Quotes of the Day
When President Bush talks about his plan to stop taxing dividend income, he says he's doing it, in part, for philosophical reasons. "It's unfair to tax money twice," he said as he unveiled his economic-stimulus plan earlier this month. "There's a principle involved. The government ought to be content with taxing revenue streams or profits one time, not twice."
But Bush was silent about the biggest double tax of all, one that hits every working American, not just the one-fourth of tax-return filers who report stock dividends. It's the income tax layered upon the portion of a worker's paycheck that is withheld to pay Social Security and Medicare taxes.
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Say a family has $60,000 in wage income. Of that, $3,720 is deducted from its paychecks for Social Security taxes, and an additional $870 is taken out for the Medicare tax. That's $4,590 that the family never sees. Nevertheless that money is taxed as personal income, as if the family received it. What it amounts to is a tax upon a tax.
And that's only the beginning. Some 10 million Americans are triple taxed, and that group's ranks swell by 1 million a year. When retirees begin to collect Social Security benefits, the income tax is again imposed on up to 85% of their benefits for those whose overall income exceeds a fixed level. For a husband and wife, it's $32,000 a year. For a single person, it's $25,000.
Because these base amounts do not rise with inflation, the number of retirees subject to the triple tax will grow each year. As a result, the tax will eventually hit many who can ill afford to pay it. And this is happening at a time when an increasing number of Americans are forced to work past their planned retirement age because of depleted pensions and retirement accounts. For 2000, 7.7 million individuals and families with incomes below $75,000 were taxed on their Social Security checks.
Be that as it may, the President's plan focuses on stockholders rather than workers. With certain exceptions, citizens would no longer pay tax on corporate dividends. The President's rationale: corporations already pay an income tax on their profits from which the dividends are paid to stockholders, and then those stockholders pay individual income tax on the dividends, thereby creating a double tax.
For 2000, the latest year for which complete tax data are available, 34 million tax filers reported receiving dividends. But the benefits flow largely to upper-income people. Just 7.9 million individuals and families — those who filed returns with incomes of more than $100,000--reaped two-thirds of the total dividends of $147 billion. In short, 6% of 129.4 million tax filers would enjoy most of the benefits from ending the double tax on dividends.
By contrast, TIME estimates that 100 million wage earners would profit from elimination of the double tax on Social Security and Medicare. And some 90% of those people take home less than $100,000 a year. People like Michael Kasprzak and Betty Williams of Seattle.
Kasprzak, 50, who grew up in the Rocky Mountains, is the director of a child-care center and preschool. Williams, 45, a Tennessee native, teaches family and child studies at Seattle Central Community College and does consulting work. They have an 11-year-old daughter at home and a 22-year-old daughter who is on her own. With a 12-year-old Mercury Sable, a three-year-old Toyota pickup truck, a mortgage on a two-bedroom home, and a trip to the movies their idea of an exciting night out, the couple is solidly Middle America.
Kasprzak says the family income varies, depending upon his wife's consulting and teaching assignments, but is usually between $65,000 and $70,000. Their income in 2001 was a bit higher. So how would they do if the Social Security and Medicare double tax are eliminated? The couple would have an extra $1,600 to spend. (Among the 100 million individuals and families who would benefit if this double tax were canceled, the savings would range from several hundred dollars to more than $2,000.) On the other hand, if Bush's current stockholder proposal is enacted, the Seattle couple would save $3, because their dividend income is just $12.
Nothing unusual there. Indeed, Kasprzak and Williams are like the overwhelming majority of middle- and low-income families who would derive little or no benefit from the President's elimination of the dividend double tax. Of 109.9 million returns filed for 2000 by those with incomes of less than $75,000, only 20% reported dividend income.
So who would be the real beneficiaries of the President's tax-cutting initiative? They are people who include the charter members of the Bush "Pioneers," the corporate executives, lawyers, oilmen and others who each raised more than $100,000 for the President's election campaign. People like Maurice (Hank) Greenberg, chairman of American International Group (AIG), the global insurance carrier that has been the beneficiary of many special-interest laws over the years.
This one would go straight to his wallet. In 2002 Greenberg ranked 47th on the Forbes list of the 400 richest Americans, with an estimated worth of $3.3 billion. Much of his wealth was tied up in AIG stock. In 2001, the latest year for which complete data are available, Greenberg owned about 44 million shares of AIG. The company paid 16¢ a share in dividends, meaning Greenberg would have collected $7 million. The President's tax plan would give Greenberg an extra $2.7 million from his newly tax-free AIG dividends. That does not include the dividends he received from other stockholdings.
