Class War by Tax Law


May 23, 1991|By TRB

WASHINGTON — Washington. -- Having jilted Sen. Daniel Patrick Moynihan's idea for a Social Security tax cut, Democrats have a new chance to get on the right side of the tax issue with a proposal from Rep. Tom Downey and Sen. Al Gore. The ''Working Family Tax Relief Act'' (or the ''Family Security and Tax Relief Act''? Mr. Gore's press release has it both ways), it would replace the personal income-tax exemption for children, currently $2,300, with an $800 tax credit per child.

Unlike an exemption, which is worth more to people in higher brackets, a dollar-for-dollar tax credit is worth the same to everyone.

Mr. Gore and Mr. Downey also propose to help the working poor by making their children's credit partially refundable for those who pay little or no income tax, and by expanding the already existing earned-income tax credit.

This would be paid for by adding a new top bracket of 35 percent, starting at around $140,000 a year, and a surcharge that works to raise the top rate to 39 percent on incomes greater than $250,000. Overall, 134 million people would get tax cuts and 15 million would get increases. Income taxes on a family of four making $35,000 to $50,000 -- middle America -- would drop about 8 percent.

There are already rumblings from Republicans about ''class warfare'' and the ''politics of envy.'' Why is it not class warfare when Republican administrations shift the tax burden onto the poor and middle class, while it is class warfare when Democrats -- finally -- point this out and try to rectify it?

The single most misleading statistic around is that affluent people -- say, the top 10 percent -- pay a bigger share of total taxes than 15 years ago. It's true. But that's because they have a bigger share of total income. As a fraction of their own income -- which is what counts -- their taxes have gone down; others' have gone up.

It is very sweet for Republicans to deplore the ''divisiveness'' of an appeal to class interests, but they have used vicious us-versus-them politics successfully in every recent national campaign. Their attacks have been along cultural rather than financial lines, aimed at a largely fictional elite of flag-burning, pornography-loving, prayer-hating, inside-the-Beltway Harvard liberals.

Compared to that, it seems fairly benign for Democrats to assert the class interests of people making less than $140,000 a year.

Nevertheless, Messrs. Gore and Downey deserve credit for guts. Especially Mr. Gore, who is risking his reputation for caution and moderation. The main advantage of their tax-cut proposal is that Gore-Downey would pay for itself.

The objection from the right will of course be that higher taxes will destroy incentives, kill the goose that lays the golden egg and so on. Keep in mind that every dollar taken from somebody in higher taxes is saved by someone else in lower taxes. It's true -- and a legitimate criticism -- that the hit on the rich takes the form of higher tax rates while the saving for others does not take the form of lower rates.

Supply-side theology holds that what affects incentives is the tax rate on the next dollar you might earn, rather than your average tax burden. It would be easy to design a progressive tax shift of equal size by closing loopholes for the rich, without affecting their marginal rates, while lowering marginal rates for the working poor and middle class. But I doubt the opposition to such a plan would be much less.

The effective top income-tax rate today is already about 35 percent for people making between $140,000 and $190,000, thanks to some complicated deduction phase-out formulas enacted last year, which Gore-Downey would abolish. So the opponents of Gore-Downey will essentially be defending the pocketbooks of people making more than $190,000 a year.

The Republican tax bills of the Reagan era managed to disguise a tax shift from the rich to everyone else as a tax cut for everybody. The genius of the Gore-Downey proposal, if it is played right, is that it strips bare these mechanics and gives people an honest choice. Is the majority willing to pay more so that the rich can pay less?

There is a serious intellectual argument that the rich are the particular engines of prosperity in the economy and that therefore the lesser classes should be pleased to reduce the tax burden on the rich -- even if that means paying more taxes themselves. Conservative writers who are not running for office make this argument all the time. I would love to hear a Republican politician make it.

TRB wrote this commentary for The New Republic.

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