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Taxing times for the middle class

By ROBYN E. BLUMNER
Published April 24, 2005

Now that everyone has faced that dreaded yearly task of rendering unto Caesar, it is worth taking a look at who really pays taxes and, more importantly, who doesn't.

Republican leaders like to denounce any criticism of the Bush administration tax cuts as "class warfare" - a phrase that makes raising questions of tax fairness sound faintly communistic. But make no mistake, we are already in a class war. The rich declared it, and they are fighting it using scores of lobbyists, accountants, lawyers and politicians to whose campaigns they have contributed. Tax policy over the last 20 years has been moving steadily toward unburdening the very rich of taxes. But under George W. Bush they have succeeded beyond their wildest dreams.

Thanks to the unwillingness of the public and press to monitor the issue of taxes, this country taxes wage earners on a larger share of every dollar of income than those who generate wealth off investments. In addition, the nation's superrich enjoy myriad legal opportunities - cleverly invented by lawyers and accountants - to shelter income. And those who illegally hide income and assets confront a purposely hobbled IRS that no longer has the resources to go after cheats.

All this is chillingly laid out in Perfectly Legal, an illuminating book by David Cay Johnston, a Pulitzer Prize-winning reporter for the New York Times. He concludes that the tax system today "forces most Americans to subsidize the lifestyles of the very rich who enjoy the benefits of our democracy without paying their fair share of the price."

Bush's tax cuts on dividend income, capital gains and estate taxes haven't simplified the tax code as much as flattened it - stripping away much of the progressivity that had been part of our understanding of what constitutes fairness. Taxes on dividends and capital gains now stand at 15 percent (though, had it been left completely to Republicans, that rate would be zero), whereas income from the sweat of one's brow can be taxed up to 35 percent.

The top 1 percent of taxpayers - people who average about $1-million a year - own half the nation's assets. Half! Yet, they are the ones who have reaped extraordinary benefits under Bush.

According to Brian Roach, an economist at Tufts University, if the president's tax cuts are made permanent - as he and many Republicans in Congress seek to do - those in the upper middle class will pay a larger percentage of their income in taxes than millionaires.

By 2010, according to Johnston, the share of taxes paid by the bottom 95 percent of taxpayers will increase by 3.8 percent, and the burden for those in the top 5 percent of taxpayers will correspondingly fall, with almost all of the tax windfall going to the top 1 percent.

For many taxpayers in the middle, any tax cuts they have been enjoying will soon be reduced sharply. The Bush tax changes doubled the number of households that will confront the alternative minimum tax - to 35.6-million by 2010.

The alternative minimum tax was passed in 1969 to keep the rich from using deductions to avoid taxes, but now it is poised to swallow up families with incomes between $50,000 and $500,000. Eventually, if left unchecked, the alternative minimum tax will reduce or cancel the value of these families' exemptions and deductions.

But the superrich will be left relatively unscathed. According to Johnston, by 2010, those making more than $1-million will lose only 8 percent of their Bush tax cuts to the alternative minimum tax, whereas those making between $100,000 and $500,000 will lose more than 71 percent. Bush knew he was rigging the system to cushion those at the very top. He could have addressed the coming explosion of the alternative minimum tax, but he chose instead to offer a system that exacerbated it.

The class war has been lost. The idea that those Americans who have supremely flourished in this country should put something back has withered with the complicity of our government.

But this is a dangerous game. As the rich divest themselves of their tax burden and hoist it onto an already squeezed middle class, the long-term prospects for this country could teeter. A fair, progressive and fully enforced tax structure is vital for future economic growth and social stability. But this will come about only if the rest of us start fighting back.

[Last modified April 24, 2005, 01:03:20]