Sunday, February 08, 2004

Loopholes Aren't Loopholes When They Benefit Rich Folks

The current Bush administration budget is a study in dishonesty. Today’s example is taken from Chapter 18, "Tax Expenditures", which discusses the huge, hidden subsidies produced by income tax rules that allow a “special exclusion, exemption, or deduction from gross income or which provide a special credit, a preferential rate of tax, or a deferral of liability.” In other words, the Loophole List.

This list, which is required under the Budget Act, highlights the holes in the revenue system. It makes it possible to see, for example, that treating employer-paid medical insurance as a tax-free fringe benefit reduces revenues by over $100 billion per year – a hidden demand-side subsidy for health care that equals 1/8th of all individual income tax receipts. (p. 294)

How, then to show the effect of last year's tax law changes that cut the top rate on capital gains from 20% down to 15%, and lowered the top rate on dividend income from 35% down to 15%? It’s a potentially embarrassing calculation, because taxpayers with income over $1 million receive one-fifth of all dividends and over half of all long-term capital gains.

So what do the Bush budgeteers do? They move the goal posts. They change the rules in mid-game. They gerrymander the definition of “tax expenditure” so tax cuts for the rich don't count. In Budget-speak:

Although not in line with previous reference tax law or normal tax law baselines, our tables exclude from the list of tax expenditures JGTRRA’s reductions in the tax rate on dividends. Reference law used for the FY 2005 Budget includes capital gains as tax expenditure, but only to the extent capital gains have not previously been taxed under the corporate income tax. Similarly, the lower tax rate on dividends is not included as a tax expenditure under reference law because dividends have generally already been taxed under the corporate income tax. This exception was made as part of Treasury’s ongoing reevaluation of the tax expenditure concept and to consider gradually changes in the baseline tax system to conform more closely with a comprehensive income tax that excludes double tax on corporate income. The same treatment is extended to the tax rate differential applied to capital gains on corporate shares, including JGTRRA’s increase in this differential.” (p. 300)

Ongoing re-evaluation?

"’When I use a word,’ Humpty Dumpty said, in rather a scornful tone, ‘it means just what I choose it to mean—neither more nor less.’"

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