Clinton's `Soak-the-Rich' Tax Hikes Trim 1980s Gains
HERE'S three points on the federal budget:
* So far this fiscal year the deficit is running under the projections. At the current rate of expenditures and revenues, the deficit would be no worse than fiscal 1992.
* President Clinton's "soak-the-rich" tax increases will chop about one-third off the income gains the wealthy won in the 1980s, calculates Bob McIntyre, director of Citizens for Tax Justice.
* Contrary to expectations, Congress may come up with more spending cuts than asked for by Mr. Clinton.
"It is not that surprising considering that you have a Democratic president and Democratic Congress trying to show they can make the trains run on time," says Stanley Collender, budget expert in Washington for Price Waterhouse.
In the first four months of fiscal 1993, which began Oct. 1, the deficit totaled $90.65 billion, compared with $99.48 billion for the first four months of fiscal 1992. If nothing changes over the remainder of this year, a Congressional Budget Office expert says, the deficit may be about the same as last fiscal year - $290 billion. That's less than the $310 billion projected by the CBO in January for fiscal 1993 and the $319 billion projected last week in the Clinton budget numbers before the cost of an e conomic stimulus package. With the stimulus package, the deficit rises to $332 billion.
One reason for the improved prospect is the sharp decline in the cost of bank and thrift failures. With good profits, fewer banks and thrifts are failing. Moreover, the Resolution Trust Corporation is making money selling the assets of failed thrifts. Last fiscal year, deposit-insurance-related losses came to about $20 billion instead of the $100 billion projected in original budget estimates that forecast a total deficit of $400 billion. This year bank-and-thrift items might be a positive budget factor.
If Congressional action on the Clinton program is delayed, the costs of the stimulus package in this fiscal year will be reduced. But if the economy were to slow down again, the deficit would worsen.
As for taxes on the well-to-do, the Clinton plan would raise the top marginal tax rate from 31 percent to 36 percent for people filing joint returns who have a taxable income over $140,000, or single filers with a taxable income above $115,000. In addition, the plan proposes a 10 percent surcharge (or 3.6 percentage points) on taxable income over $250,000, excluding capital gains. These and other changes, the Treasury estimates, will raise revenues of $27 billion in 1994 and about $126 billion from 1993 to 1998.
In addition, the well-to-do will pay an extra 1.45 percent, or 2.9 percent if self-employed, in Medicare taxes on earned income only. So the top federal marginal rate could be 42.5 percent.
"I don't think that is a confiscatory rate," says Roger Altman, deputy secretary of the Treasury.
It is less than the 50 percent top marginal rate that existed before the 1986 tax reform legislation. From the standpoint of maintaining incentives for wealthy taxpayers to work and invest, the marginal rate is the most important, says Henry Aaron, a Brookings Institution tax expert. It is "perfectly reasonable" for President Clinton, elected on a platform of fairness, to boost the taxes of the well-off, he adds.
Though the 1986 reform lowered marginal rates, it closed enough tax loopholes to keep the "effective" tax rate (what percentage of gross income individuals actually pay to Uncle Sam) about the same - plus or minus 1 percent - for middle and upper-income taxpayers, Mr. Aaron says. Adding up all taxes (state, local, and federal), the richest 1 percent of Americans paid an effective tax rate of 26.8 percent in 1988, according to the late tax economist, Joseph Pechman. With few loopholes available now, the C linton proposals should boost the effective rate on the prosperous.
Nonetheless, the rich often can defer income, for example by building up capital gains or stock options, notes Kenneth Norcross, a tax attorney at Pitney, Hardin, Kipp and Szuch in Morristown, N.J.
A Treasury expert said such tax avoidance was taken into account in making Clinton revenue estimates, contrary to some reports.
Those making over $100,000 will pay 70 percent of all the extra tax revenues in the Clinton plan.