Going after the rich: a lobbying frenzy looms as Washington debates taxing the wealthy

Going after the rich: a lobbying frenzy looms as Washington debates taxing the wealthy

Susan Dentzer

You know the saying The rich get richer’? Well, Mr. Bush wants to make it a law,” Massachusetts Governor Michael Dukakis taunted during his race for President in 1988. But times change, and last week Dukakis was busy explaining why the Bush administration’s new plan to soak the rich was actually a terrible idea. At a National Governors Association convention in Mobile, Ala., Dukakis joined his fellow governors in denouncing a White House proposal to limit federal deductions of state and local income taxes for the wealthy. Such a step could devastate not only the state dubbed Taxachusetts” but also other high-tax states like New York-creating pressure to slash their own taxes even as they face massive budget woes and regional recessions. “It’s the dumbest idea that’s come down the pike in about 10 years,” Dukakis griped.

The episode was the latest round of political volleyball in the long summer struggle to slash the federal budge deficit. As expected, members of Congress prepared to head home for their August recess with no deal in sight-and with Republicans blaming Democrats for causing the stalemate in negotiations. Now the stage is set for a breathless game of Beat the Budget Clock when Congress returns in September. The deficit for fiscal 1991, which begins October 1, is projected to rise to more than $230 billion; negotiators must agree on ways to narrow the gap before automatic budget cuts take effect as of October 15. But the dispute over taxing the rich now threatens a repeat of the lobbying frenzy that accompanied the sweeping Tax Reform Act of 1986. Moreover, conflict in the Persian Gulf and rising oil prices could tip the economy into recession, making Washington’s professed goal of achieving $50 billion in spending cuts and tax hikes more elusive than ever.

As the White House’s proposal suggests, the notion of employing Robin Hood tactics to cut the deficit has gathered momentum-leading lawmakers to consider everything from raising the top income-tax rate to enacting luxury” taxes on furs and pricey cars. Higher levies might be justified. The rich prospered during the 1980s, as the federal tax system became decidedly less progressive (see chart). Payroll taxes to fund Social Security and medicare rose sharply, and since such taxes are levied on wage income only up to about $50,000, these hikes inflict the most pain on people near the bottom and middle of the income scale. Meanwhile, cuts in federal income-tax rates more than offset the impact of higher payroll taxes for the top 20 percent of households. And the top I percent, with incomes of about $200,000 or more, fared best of all; as a percentage of income, their tax bills fell more than those of other taxpayers.

Some liberal analysts contend that almost all tax hikes should now be aimed at the wealthy. “You shouldn’t raise taxes on the middle class, whose tax burden was going up as the deficit was rising,” argues Robert Shapiro, vice president for economics at the Washington -based Progressive Policy Institute. But it’s more likely that new taxes on the rich would accompany levies aimed at the broad middle class. That could help blunt the pain of raising excise taxes on gasoline, liquor and cigarettestax hikes that could gobble up I percent to 2 percent of income for the poor and the middle class. The public is al aware that the budget crunch stems partly from the costs of the S&L cleanup. By spreading the burden, some lawmakers think they could soften voters’ wrath at paying a sort of “S&L fat-catbailout tax of 1990.”

But just how to hike taxes on the rich? Many Democrats had been toying with creating a new top tax rate, perhaps by extending the bubble”-a legacy of the 1986 tax reform that produced a 33 percent marginal tax rate (the rate on additional dollars of income) for many moderate-to-higb-income taxpayers, but a lower 28 percent top tax rate for the richest. The bubble was baldly designed to rake in revenue by phasing out the benefits of key features of the tax code for the better-off. Some economists contend hat this higher marginal rate hasn’t really hurt taxpayers, since nobody’s total federal income tax exceeds 28 percent of earnings. But many lawmakers viewed it as a symbol of tax inequities that had to be axed.

Raw deal. Contemplating a package likely to have more moving parts than a centipede, many Democrats also viewed a new top bracket as the quid pro quo for going along with President Bush’s proposed capital-gains-tax cut. Republicans also were warming to a deal-but now many on both sides appear to have concluded it would be a bad bargain. Top Democrats soured because a capitalgains-tax cut could pump nearly $13 billion into the pockets of those earning $100,000 and up, overwhelming the effect of a rise in the top rate. Furious that Democrats have declined to submit formal budget proposals, the GOP now says it will take the case for capital-gains-tax breaks to voters. “The American people understand the positive economic impact of capital-gains-tax cuts and the negative impact of raising marginal rates,” says Representative Richard Armey (R-Tex.).

The White House’s up-the-middle alternative-limiting state and local income-tax deductions to a maximum of 10,000-was leaked two weeks ago, apparently to break the impasse. A similar proposal was floated during the debate over tax reform, and its resurrection carries political overtones. The plan would mainly affect taxpayers earning more than $100,000 in high-tax Northern and Midwestern states dominated by Democrats with the exception of New Hampshire which has no state income tax and is the home of White House Chief of Staff John Sununu. Yet state officials across the country have thunderingly denounced the plan. Over half the states have had to raise taxes this year, in part because the federal government has cut back assistance or required states to spend more on programs like medicaid. The ability to deduct state and local income taxes from federal returns is a pressure valve that eases the pain on taxpayers when these taxes rise. Capping the deduction would “erode the ability of the states .. to finance the goods and services they have to provide,” argues Republican Governor Carroll Campbell of South Carolina.

Some political strategists suspect the White House of using an old negotiating ploy: Introducing a proposal so noxious that other dreadful options look good by comparison. By that logic, proposals to limit other deductions for the well-off could come to the fore. One alternative could be clamping down on home-mortgage-interest deductions. Taxpayers can now deduct interest on up to $1 million of debt used to acquire or improve a home, but that sum could be lowered to 500,000 or $250,000. Alternatively, says Joseph Minarik, executive director of Congress’s Joint Economic Committee, such deductions could be turned into fixed tax creditssay, 15 cents for every dollar of mortgage interest paid. That would not only cut the size of the tax break for high income earners but also equalize its value to taxpayers at all income levels.

Tolletries tax? Given today’s depressed housing markets, home builders and real-estate lobbies would doubtless descend on Congress in protest with the celerity of bats from hell. And other options for taxing the wealthy could prove no less controversial. Federal sales taxes on furs, jewelry and “toilet preparations in place until the 1960s, might be salable again in the sober 90s, unless retailers shot them down as well. Even raising the so-called alternative minimum tax, which limits the use of certain tax breaks to reduce taxpayers’ liability, would find detractors. Hiking it could hurt everything from oil drilling to charities dependent on property donations.

The battles ahead are dimming hopes that the target of $50 billion in deficit reduction will be fully achieved. The invasion of Kuwait by Iraq clouds the picture still further; if the U.S. economy is indeed heading south, lawmakers will somehow have to craft a budget that cuts spending and raises taxes without making matters worse. Whatever happens, “September is going to be an ugly month,” says Stanley Collender, a budget expert at Price Waterhouse. And plans to soak the rich, like deep cuts in the deficit, might go right down the drain.

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