Archive for Monday, April 2, 2001

COMMENT AMERICANS SHOULD CONSIDER DEBT, INSTEAD OF TAX CUTS

April 2, 2001

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No, this famous financial newspaper has a soft spot for the national debt. Last week, its super-conservative opinion page published a piece headed, "Who's Afraid of the Big Bad Deficit?''

Coming hard on the heels of President Bush's proposed $1.6-trillion tax cut, that's not a good sign. Conservatives may not care if the tax cut overreaches, as long as it puts money in their pockets.

Back in the 1950s, when the United States and Russia were testing nuclear bombs in the open air, people started worrying about "fallout'' and what they were breathing in. Supporters of testing ran marketing campaigns that said (more or less): "Little black flecks in the air are good for you.''

I'm starting to get the feeling that deficits are today's little black flecks.

For me, here's the biggest argument for using the tax surplus to reduce the debt: We'll need the money for Medicare and Social Security when the boomers retire.

I doubt that Americans will accept many cuts in benefits. Most likely, we'll borrow to preserve this vital safety net -- and the less debt the country has when borrowing begins, the better off we'll be.

An alternative is to raise future taxes -- and guess which tax? Probably the payroll tax, because it's supposed to support the cost of Social Security and Medicare hospitalization.

Payroll taxes are a far greater burden on the poor than on the rich.

How sad it would be, if we cut income taxes, then raised payroll taxes to keep the elderly going.

Here's how the tax bill tips:

l Tax brackets. The proposed, low 10 percent and 25 percent brackets don't help only the people at those income levels. They help everyone -- a fact that few taxpayers understand.

To the IRS, your income looks like a layer cake. The bottom layer isn't taxed at all. The next layer up is taxed in the lowest bracket -- say, 10 percent. The layer above that is taxed in the next highest bracket -- say, 25 percent. And so on, all the way up.

Even the rich have part of their income taxed in these lower brackets.

So they get the plebian tax cuts as well as a cut in the top bracket (to 33 percent, down from 39.6 percent today).

l Capital gains. Did you know that the tax on capital gains has already dropped this year, on assets you will hold for more than five years?

The capital-gains rate falls to 8 percent for investors in the lowest bracket, down from 10 percent last year. Investors in the higher brackets pay 18 percent, down from 20 percent last year.

How you figure the five-year holding period is complicated, but I'll leave that to you. Most taxpayers won't have to worry about it much. Filers with taxable incomes of $200,000 or more report 70 percent of all capital gains.

l Child credit. Bush doubles this credit to $1,000 from $500 and extends it to higher-income people. It would go to couples earning up to $200,000, an increase from $115,000 today.

But he doesn't extend the credit down. Low-income parents who pay only Social Security taxes (or minimal income taxes) get little or nothing.

These would be people whose incomes fall in the bottom 40 percent -- up to $13,600 for singles and $24,400 for couples, Citizens for Tax Justice says.

(It surprises many people to learn that such a large portion of Americans makes so little. Note that we're not counting teen-age babysitters here -- they usually don't owe a tax.)

l Payroll taxes. When Bush says that "everyone benefits'' from his tax cut, he isn't counting low to moderate earners. For them, the burden is Social Security taxes, which are not cut. A single mother of two, earning $22,000, gets no new tax break at all, says Al Davis, a Democrat on the staff of the House Ways and Means Committee.

l New charitable deductions. Bush proposes a parcel of them: for corporations, for donations from IRAs, for people who take the standard deduction. By this, he's hoping to make up for the expected decline in charitable giving if the estate tax is repealed.

Ironically, charitable giving is one of the lovelier loopholes for petty tax evaders. Unless the IRS requires universal 1099s, how will it know whether you've really donated the $500 you claimed? Oh well.

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