Media Reality Check
  Notable Quotables
  Press Releases
  Media Bias Videos
  30-Day Archive
  The Watchdog
  About the MRC
  MRC in the News
  Support the MRC
  Planned Giving
  What Others Say
  Take Action
  Gala and DisHonors
  Best of NQ Archive
MRC Resources
  Site Search
  Media Addresses
  Contact MRC
  Comic Commentary
  MRC Bookstore
  Job Openings
  News Division
  NewsBusters Blog
  Business & Media Institute
  Culture and Media Institute

Support the MRC


What The Media Tell Americans About Free Enterprise

Tell a friend about this site

April 1997


Tax Hike Hide and Seek
Guest Editorial, by Michael Schuyler

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 incentives.

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 closers.

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 corporations.

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.


Rich Noyes


Home | News Division | Bozell Columns | CyberAlerts 
Media Reality Check | Notable Quotables | Contact the MRC | Subscribe

Founded in 1987, the MRC is a 501(c) (3) non-profit research and education foundation
 that does not support or oppose any political party or candidate for office.

Privacy Statement

Media Research Center
325 S. Patrick Street
Alexandria, VA 22314