If the tax-increase proposals in President Clinton's budget
become law, people can expect to pay more for airline tickets than
otherwise, face higher capital gains taxes in some cases, and
receive lower after-tax returns on stock investments (which many
people now own through pensions and other retirement accounts).
Looking to the future, people can anticipate slower growth, which
will hold back gains in production, real wages, and incomes.
Surprised? Most media stories show the President seeking large
tax cuts in his budget. If the stories mention tax increases at all,
they usually do so only in passing. (There are a few exceptions,
including the Wall Street Journal editorial page and the Washington
Times.) In reality, however, the President has requested
approximately 50 tax increases (more if one counts all "user fees").
The proposed tax increases are substantial.
They also are hidden. Most would be collected at the business
level and many involve very complicated provisions in the tax code.
Consequently, people have little warning that the requested tax
hikes would be large and would have undesirable incentive effects.
The media could easily illuminate some of this by asking just a
few hard questions. For example, what is the net tax cut? The
Administration's own estimates indicate the tax cuts would total $98
billion over five years, but after netting out the tax increases,
the five-year tax reduction drops to just $22 billion. Further,
under the Administration's budget "contingency" plan, many of the
proposed tax reductions would expire at the end of the year 2000
unless renewed by a future Congress and President. The tax
increases, on the other hand, would stay on the books. What has
happened to the Administration's tax cut? It has disappeared and
become a tax increase!
More important, a thread running through the tax-hike proposals
is that most of them would, in effect, increase the marginal tax
rates on the returns to saving and investment. For instance, suppose
you bought shares of a particular stock over the years at different
prices and you sell part of your holding. The Administration would
arbitrarily require you to use an averaging method in figuring the
cost of the shares sold that in some cases would boost your apparent
capital gain and, thus, your tax bill. In effect, you would be
paying a higher capital gains tax rate.
The stiffer marginal tax rates would worsen already harsh tax
biases against saving and investment. That would hurt capital
formation because, to offset the greater tax bite resulting from the
President's proposals, investments would have to earn higher pre-tax
returns for potential investors still to find them worth doing. With
the bar set higher, fewer potential investments could clear the
hurdle. In contrast, most of the Administration's proposed tax
reductions would have weak or ambiguous effects on economic
Less investment, of course, means less production and reduced
international competitiveness. Also, because real wages ultimately
depend on productivity, it means lower real wages. This story may be
technical, but it is of great economic importance. It is virtually
unmentioned, however, in media accounts.
The Administration insists that many of its proposals would
merely close corporate tax breaks and other tax subsidies. An
examination of the proposals, though, reveals a game of heads the
government wins, tails the taxpayer loses. For instance, one
proposal would overturn the distinctions between debt and equity by
denying the deductibility of interest costs on very long-term bonds,
asserting that such bonds are the equivalent of stocks. But several
other proposals want to treat stocks like bonds in certain cases
where doing so would increase taxpayers' liabilities. Despite such
contradictions, press reports have generally not questioned the
Administration's characterization of its proposals as loophole
Most of the tax cuts in the Administration's budget are at the
individual level while most of the tax increases would be collected
at the business or investor level. Although all business and
investment taxes are ultimately paid by people (as owners, workers,
suppliers, or consumers), press reports in this and previous
Administrations have often failed to pierce that veil. In the
current instance, this leaves the mistaken impression that the
Administration is trying to relieve the tax burdens of the people at
the expense of closing loopholes enjoyed by a handful of
It's not surprising that an Administration would want to hide tax
increases. It's disappointing that most of the media have allowed
the public to remain in the dark.
Michael Schuyler is a senior economist with the Institute for
Research on the Economics of Taxation (IRET) in Washington, D.C.