Wall Street Journal: August 5, 2004
CAPITAL By DAVID WESSEL
Bush, Kerry Are Far Apart on How Raising Taxes on 'Rich' Pans Out
August 5, 2004; Page A2
Campaigning last weekend, President Bush offered this attack on opponent
John Kerry: "He said he's only going to raise the tax on the so-called
rich," the president said in Canton, Ohio. "But you know how the rich
is: They've got accountants. That means you pay. That means your small
business pays. It means the farmers and ranchers pay."
That's what he said. (I checked the White House transcript, which gets
points for faithfully recording the president's unique grammar.) What
did he mean?
"He's only going to raise the tax on the so-called rich."
True. The candidates differ sharply on how heavily to tax Americans with
incomes above $200,000 a year. President Bush wants a top marginal tax
rate of 35%. The Democratic Mr. Kerry would boost rates to 39.6% and
undo Mr. Bush's tax breaks for dividends and capital gains for those
folks, too. He'd use the money to expand access to health insurance and
to subsidize employer-provided coverage.
"You know how the rich is: They've got accountants. That means you pay."
Is the president courting votes from cynics who say the rich avoid
taxes and the rest of us pay? Claire Buchan, a White House spokeswoman,
explains: "The president is noting that the so-called wealthy have
the resources to hire accountants to find ways to reduce their tax
bills...."
Quips Jason Furman, a Kerry economist: "If the most fortunate weren't
paying taxes in the first place, why did they need the Bush tax cut?"
Seriously, rich folks do find ways to shrink tax bills and alter their
behavior after big changes in U.S. tax laws, such as the 1986 law that
cut the top rate to 28% from 50%. "If someone has been contributing
money to a deferred-compensation plan and tax rates come down to 28%
after decades of being at 50%, it's a good time to take money out," says
Massachusetts Institute of Technology economist James Poterba.
Higher tax rates prod the rich to search harder for tax shelters and
other tax dodges. The latest academic work suggests that lifting the top
tax rate to 39.6% from today's 35% (which works out to a 7% decrease in
such taxpayers' take-home pay at the margin) would reduce taxable income
in that bracket by about 4%.
Overall, though, the government still is likely to come out ahead, as
the gush of tax revenues after the 1993 tax increases suggests. "In the
last decade, the top rate was as high as 39.6%, and we know at that rate
you can collect quite a bit of revenue," says Joel Slemrod, a University
of Michigan economist.
"That means your small business pays. It means the farmers and ranchers
pay."
The president, Ms. Buchan explains, means that "the so-called wealthy"
can afford to hire accountants but "small businesses, farmers and
ranchers who are organized as Subchapter S companies don't have those
resources, but would nonetheless be subject to the tax increases."
Yes, Subchapter S companies pay taxes on profits at individual income
tax rates. But the bulk of small businesses, farmers and ranchers
don't make enough to fall into top brackets. They won't pay more under
Mr. Kerry's plan. And I've never understood the case for taxing a
farmer, rancher or small-business owner who clears $500,000 differently
than a corporate executive, lawyer or ballplayer who earns $500,000.
There is a conservative case that the economy does better with smaller
government, but it is hard for Mr. Bush to make. "If you want the
efficiency of smaller government, you have to have smaller expenditures
and smaller taxes at the same time," says Urban Institute economist
Eugene Steuerle, a Reagan tax official. By cutting taxes now, but not
cutting spending, Mr. Bush is guaranteeing tax increases in the future,
Mr. Steuerle argues.
The prospect of such tax increases, no matter who wins, makes it worth
listening to rhetoric about the Alternative Minimum Tax. Created in
1970 to make sure the richest taxpayers don't get so many tax breaks
that they avoid taxes altogether, it is encroaching on the upper-middle
class. It doesn't sound bad -- a 26% or 28% rate -- but the taxpayers
affected don't get the full benefit of the personal exemption, deduction
for state and local income taxes or miscellaneous deductions. Without
changes, the AMT will be bigger than the regular income tax before the
end of the decade.
Some savvy tax lobbyists speculate that the need to "fix the AMT" (which
both candidates vow to do) could force big changes to the U.S. tax
code in the next few years. Some Republicans suggest quietly that the
structure of the AMT -- fewer deductions and credits so a broader base
of income is taxed, but at a rate lower than would otherwise be the case
-- is substantially more appealing than raising tax rates.
Your thoughts? Write to [EMAIL PROTECTED] Online subscribers can see Q&A
Tuesday at WSJ.com/CapitalExchange4.
URL for this article:
http://online.wsj.com/article/0,,SB109165532423583152,00.html
_______________________________________________
http://www.mccmedia.com/mailman/listinfo/brin-l
