Category: Policy Reports

The budget summit agreement, including the largest tax increase in history. was rushed through Congress in the final moments of the last session. Even now – long after passage of the act and the 1990 elections – many specifics of the agreement have not been made public. We know enough to compare overall promises with reality, however. For example, although the conferees promised to cut spending in return for higher taxes, precisely the opposite result occurred: while taxpayers pay more, the federal government will also borrow and spend more.

As the U.S. economy falters on the eve of a serious recession, leaders in both political parties are proposing new taxes as a way to reduce the federal deficit. This strategy is self-defeating. The new taxes will make the recession deeper and longer and will lower our economic growth rate throughout the 1990s.

In order to correct the unfairness in the present tax code and encourage a higher national saving rate, we should index capital gains and other investment income for the effects of inflation, exempt capital gains and other investment income from the Social Security benefit tax, and lower the tax rate for capital gains on the sale of income-producing assets.

Almost everyone agrees that the current method of taxing capital gains is harmful and unfair. Although personal income tax rates are inflation-indexed, there is no similar protection for people who make long-term investments. The holder of an asset can face substantial taxes if inflation causes an increase in the asset's price, even though the real value of the asset may not have changed.

On the whole, Texas public schools are very inefficient. If we compare student achievement scores with the amount of money spent to achieve those scores, we conclude that about one out of every three dollars spent on public education is being wasted.

Each year Ametica "spends" $105 billion in tax deductions for employee benefits. The deductions cause the tax rates for all taxpayers to be higher than they otherwise would be. The justification is that federal policy should encourage health insurance, retirement pensions, disability insurance, day care, etc. Yet this tax subsidy is highly arbitrary and inequitable. In general, the tax law favors employees of large firms and higher-income employees at the expense of small firms and lower-income employees.

In the case of Edgewood v. Kirby, the Texas Supreme Court declared the system of educational finance in Texas unconstitutional. The issue was considerable disparity in taxable property values among Texas school districts, ranging from $20,000 per student in the poorest school district to $14,000,000 per student in the wealthiest school district in 1985-86.

In the auto industry and elsewhere, corporate leaders are calling for national health insurance. They mistakenly believe that they can turn over the cost of their employee health care plans to the U.S. taxpayer. What they forget is that they also pay taxes. Under national health insurance, the nation's largest companies and their employees would pay more in national health insurance taxes than they currently pay for private health insurance.

A capital gain is the difference between the sales price and the purchase price of an asset. Under current law, this gain is taxed at the same tax rate as ordinary income. Although the tax code is indexed to prevent recipients of ordinary income from being pushed into higher tax brackets by the effects of inflation, there is no similar protection for people who hold assets for several years. An investor who holds an asset which has increased in value with the rate of inflation is no better or worse off in real terms.

America is known throughout the world as the land of opportunity – a place where people can work hard and freely use their talents and abilities to make a better life for themselves and their children. Yet many elderly workers aged 62-69 are dismayed to find that the promise of America is conditional. For if elderly workers choose to work to improve their standard of living, they find that government takes the vast bulk of their additional wages through special taxes that apply only to them.

An elderly widow living on a small Social Security benefit and $24,000 of income from interest, dividends, and a pension annuity faces a 1989 marginal tax rate of 48.3 percent. This extraordinarily high rate is the result of two special taxes levied against the elderly — the Social Security benefit tax and the Medicare surtax. Without them the widow would be in the 15 percent federal income tax blanket. Because of them, her tax rate is more than three times that of younger people with similar incomes. In the future, things will get worse.