range and would receive no tax cut, while wealthy individuals would reap tax-cut bonanzas.

Ways and Means Committee chairman Bill Archer recently claimed that the congressional tax plans provide the bulk of their benefits to the middle class. The tables on which Mr. Archer bases his claims, however, stop in 2002, even though the upper-income tax cuts in the bills mushroom after 2002. They do not reflect the extent to which the upper-income tax cuts dominate the tax package when the provisions are fully in effect.

Wealthy families favored

Analyses by the Treasury Department show that when fully implemented, the tax bills overwhelmingly favor high-income families.

Under both the House and Senate tax bills, the wealthiest 1 percent of the population would receive as much or more in tax cuts as the bottom 60 percent of the population combined. The richest 3 million people would get tax cuts as big as the 160 million Americans with the least incomes would have to share.

What should be done? Congressional leaders claim to be providing a middle-class tax cut. In addition, at President Clinton's behest, House Speaker Newt Gingrich and Senate majority leader Trent Lott signed a letter as part of the budget agreement that promised their tax cuts would not explode in cost in future years. The congressional leaders have not kept their part of the bargain. It is time, then, for the president to intervene.

Mr. Clinton has the power to hold congressional leaders to their words, and he should not hesitate to use his veto until he receives a bill that would meet the promised standards. The tax plan the president proposed on June 30 is evidence that the budget agreement can be implemented without including exploding tax cuts that disproportionately benefit wealthy individuals.

* Iris J. Lav is associate director of the Center on Budget and Policy Priorities in Washington and its senior tax policy analyst.