Proposals on Taxation Favor Capital over Labor

The president’ s tax reform advisory panel presented to the Treasury some ideas for changing the tax code of the US yesterday. Everyone wants a simpler, fairer system, and everyone wants a smaller tax bill with more government services. While Americans are at it, they might want to wish for universal popularity, eternal youth and a pony. Once again, the White House is showing a preference for wealth-holders at the expense of income-earners.

The best example of this is the reduction on investment taxes. Under the current system, long-term capital gains and dividends are taxed at 15%. Of course, that is the lowest tax rate that the panel has proposed for income made by getting up in the morning and shoveling out stables, up from the current 10%. Moreover, the top tax rate for income earned by the sweat of one’s brow is 35%. That isn’t good enough for the Busheviks. They want to make 75% of capital gains made on domestic investments tax free and the other 25% comes in at one’s regular tax bracket. However, debt investors don’t make out as well as equity or real estate players; interest on everything but tax-free government debt is taxed at the individual rate.

Another pro-capital owner approach is the abolition of the alternative minimum tax. Now, the AMT started out as a way to make people with well-sheltered income pay something toward the operations of the Republic. However, thanks to growing nominal incomes, a great many regular folks are getting hit with this over and above their other tax liability. The advisory panel’s solution is to abolish the AMT, costing the Treasury $1.3 trillion over the next 10 years. Because the over-all package must be revenue-neutral as per Mr. Bush’s instructions, a huge number of middle class tax breaks will change (less attractive homeownership breaks, caps on employer provided health care, an end to deducting local and state taxes). It would have been far easier to simply index the AMT, but that would have meant continuing to tax the well-sheltered.

Moreover, the panel has proposed streamlining the IRA, 401(K), FSA, HSA alphabet soup to have a single Save for Retirement Account capped at $10,000 per year contribution per taxpayer, and a single Save for Family Account also capped at $10,000 annually for things like college and house purchases. While this streamlines the system, it puts a tax burden on those earning enough to put away more than $20,000 a year, while lifting it from those who already have a million or more. And savings plans are of no value at all to the poor – they don’t have income to save.

The American tax system is complex, convoluted and messy. But so long as the taxes fall unequally on income and wealth and so long as the tax code distinguishes capital gains from labor-based income, it will be impossible to fix the system. The only thing less practical would be to try taxing all non-Americans living outside the USA – which, while immensely popular among voters, would face enforcement problems.


© Copyright 2005 by The Kensington Review, J. Myhre, Editor. No part of this publication may be reproduced without written consent.
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