Commentary | Budget, Taxes, and Public Investment

Tax Proposals good for Rich, Bad for Poor

Opinion pieces and speeches by EPI staff and associates. 


Tax Proposals Good For Rich, Bad For Poor

by Max Sawicky

If taxes are so complicated, why is Congress making them worse? It brings to mind the old Saturday Night Live skit by Billy Crystal and Christopher Guest. They played two goofballs who couldn’t resist doing horrible things to their bodies, then saying, “I hate when that happens.”

Taxes are pretty simple for most people, but things aren’t improving. The 1997 tax cuts significantly muddled the tax code. Now Congress is at it again with two particularly obfuscating measures, one pertaining to the affluent, the other to the working class. Both groups get a tax cut, but not without a price.

Under a bill passed in the House of Representatives, some low-income families with one or two children will enjoy the fruits of a refundable Child Tax Credit. Most families get a credit of $500 per child, but only to offset income tax liability. If they owe less in income tax than they receive in credits, they get the smaller amount as a credit.

But families with three or more children have access to something called the “Additional Child Credit.” This might provide a refund of their Child Tax Credits; it depends on the amount of payroll taxes they pay and the amount of Earned Income Tax Credit to which they’re entitled. See, it is complicated.

Now the House has voted to extend partial refundability of the Child Tax Credit to families with one or two children, affecting a couple of million families with incomes between $20,000 and $40,000. And in a token effort to reduce the “marriage penalty,” another provision of the bill expands the EITC for married couples.

There’s no reason to have an EITC, Child Tax Credit, dependent exemption, and Additional Child Credit. They’re all for families with children. Congress should consider integrating these provisions into a streamlined credit. If they want to cut taxes, they could simply give everyone a bigger credit.

The other group whose tax filing could become more onerous is upper income taxpayers. The House has voted to repeal the Federal Estate and Gift Tax. You might think this only makes things easier for taxpayers, but you’re wrong.

Repeal of the Estate Tax is being paired with a proposed increase in the income tax. Presently, if you hold financial assets that have appreciated, you’re liable for capital gains tax if you sell the assets at a profit.

Capital gains is one of the messiest areas of the income tax. There are different rates depending on when you buy stock, when you sell, your income, and so on. If you die without selling assets, there is no capital gains tax owed by those who inherit the assets. The only possible tax comes from the Estate and Gift Tax.

To offset the cost of repealing the tax, Congress is contemplating the extension of capital gains taxation to all who inherit financial assets, called a ‘carryover’ provision. Added to the burden of figuring out these taxes is obtaining the records Granny should have kept. Just when did she buy Consolidated Buggywhip, Inc.? At what price?

It’s interesting to note that ‘carryover’ will mean higher taxes for many people who would never be liable for any Estate and Gift Tax, a case of the rich benefitting at the expense of anyone who gets an inheritance of any size.

Maybe Congress won’t pass the carryover. But the elimination of the Estate and Gift Tax opens up myriad new opportunities for the rich to avoid paying income taxes while living.

They’d be subject to capital gains taxes if they sell assets, but there will be advisors figuring out how to perform the following trick: if a rich client gives an asset away, there is no tax, because gifts are no longer taxed. If the gift is returned, there’s still no tax, because gifts aren’t income.

Now, the asset can be sold at a profit, but the profit is not counted as income. Why? Because the asset was simply converted from one form — say, shares of stock — to another, cash. No income, no tax. No estate and gift tax, no tax on the transfer of wealth.

For the wealthy person, there’s no personal burden. Someone is hired to do the dirty work, and it’s financially worthwhile. The low-income taxpayer has less consolation: a smaller tax cut and a larger personal responsibility.

Congress used complexity as a subterfuge to avoid giving a sizeable tax cut to low-income folks. It also indulged complexity to aggrandize the rich.

I hate when that happens.

Max Sawicky is an economist at the Economic Policy Institute in Washington, D.C.