Consider two major elements in the tax-cut bill proposed last week by Rep. Bill Archer, head of the House Ways and Means Committee. Democrats are fighting the bill, which may never become law. But, let’s focus on just two elements: capital gains and the corporate alternative minimum tax. You’ll see that Archer is a tax haberdasher trying to bring skinny ties back into fashion, replacing fat ties, which had replaced skinny ties. If Archer has his way, capital gains’ tax advantage over salary income will grow enormously, and some very profitable big corporations may be able to pay no federal income tax. The landmark 1986 tax act, reversing previous fashion, made capital gains and salary income almost equal and put teeth in the corporate alternative minimum tax. The 1990 and 1998 tax bills restored some of cap gains’ advantage over salary, but Archer is going much farther.
Capital gains first. That’s money you make on capital assets like stocks or mutual funds or bonds or real estate other than your house. (Retirement plans don’t count as’ capital assets.) Most such gains flow to a relative handful of higher-income types, including me.
Today’s maximum tax rates are 28 percent on capital gains, 41.05 percent on salaries. The salary number is the top rate of 89.6 percent plus 1.45 percent for Medicare. Archer doesn’t propose to change the rate on salaries but would reduce the top gains rate to 20 percent.
What’s more, starting in the year 2001, Archer would index capital gains for inflation. If you bought $10,000 worth of stock, held it for five years and inflation ran 8 percent, your cost for tax purposes would be about $11,600, rather than the $10,000 you actually paid. Inflation pushes up salaries, too. But would paychecks get the same generous treatment? Nope. No inflation indexing.
Besides, do you remember the tax-shelter industry, a noxious weed in the 1970s and ’80s? The sheltermeisters transmuted ordinary income into capital gains. In the process, we got zillions of uneconomic buildings based on tax avoidance rather than business sense. The industry (and many of the properties) went blooey after the 1986 law passed. In my humble opinion, if Archer’s proposals become law, the tax trolls will return with a vengeance.
“If that were going to happen, it would already be in full swing,” argues Ari Flei-scher, a spokesman for the Ways and Means Committee, citing the already significant differential between the cap-gains and ordinary-income rates. But build an advantage as big as Archer’s and, believe me, the shelter dodges will come again.
Now to the corporate alternative minimum tax. This thing is so complicated it can drive even accountants to tears. Think of the savings if businesses didn’t have to deal with this tax, known as the AMT.
But let’s recall some history. The reason Congress enacted a corporate AMT with teeth is that some big, profitable companies used to pay no federal income tax at all. The public screamed. The poster boy was General Electric, which earned a total of $5.5 billion from 1981 through 1988 and didn’t pay a cent to the IRS. GE did this perfectly legally, partly by using temporary provisions put into the tax code to help money-losing companies by letting them sell tax deductions to moneymakers.
Archer, who wants to eliminate the AMT, bowed to pressure and now proposes only to eliminate depreciation from the AMT calculation. Look out. Loosen the AMT, and you can bet that financially aggressive companies like GE and Disney will cut their federal income taxes sharply, if not completely. Good for shareholders, but disastrously bad public policy. Companies get a chance to flourish because of the society we’ve built, and they should pay taxes to help support it. Fleischer argues that even with a weaker AMT, the likes of GE will pay income taxes because many of the old tax dodges are gone. But corporate-tax avoiders are an ingenious breed who can slip through the smallest loophole.
I don’t mean to sound completely negative about Archer’s plan, which has some good things, such as closing tax loopholes. And I’m no fan of the Democrats’ proposed tax-style changes, either. The point: when it comes to ties and taxes, newer fashions aren’t necessarily better.
Rep. Bill Archer’s new tax bill favors capital and corporations in ways that don’t help individual wage earners.
WHO WINS
Holders of Capital:
Top capital-gains tax rate would be reduced
After 2000, capital gains would be indexed for inflation.
Corporations:
Alternative minimum corporate tax would be loosened
WHO DOESN’T
Wage earners:
Top tax bracket remains 39.6% plus 1.45% for Medicare.
No indexing for wage increases for inflation.
Individuals:
No change in alternative minimum tax.
