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Reviewing Federal and City Tax Cuts

by Glenn Pasanen, Sep 28, 2007
 

The large tax cuts in the city’s budget -- $1.6 billion in 2008, growing to an estimated $2.2 billion in 2011 – are part of a national tax-cutting movement that has flourished since 2001.

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What, though, is the impact of cutting taxes? And how do New York City’s efforts to cut taxes compare with the moves taken by the Bush administration at the national level?

The national and city cuts both have reduced tax bills, particularly for people with high incomes. Neither has sought to make the tax system much fairer for people at the lower end of the economic ladder. But President George W. Bush’s tax cutting springs at least partly from ideology while Mayor Michael Bloomberg has been more pragmatic, adjusting his tax policies to meet immediate fiscal realities. The president’s tax cuts have spawned large deficits, but Bloomberg, who by law must balance his budget, has seen large surpluses for much of his administration — at least until now.

A Sea of Red Ink

Several new studies on Bush’s 2001 and 2003 federal tax cuts find that the cuts have had a regressive impact, widening the gap between the rich and the rest of America.

According to the president, the tax cuts have spurred the economy. He has also said they put more money in the hands of individuals as opposed to government. To some extent, that is correct. The tax cuts cost the federal government about $300 billion in lost revenues in fiscal year 2007 alone, according to a July report by the Center on Budget and Policy Priorities. Because the federal government has had to borrow money to pay for those tax cuts, the reductions have contributed to the $3 trillion that Bush has added to the national debt since he became president in 2001.

As reported in a September 13 report by Citizens for Tax Justice, a research and advocacy group, the impact of the tax cuts and the size of the new debt is masked by the way in which Bush defines annual “deficits.” The president announced this summer that estimates of the 2007 budget deficit had dropped from $244 billion to $205 billion. That figure, though, included only the $205 billion borrowed from outside government to help balance the federal budget. It does not consider the additional $180 billion in Social Security funds Washington borrowed. Including that brings the actual deficit to $385 billion. The best one can say is that the projected $385 billion actual deficit in 2007 is lower than the deficits of more than $500 billion a year that the federal government ran in 2003, 2004 and 2005.

The result of this deficit spending is that the Congress has had to raise the national debt limit five times. The new limit will be $9.815 trillion, some $3.9 trillion more than it was when Bush took office.

Shifting the Tax Burden

In an April report, Citizens for Tax Justice noted that, contrary to popular opinion, the United States is one of the least taxed industrial countries in the world. Of 30 nations in the Organization for Economic Cooperation and Development, only two, South Korea and Mexico, have lower taxes. In 2005, total federal, state and local taxes in the U.S. were 25.8 percent of our economy, as measured by our gross domestic product (GDP, the market value of goods and services). The 27 countries with higher taxes ranged from Japan – with taxes at 26.4 percent of GDP – to Sweden at 51.1 percent.

Because of relatively high income and property tax rates, residents of New York State pay a greater percentage of their income in taxes than most other Americans. The federal state and local tax bill for an individual in the U.S. averaged $3,699 in 2005, according to figurescompiled by the Business Council of New York State. New York State residents, the council said, paid an average of $5,770.

The Citizens for Tax Justice report also shows that in the last 40 years there have been significant shifts in taxes, both as a percentage of the economy (measured by the GDP) and in individual taxes as a percentage of total taxes. Business taxes account for a much smaller percentage of total taxes today than in the 1960s. In 1965, U.S. corporate income taxes were 4.0 percent of our GDP. By 2004 they represented only 1.9 percent of GDP.

Personal income taxes are the main source of U.S. federal (and many state) tax revenues. In 2000, largely reflecting President Bill Clinton’s 1993 progressive (i.e., higher earners pay at a higher tax rate) new top rate of 39.6 percent, total personal income taxes in the nation (including state and local taxes) accounted for 41 percent of all taxes. After Bush and the Republican Congress dropped the top rate to 35 percent in 2001, personal income taxes as a percentage of all taxes declined to 34 percent by 2004. Since the bulk of personal income tax revenues comes from higher income households, this high-income households save much more money than lower-income ones.

At the same time working- and middle-class households are carrying a higher tax burden because of social insurance and payroll taxes like Social Security and Medicare. In 1965, these taxes were only 13 percent of all the nation’s taxes. Since 2002 they have totaled 27 percent of all taxes each year.

