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MARIN COUNTY'S NEWS MONTHLY - FREE PRESS
(415)868-1600 - (415)868-0502(fax) - P.O. Box 31, Bolinas, CA, 94924

July, 2006

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Tax Facts: Nation Left Vulnerable With Tax Cuts
By Karen Nakamura

Both sides of the political spectrum are making an issue of the tax burden carried by the middle class as compared to the upper class. National races are hammering away on the theme. So are Phil Angelides and Arnold Schwarzenegger in the California Governor's race. Republicans oppose any tax increase, insisting it'll hurt the little guy. Democrats say the rich are getting tax breaks to the detriment of the little guy and the country needs to adjust rates accordingly. What's really happening?
According to the United States Department of Treasury, (ustreas.gov/taxes/history), over 22 years from 1964 to 1986, the top individual tax rate was reduced from 91% to 28%. The rate was reduced from 91% to 50% in the 1970s. Fiscal conservatives claimed the 50% wasn't far enough and made it a Republican issue. As a result, the business friendly Reagan administration introduced the Tax Reform Act of 1986 bringing the "top statutory tax" rate down from 50% to 28%. Corporate tax rates were reduced from 50% to 35%.

Other provisions had far reaching effects including the Alternative Minimum Tax, bane of the middle-class. Provisions were blamed for a downturn in real estate and a significant role in the Savings and Loan scandal. Neil Bush, George W's brother, was a prime player.

In 1990, with Reagan era deficits looming, Congress increased the top individual rate from 28% to 31%, the No New Taxes snafu of Bush Sr. A second tax increase was enacted under Clinton in 1993 when the rate was raised to 36% with a 10% surcharge added. That brought the "effective top tax rate" to 39.6 percent." Voted along strictly partisan lines, this increase (and the internet explosion) enabled much of the economic boom of the '90s. Added to that stimulant, in 1997, the Taxpayer Relief Act provided the Per Child Tax Credit, giving a much-needed refund to many low-income families.

However, when the Republicans took over Congress, they passed Bush's Economic Growth and Tax Relief and Reconciliation Act of 2001, which lowered top tax rates for individuals. Treasury says, "These rates are to be phased in╔ ultimately, the top tax rate will fall from 39.6% to 33 percent."

Few would disagree with reducing taxes rates from 91% to 50%, maybe 39.6%, and perhaps even 33 percent. But these rates don't reflect the perks that come with deferred payments, tax write-offs and other deductions that accountants and tax lawyers afford.

Doctors William G. Gale and Peter R. Orszag declared in assessing the Bush tax policy that the magnitude of changes needed to fund tax cuts in 2014 could include a 48% reduction in Social Security benefits; elimination of the federal component of Medicaid; an 80% reduction in domestic discretionary spending; a 37% increase in payroll taxes; or a 124% increase in corporate income taxes.

This last estimate is particularly important.

According to the US Treasury, "The 1986 Tax Reform Act was roughly revenue neutral, it was not intended to raise or lower taxes, but it shifted some of the tax burden from individuals to businesses." What this trend did was cause consumer prices to rise as extra costs were passed on to the customer. The Treasury enlightens us further. "Though called an income tax, the Federal tax system had ╔actually been a hybrid income and consumption tax."

This modest declaration bodes ill for the middle and lower classes. Consumption taxes, favored by the wealthy to make up for revenue lost by tax reductions, increase the tax burden on the poor disproportionately. A 7% sales tax is a greater percent of income to someone making $20,000 a year than to someone making $2,000,000.

The Bush 2001 tax cut resumed the trend towards a consumption tax policy. The Treasury comments: "Another feature of the 2001 tax cut╔ particularly noteworthy is that it put the estate, gift, and generation-skipping taxes on course for eventual repeal, which is also another step toward a consumption tax."

In a paper published by the Center On Budget And Policy Priorities, Isaac Shapiro and Joel Friedman write the tax-cut costs could reach $3.9 trillion by 2014. As important is the increased interest payments on the debt from 2005-2014, growing until in 2014 they could equal $218 billion. "This amount alone is as large a share of the economy as the government now spends on all programs and activities under the Departments of Education, Homeland Security, Interior, Justice, and State combined."

David Sirota said in "In Their Times", Oct. 4, 2005, "The President has repeatedly invoked the benefits of his tax cuts to provide [for] small businesses. Yet, according to Treasury Department data, the╔ reduction benefits only two percent of small business owners╔ Ninety-eight percent of small business owners are not in the top tax bracket. ╔Many more such individuals receive the Earned Income Tax Credit for lower-income working families than are in the top bracket."

Sirota brought it down to the local level when he explained problems leading to the levee failure in New Orleans.

"In the same budget that provided more than a trillion dollars in tax cuts, Bush proposed providing only half of what his own administration officials said was necessary to sustain the critical levee system╔" Less than two weeks after Bush signed his tax cut on June 7, the New Orleans Times-Picayune reported that "despite warnings that it could slow emergency response to future flood and hurricane victims, House Republicans stripped $389 million in disaster relief money from the budget."

Sirota conrinues. "The administration provided just $5 million╔to critical hurricane protection levees in New Orleans -- one-fifth of what╔ experts and Republican elected officials in Louisiana told the administration was needed╔ Year after year, the Bush administration insisted on massive tax cuts for the wealthy. And year after year, the White House refused to provide the funding╔ needed to strengthen levees╔ and get federal emergency response ready for an onslaught from Mother Nature. America's budget surplus, built in the '90s to serve as a rainy day fund, was robbed to provide more and more giveaways to the rich. When the rainiest day of them all came, our country was left totally -- and unnecessarily -- vulnerable."

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