Senator Kay Bailey Hutchison, the Republican from Texas, recently bragged that she was the key instigator in persuading the Senate Finance Committee, as part of its pending "marriage penalty reduction" bill, to raise the income level at which a couple enters the 31 percent income tax bracket. The Finance Committee had already decided to raise the qualifying level for the 28 percent bracket for couples. But according to The Washington Post, Hutchison insisted on a higher entry point for the 31 percent tax bracket, too, "so that the [marriage] tax relief would be extended to middle-income couples."
Now, this is a particularly dumb statement even by U.S. Senate standards. First of all, couples now in the 31 percent bracket already would get the full benefit of the Finance Committee's plan to raise the starting point for the 28 percent bracket. That's a tax cut that none of the almost two-thirds of couples whose top bracket is now 15 percent would enjoy. In fact, about a quarter of the couples now in the 28 percent bracket wouldn't get the full benefit of narrowing the 28 percent bracket, either, because they only have a small amount of income taxed at 28 percent now.
Second, it's an odd definition of "middle income" that includes couples earning more than about $150,000 a year. That's the income it generally takes for a couple to hit the 31 percent bracket now, and it's a level that only 7 percent of couples currently enjoy.
To be sure, it's not at all clear that Hutchison actually believes that "middle income" encompasses only the top 7 percent of couples, or that she understands that her proposal does nothing for couples who are in the 28 percent bracket now, or that she knows that most of the benefits of her plan would go to the 4 percent of couples in the 36 percent and 39.6 percent top brackets. As she admits, she's been long criticized--even by conservatives--for being a dim bulb. "That is what I have faced all my life," she told the Post.
And Hutchison isn't the only senator to misunderstand income tax rates. Earlier this year, media-canonized Saint John McCain touted his campaign proposal to raise the entry point for the 28 percent tax bracket as a boon to people in the 15 percent bracket, even though such a change would help precisely zero taxpayers in that bracket.
So it may be no shock that Hutchison's defense of her proposal makes no sense. But it is disconcerting that the Washington Post reporter who wrote the puff piece on Hutchison (and who has long covered tax issues for the paper) would fail to point out the obvious fallacies in her argument. Unless, of course, he doesn't understand much about taxes, either.
Who Runs Washington?
Last February the World Trade Organization (WTO) ruled that a long-standing U.S. tax break for corporations that export products was a blatant violation of our trade agreements, which explicitly prohibit export subsidies. Hooray, you might have thought. Finally, we'll be rid of a $3.5-billion-a-year piece of corporate welfare that dates back to the Nixon administration.
But is the Clinton administration looking for ways to put that $3.5 billion a year to better use? Hardly. Instead, the administration has teamed up with big multinational corporations in an effort to restore--and perhaps expand--the Foreign Sales Corporation loophole under a new name.
The old system gave corporations a tax exemption on 15 percent of their export profits. The new Elective Regime for Foreign Sales offers the same 15 percent tax exemption, but would apply to profits U.S. multinationals earn from foreign sales even if they manufacture the goods abroad--albeit with at least half U.S. content. We're "expanding beyond exports," explained a happy lawyer for the lobbying conglomerate Washington Counsel Ernst & Young, which along with corporate law firm Covington & Burling takes credit for devising the plan.
In a submission to the WTO, the administration opines that congressional passage of the revised tax break "will depend in some measure on acceptance of the proposal by ... other affected United States residents (for example, U.S. labor)." Fat chance. Since labor didn't like the old tax subsidy, which was at least contingent on exporting U.S.-made goods, labor certainly won't support wasting billions of dollars a year on a multinational giveaway for manufacturing abroad.
Letting corporations write their own loopholes stinks. Yet the corporate lobbyists have more than the Clinton administration in their pocket on this issue. Their plan has also been endorsed by top tax-writers in Congress--both Republicans and Democrats.
What Would Be a Baby Step?
The House Ways and Means Committee has approved a bill to repeal the 3 percent federal telephone tax. The Joint Committee on Taxation says this will save the typical taxpayer $30 a year--ranging from about $20 a year for the lowest third of earners up to about $100 a year for the top 2 percent. Virginia Governor James Gilmore, a Republican whose antitax zealotry as head of the federal Advisory Commission on Electronic Commerce was crucial to the commission's failure to reach consensus on the fair taxation of Internet sales, called the $30 tax cut "a giant step toward cutting taxes for American consumers and bridging the gap in the digital divide." For instance, if low-income taxpayers save up their telephone tax cuts for 12 years or so, they'll be able to buy a year's worth of AOL. ¤
--Robert S. McIntyre