The 2003 capital gains and dividend income tax cuts have proved particularly regressive. The capital gains rate was cut from 20 percent to 15 percent. And the tax rate on dividend income, which had been treated as ordinary income at the time and so taxed up to 35 percent, was also cut to 15 percent.

It will come as no surprise that the very rich made out like, well, bandits. An August 10 Citizens for Tax Justice report shows that the cost in 2005 alone of the capital gains and dividend income cuts was $92 billion. Three quarters of the benefit went to less than 0.6 percent of all tax filers, providing those earning over $500,000 in 2005 with an average benefit of $81,204.

“Most amazing, the 13,776 tax filers with adjusted gross income in excess of $10 million – a mere 0.01 percent of all filers – received 28.2 percent of the total tax savings,” the report said. Their average tax break was almost $1.9 million.

A Center on Budget and Policy Priorities report issued in March 2007, asked, “Have the 2001 and 2003 tax cuts made the tax code more progressive?” No, it answered. The 2001 and 2003 tax cuts, the report said, “will increase the incomes of high-income households by a much larger percentage than the incomes of low- or middle income households.”

It calculated that if the tax cuts become permanent – they are currently scheduled to expire at the end of 2010 – by 2012, those earning over $1 million a year will see an increase of 7.5 percent in income, compared to only a 2.3 percent increase for middle-income households and an increase of just one half of one percent for the one fifth of households with the lowest income.

Conservative proponents of the tax cuts argue that the rich pay a higher share of taxes now than they did before the cuts. Yes, between 2000 and 2004 the share of personal income taxes paid by the top 1 percent of taxpayers went up slightly, from 36.5 percent of all personal income taxes paid to 36.7 percent. But total income tax revenues dropped by $250 billion between 2000 and 2004 because of the rate cuts, so the top 1 percent paid about $100 billion less than they would otherwise have paid at the higher rates in 2000.

Further, between 2000 and 2004, federal income tax rates dropped by 4.6 percentage points for the top 1 percent of taxpayers, 2.1 percentage points for those in the middle of the income scale, and by only 1.6 percentage points for those at the bottom.

New York City’s Tax Cuts

The Bush tax cuts clearly reflect a conservative, regressive-tax ideology. The recent New York City cuts are harder to characterize.

During his more than five years in office, Mayor Michael Bloomberg’s policies reflected no consistent position on taxation. Instead, he has variously adjusted the city’s tax system for pragmatic and political reasons.

The mayor determined in 2003 that the city needed $2 billion in new taxes to avoid a huge deficit, and he increased all the big taxes (except on corporate income): property, personal income and sales taxes. In 2007 he went the other way and cut taxes by $2 billion a year because he had the (one-year) surplus money to do it. At the same time, Bloomberg shows little interest in a progressive tax agenda.

The elimination of the 4 percent city sales tax on all clothing in the 2008 budget is marginally progressive, since clothing expenses as a percentage of income will be slightly lower for low-income households. But the loss of tens of millions of dollars in high-end taxes on clothing like the outfits touted in the recent fashion shows is a reminder of how much the modest gains for low-income New Yorkers have cost us.

The biggest part of the 2008 cuts – the across-the-board property tax rate cut and residential owner ($400) rebate -- no doubt eased the tax burden of many lower- and middle-income homeowners who needed it (and many wealthy residential owners who didn’t), but the bulk of the rate-cut benefit went to large corporate property owners.

Further, the one significant progressive idea in recent years never made it into the adopted budget because the mayor rejected the City Council’s proposed $300 rebate to low- and middle-income renters. That’s a missed opportunity.

In terms of creating a more progressive city tax system, the city’s personal income tax offers a big opportunity. The rates for this tax currently resemble a flat tax (where everyone pays the same tax rate, regardless of income) because they range only from a 2.9 rate for joint filer with an annual taxable income of $21,600 or less to a top rate of 3.7 percent for joint filers making $90,000 or more. There were higher top rates through much of the 1990s and from 2003 to 2006.

In comparison, the federal personal income tax has six brackets and ranges from 10 percent on joint taxable incomes up to $15,650 to 35 percent on joint taxable incomes above $350,000.

Without a more progressive personal income tax rate structure and without a review of inequities in the property tax system, the city under its current leadership seems likely to continue to use taxes – reducing them or increasing them in an ad hoc way -- as immediate economic conditions dictate. That’s non-ideological, but it’s also a missed chance to establish a fair and more stable city tax policy for the long term.

Glenn Pasanen, who teaches political science at Lehman College, has been in charge of Gotham Gazette's finance topic page since 2001. 


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