Tax Benefits for Rich Seen as Debate Focus

Underlying the debate as the House and Senate begin floor action on their tax bills today will be one fundamental issue: Are the tax cuts so skewed toward upper-income Americans that they will widen the gap between the rich and the poor?

The Treasury Department estimates that an overwhelming 68% of the benefits in the House bill and 65% in the Senate version would go to households whose income is in the top 20% nationally.

Two liberal groups, Citizens for Tax Justice and the Center on Budget and Policy Priorities, contend that when recent cutbacks in government social programs are included, the proportion of net benefits going to the richest 20% soars to 87%.

“In general, we believe that the benefits of the tax-cut package should be distributed equitably throughout the income levels,” Treasury Secretary Robert E. Rubin said in a letter to Senate Finance Committee Chairman William V. Roth Jr. (R-Del.).

Republicans, however, are unabashed. “This year, it’s time to put people who pay taxes first,” Rep. Bill Archer (R-Texas), chairman of the House Ways and Means Committee, told reporters. Said Sen. Phil Gramm (R-Texas): “This is a tax cut for taxpayers.”

There is little question that the bulk of the tax cuts in the bills would go to middle- and high-income families. The major provisions--tax credits for children and education, and particularly reductions in capital gains taxes and inheritance taxes--all but guarantee that.

But analysts are divided over just how unfairly the tax reductions are skewed--and, more basically, whether the one-sided distribution of benefits should be a matter of serious concern.

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Clint Stretch, a tax analyst for the accounting firm Deloitte & Touche, says the two biggest winners in the legislation are middle-class families with children and high-income taxpayers who have large capital gains--profits from the sale of stocks or other assets.

In a set of case-studies the firm has compiled, a married couple with two children and a household income of $35,000 a year would see its tax liability slashed by 40%--to $1,573 a year, down from $2,625 now. If one child were in college, the tax relief would rise to 78%.

Some analysts even question whether it is practical to try to fashion tax cuts that help low-income families--precisely because of Gramm’s point that the poor do not pay very high taxes in the first place and would not benefit much from tax relief.

William G. Gale, a tax expert at the nonpartisan Brookings Institution, points out that partly because of that reality, most federal efforts to aid the poor have been channeled through spending programs, such as Medicaid and food stamps, where it can be targeted directly.

But now Republicans have made spending increases off limits, Gale says. So the only vehicle left for affecting income distribution is the tax code.

Gale also questions the critics’ use of tables showing that such-and-such a percent of the tax reductions go to this-or-that income bracket. If most of the tax cuts would go to the nation’s richest 20%, this reflects the fact that Americans in this bracket also pay most of the taxes.

“The right way to look at this question is to ask what’s the average tax cut for a household in each of the various income brackets,” Gale contends. By that method, as Stretch found in his study, this year’s tax breaks would seem to favor middle-income Americans.

Just what difference all this makes in widening or narrowing the gap between rich and poor Americans is also a matter of debate.

Gene Steurele, a tax policy expert at the nonpartisan Urban Institute, cautions that while the bills would provide $85 billion in net tax reductions over the next five years, that is not enough to have much impact on the rich-poor gap.

Moreover, Steurele notes, the widening gap has resulted primarily from such demographic and technological factors as the increase in single-parent families and the increasing demands in high-technology industries. “It’s not clear that government policy does much to affect that,” he says.

Finally, while reductions in capital gains and inheritance taxes may sound like a boon for the rich, Steurele says they mainly offset the impact on those taxes of the high inflation of the 1970s and 1980s.

“Over the long run, the same percentage of the people will be taxed 15 years from now as are being taxed now,” he says. In other words, in a broad sense, he says, the changes mandated by the tax bill do not amount to much.

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Even so, critics argue that the tax writers could have made a bigger effort to help lower-income families--possibly by raising the current earned-income tax credit, which provides cash payments to the working poor when they do not earn enough to benefit from a tax credit.

Peter J. Davis, a former congressional tax strategist who runs a consulting firm here, points out that lawmakers have already tightened eligibility for federal welfare payments and cut other social programs. “It does matter,” he says of the tax bill’s skewed makeup.

Moreover, the Center on Budget and Policy Priorities’ Robert Greenstein points out that the figures being debated cover primarily the period from 1997 through 2007. Because many of the tax cuts would take effect only gradually, the skewing would be most pronounced in the later years.

In any case, there is likely to be no dearth of debate on the equity question as the two chambers begin formal consideration of the measures. Liberal Democrats in both houses are planning all-out assaults, and Republicans are wearing their defensive armor.

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Where the Breaks Are

Taxes owed under current law and the Senate Finance Committee bill by a married couple with two children, one in college and the other younger than 18. The impact of the House Ways and Means Committee bill would be similar.

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Tax under Household Tax under Finance Change from % change from income current law Committee bill current law current law $20,000 -$1,581* -$1,956* -$375 -24 35,000 2,625 573 -2,052 -78 50,000 4,035 1,960 -2,075 -51 75,000 8,266 6,086 -2,180 -26 100,000 14,076 13,336 -740 -5 200,000 40,289 39,809 -480 -1 1,000,000 305,991 303,591 -2,400 -1

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