On taxes...don't be fooled
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|Sat, 10-09-2004 - 2:06pm|
By CHARLES W. KADLEC
t's common for leaders of the Democratic Party to claim that Republican tax cut proposals "favor the rich," but this shows a lack of understanding of the true consequences of today's high tax rates. When Republican leaders fail to challenge this claim, they implicitly endorse the assumption that high-income individuals currently bear the entire burden of high tax rates.
Common sense and experience tell us the reverse.
Much of the burden of today's high tax rates falls on individuals with middle and low incomes, and, arguably, these rates have contributed to the increased disparity between rich and poor that has occurred under the Clinton administration.
Remember the luxury tax, passed by Congress in 1990 and aimed at the rich who could afford expensive jewelry, furs, automobiles and boats? It was repealed three years later because those hurt worst by the tax were thousands of low- and middle-income workers who lost their jobs as the luxury goods and recreational boating industries suffered a severe recession.
The same phenomenon is occurring now with the tobacco industry, which agreed to pay the states $246 billion over the next two decades to settle lawsuits by the states' attorneys general seeking to recover health care costs. The tobacco industry is not paying for this settlement. The cost has been shifted to smokers, who are paying higher prices for their cigarettes so that the industry can protect its profits while paying the states and lawyers. Not everyone may care that smokers are paying more, but the point is that the tobacco companies simply shifted the burden of the settlement to their customers.
Another shift occurred in 1993, when the Clinton administration increased the top personal income tax rate by 20 percent. The administration promised that the new 39.6 percent rate would affect only those with the highest incomes.
But is that really true? After taxes went up, I noticed that the fees my dentist charged also went up about 20 percent. He wrote the check to the I.R.S., but his customers got the bill.
My dentist was not alone. That year, the income of the top 5 percent of households jumped an average of 20 percent, according to data from the Statistical Abstract of the United States.
By contrast, the income of the middle 20 percent fell 1 percent that year.
Fortunately, Americans understand that high taxes jeopardize their financial security.
For example, polls show that some 60 percent of people support repeal of the inheritance tax, even though it supposedly only affects the richest 2 percent of all Americans. They may not be able to articulate why the death tax is bad, but they instinctively grasp its true cost.
With effective tax rates rising above 80 percent, the death tax discourages savings and investment, encourages the squandering of assets and allows the government to take most of whatever is left. It silently steals from our communities the investment necessary to build wealth and create jobs.
Middle-class Americans also intuitively understand that high tax rates on personal income are a barrier to prosperity. For example, an average two-income couple in the 31 percent tax bracket must also pay 12.4 percent in Social Security taxes and 2.9 percent in Medicare taxes on each of the two incomes. Add in state and local income taxes, and the marginal tax rate could easily exceed 50 percent.
That means a $30,000 college tuition really costs $60,000. And to put away an extra $250,000 toward retirement, a couple would have to earn $500,000. What's fair about that?
Today's high tax rates also hurt those lower on the economic totem pole. Let's say that someone in the highest tax bracket wants to renovate his house, and pay a contractor $20,000.
Assuming the contractor is in the 31 percent bracket, he would take home only about $10,000 after income and other taxes are taken out. B ut the high-income family has to pay much more than $20,000. The wage earner must earn $40,000 to afford the $20,000, because he must first pay federal income taxes, Medicare taxes and state and local taxes. So high rates suppress economic activity by depressing both what the family can spend and what the contractor can earn.
Talking about tax cuts in terms of their impact on the "rich" versus the "middle class" only supports the misperception that the wealthy pay the brunt of high tax rates.
The reality is that the middle class also pays.
The political establishment would be well-advised to listen to the wisdom of the people and lead them where they want to go, to a land of zero death taxes and lower overall rates.
Charles W. Kadlec is managing director of J&W Seligman Company, an investment management firm, and author of ``Dow 100,000: Fact or Fiction.''