Tax Cuts and Economic Justice

The common wisdom in politics is that a candidate for office never lost an election by promising a tax cut. Nonetheless, if progressive candidates can resist the lure of big campaign contributions, the 2000 elections may provide a challenge to this wisdom. A recent Wall Street Journal poll indicates that a majority of the public disdains large tax cuts and prefers that future surpluses be devoted to such causes as education and health care.

This skepticism about tax cuts is a welcome change in our politics. These proposed reductions would exacerbate social disparities while failing to deliver any long term benefit to the overall economy.

Over the last quarter century, the distribution of wealth has become stunningly more unequal. According to estimates by economist Edward N. Wolff of New York University, in the 1980s the number of millionaires rose modestly from about 2.8 million to 3.2 million, By 1998 that number had jumped a quarter to 4 million. Forbes magazine is predicting that its next list of the 400 richest Americans will include 250 billionaires, well above the 60 on last year's list. By Wolff's estimate, wealth became dramatically more unequal in the 1980s and slightly more so in the 1990s.

Those at the top of our income pyramid have already benefited from nearly a quarter century of tax cuts targeted primarily at them. Thomas Oliphant reports in a recent editorial in the Boston Globe that: "for the top 1 percent of households, the average tax cut received since '77 was worth $40,000-plus. That is nine grand above the entire, after-tax income for the average household in the middle-fifth of the spectrum today. During 1999, in other words, the widened income disparity is such that the best-off 1 percent will have as much after-tax income as the bottom 38 percent combined; that 2.7 million people will have the same combined income as 100 million people. The mere rise in income at the top will exceed the total income of the bottom 20 percent."

Republican proposals to reduce capital gains and estate taxation would especially benefit the very rich and add more momentum to these trends. Citizens for Tax Justice reports that the plan approved by the House would give 45 percent of its benefits to the wealthiest one percent of taxpayers.

Under current estate tax law, a wealthy couple may already leave 1.2 million dollars to children and in addition give those children $20,000 each annually -- all tax free. Only about ten percent of American families can even come close to such numbers. These limits seem generous enough to allow parents to provide for the reasonable needs of their children.

The currently proposed tax cuts are not only unjust. There is no evidence to suggest that they would make this economy more productive or yield any substantial benefits for the rest of us. I am not familiar with any studies of the incentive effects of estate taxation. I am confident that thorough study of this matter would, as Andrew Carnegie once argued, yield a radical conclusion. Vast inheritances do more to erode the work ethic among children of the wealthy than estate taxation does to quash the entrepreneurial incentives of their parents.

Family businesses can of course be affected by estate taxes. Nonetheless, ownership free and clear of a several hundred thousand dollar stake in such enterprises -- clearly possible under current federal law -- enables heirs to borrow the funds necessary to continue successful operation -- if they have the skill and desire. Without fair estate taxation, equal opportunity for other potential business leaders would become a mere legal fictions.

The "supply side" case for capital gains tax reduction is equally weak. Slashing capital gains taxes may encourage stock market participation. Nonetheless, most of this activity involves purchase of existing shares. Current shareholders benefit, but no new money is made available for modernizing plant and equipment. New York-based economist Doug Henwood reports in his recent book, Wall Street, that since 1952 corporations have funded 95 percent of their expansions internally, primarily through retained profits.

Reductions in the capital gains tax will trigger an even more speculative stock market The escalation in stock prices already encourages among mutual fund and corporate managers alike an obsession with short term profits. Mergers and stock buy backs, which do little for long run productivity, have become the game of choice.

Not surprisingly, the near decade long "boom" has produced remarkably feeble gains in worker wages, net corporate investment, and worker productivity. Henwood has recently compared this upswing with the ten previous expansions of the post World War II era. He concludes that despite its length, the current boom is "mediocre at best." Further tax changes along the lines currently proposed will only fuel the worst excesses of the last two decades.

If we are serious about tax and policy reforms that might encourage a more productive and entrepreneurial economy, better tax support for secondary and vocational education would be a good place to start. Education is just one area where our obsession with cutting taxes erodes both economic justice and undermines the long term productivity of our economy. The General Accounting Office estimates that US schools need over 100 billion dollars in basic repair and maintenance just to reach minimum standards, and the needs are greatest in poorer communities. Without at least adequate and more equal funding of public education, equality of opportunity becomes little more than a pious hope.

More broadly, state and federal largesse in the forms of contracts, research grants, and tax abatements should be confined to corporations that pursue the best labor practices, including fair wages and a broader worker voice in financial and product planning. These firms have a track record of making the best use of both worker skills and available investment funds.

I don't expect such themes to receive much attention from this Congress. Absent such debate, the best progressives can hope for is that public disenchantment can counter the vast campaign contributions of those who stand to gain from these discriminatory tax proposals.

John Buell lives in Southwest Harbor, Maine and writes on labor and environmental issues. He is co-author, with Tom DeLuca, of Sustainable Democracy: Individuality and the Politics of the Environment (Sage). He invites comments via e mail at:

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