Other members of the Forbes 400 would also do quite nicely, based solely on their stockholdings in their companies. Philip Knight, Nike's billionaire founder and chief executive, who turned a sneaker into a household name, could save $14 million or more in taxes. Michael Eisner, ceo of the Walt Disney Co., could shave off $1 million. Still others belong to an elite tax-savings fraternity. Most notably: the five members of the Walton clan of Arkansas, the first family of Wal-Mart Stores, who could pocket $187 million.
Then there's the man credited with persuading President Bush to dump the dividend tax — Charles Schwab. Founder of the discount brokerage firm, Schwab took part in the President's Economic Forum in Waco, Texas, in August 2002. As the President listened to speakers lay out proposals for getting the economy moving, Schwab ticked off several ideas, including a recommendation "to reduce the double taxation of dividends."
The President seized on it. "I love your ideas about...double taxation of dividends," he said. "That makes a lot of sense." Five months later the proposal was incorporated into the Bush tax plan. As for Schwab, he could trim $4 million from his tax bill.
If a picture is beginning to emerge of the Bush plan as a windfall for the upper crust, it's the correct one. Fewer than 600,000 individuals and families with incomes of more than half a million dollars — less than one-half of 1% of all tax-return filers — collect 29% of the dividends that would become tax free.
Why kill the tax on dividends rather than offer double-tax relief to a broader swath of Americans? The Bush Administration makes the argument that tax relief for investment income is better for the economy than relief for paycheck income. A White House spokeswoman told TIME, "Taxes on capital are very inefficient. So your bang for your buck in terms of lost revenue compared to the amount of jobs and growth that would be created by removing the tax on capital is very high."
However, one could argue that the double tax on Social Security and Medicare, which affects every working person, has grown inequitably large. For much of Social Security's existence, it mattered little because the tax rate was low and the amount of earnings subject to tax was low as well. In 1950 the rate was 1.5%, and it applied to only the first $3,000 of earnings. No one paid more than $45 in Social Security tax. Even by 1970, after the rate had gone up to 4.2%, taxable earnings were $7,800, some $2,000 below the median family income. By 1980 the rate had climbed to 5.08%, and it was levied on the first $25,900 of income, well above the median family income of $21,023. Over the past 25 years, Social Security and Medicare taxes paid by a median-income family have spiraled 333%, from $937 to $4,055. That pace was 11/2 times as fast as the growth in median family income and three times as fast as the increase in the minimum wage.
Middle-income and lower-income taxpayers are hit hardest by Social Security's double tax for yet another reason. The amount of income subject to tax rises annually with inflation, making it the most regressive of all levies. This year workers pay the 6.2% tax on all wage income up to $87,000. Above that, wages are not subject to the tax. As a result, the true Social Security tax rate declines as income rises. A working family that earns $50,000 pays $3,100 in Social Security taxes — the full 6.2%. A corporate executive or Hollywood entertainer with wage income of $3 million pays $5,394--the tax on the maximum earnings of $87,000. The Social Security tax rate works out to less than two-tenths of 1%, meaning that middle-income folks pay the tax at a rate 34 times as large.
There is one final inequity. In the case of stock dividends, the double tax is paid by two different parties. Corporations pay the corporate income tax on earnings that are distributed in dividends. Shareholders pay the individual income tax on those dividends. But Social Security's double and triple taxes are all paid on the same income of the same working person.
To be sure, repealing either the double tax on dividends or Social Security and Medicare would add to the federal deficit. The Administration calculates that tax-free dividends would cost the Treasury about $20 billion in the first year. In the case of Social Security and Medicare, the cost would be substantially higher.
Would there be any support in President Bush's inner circle for ending Social Security's double tax? Six years ago, several members of Congress took note of the inequity. That April, a Missouri lawmaker introduced legislation, called the Working Americans Wage Restoration Act, to make Social Security taxes deductible from income. To the sponsors it seemed only fair, since contributions to IRAs and 401(k) plans are deductible. And corporations deduct the portion of Social Security taxes they pay their employees. Calculating that his bill would save the average two-earner family $1,227 in income tax, the lawmaker said, "Ending this unfair double taxation is an excellent way to affirm the value of work, provide tax relief to those who deserve it most and stimulate economic growth. For nearly 73% of American families, payroll taxes exceed income taxes. It is middle-income Americans who are hammered the hardest by the double taxation of payroll taxes."
The legislator? None other than John Ashcroft, then a Senator and now President Bush's Attorney General.
- Donald L. Barlett and James B. Steele