Myth: A capital gains tax cut will help the little guy.
Fact: Only 1 percent of all taxpayers claim two-thirds of all capital gains.
Summary
Only 7 percent of all taxpayers report capital gains in any given
year, and over two-thirds of the gains reported went to people making over
$100,000 a year. Although it's true that most Americans own capital assets
(like homes or businesses), they sell them only a few times in their life.
The rich, on the other hand, make most of their annual income in capital
gains, and deal in them constantly. That is why a capital gains tax cut
would overwhelmingly benefit the rich.
Argument
According to IRS records, 93 percent of all Americans filing tax
returns receive no capital gains income in any given year. Of the 7 percent
who do, two-thirds of the gains go to those making over $100,000 a year.
Here is a more complete breakdown on capital gains income:
Breakdown of Capital-Gains (CG) Earners, 1989 (1)
Number of Percent Total CG Percent
Type taxpayers of all reported of all CG
Taxpayer (millions) Taxpayers (billions) Reported
------------------------------------------------------------
Total 112.3 100% $150.2 100%
CG earners:
Over $100,000 1.3 1 108.2 72
Under $100,000 7.2 6 42.0 28
Non-CG earners: 103.8 97 0.0 0
As you can see, 1 percent of all taxpayers collect over two-thirds
of all capital gains. A study of tax returns between 1989 and 1991
found that this is even more concentrated than it first appears: one twenty-fifth
of 1 percent of working Americans collected 32 percent of all capital gains
income.
A person must be careful in this debate, because deception runs rampant
among those promoting this tax cut. Listen to Paul G. Merski, an economist
on the Senate's Joint Economic Committee:
"Contrary to the Democrat class-warfare party line, the overwhelming
majority of taxpayers who would benefit from lower capital gains taxes
are not 'rich.' [In 1993], 83.7 percent of returns reporting capital gains
-- that's 12 million Americans -- came from families with incomes under
$100,000. By comparison, only 16.3 percent of taxpayers reporting capital
gains in 1993 had incomes above $100,000." (2)
Of course, if you're familiar with the above chart, the deception here
is obvious: his wealthiest 16.3 percent of all capital-gains earners is
really only 1 percent of all taxpayers, and they're pulling down
over two-thirds of all capital gains.
Many are surprised by how disproportionately the rich deal in capital
gains, because most Americans own capital assets, like homes and small
businesses. But owning a capital asset is not the same as selling it. It
is only when the asset is sold -- and only if it collects a profit -- that
it is taxed. Middle class owners usually sell their homes or businesses
only a few times in their lives. However, the very rich make most of their
annual income in capital gains -- precisely because it is taxed at lower
rates than normal salaried income.
Others criticize the above figures because the government does not
tax the largest pool of capital in the U.S. economy: namely, employee pension
funds. In 1989, pension funds saw a profit of $409 billion, 82 percent
of which benefited the middle class. (3) Critics therefore charge that
the tax on capital gains is selective taxation of the rich.
But corporations have been raiding pension funds increasingly in the
last 15 years, and new laws by Congress make it even easier for them to
do so. (4) The tax-free status of these pension plans is actually a boon
to corporations, because it makes raiding them all the more profitable.
That is why corporate lobbyists (who have been so effective in persuading
Congress to raise regressive state and payroll taxes on the middle class)
have allowed Congress to keep the pension plans tax free.
Unfortunately, pension funds are approaching a state of crisis in this
country, and it looks like a massive taxpayer bailout is on the horizon,
much like the Savings and Loan fiasco.
For corporations, recent laws put them in a win-win situation with
pension plans. When a pension fund is overfunded -- that is, it has more
than enough money to meet its pension obligations -- companies have seized
the excess cash with the justification that the company or portfolio manager
made it profitable. (This, despite the fact that many employees take pension
benefits in lieu of pay raises, and the pool of capital belongs to the
employees.) But if a pension fund is underfunded, then companies usually
refuse to pitch in to make the plan solvent again. It therefore becomes
the problem of the Pension Benefit Guaranty Corporation (PBGC), a quasi-government
agency that issues pension checks to retired workers in case the company
reneges on its pension commitments.
However, corporate membership in the PBGC has been steadily dropping,
frightened off by soaring premiums used to cover the growing number of
bankrupt companies and underfunded pensions. In 1988 (the last year for
available figures) the share of the workforce enrolled in pension plans
covered by the PBGC was only 30 percent, and falling. The vast majority
of workers in pension plans are unprotected against failure (and we should
not forget that half of all American workers have no pension plans at all).
If the PBGC eventually fails (as it is appearing to do), then taxpayers
will be called to bail out underfunded pensions.
Meanwhile, corporate lobbyists have convinced Congress to rewrite the
pension laws so management can raid pension funds much more effectively.
This is a profitable endeavor, since most pension funds are overfunded.
The law now allows companies to terminate a pension plan and replace it
by buying "annuities" that will pay workers the accrued benefits.
What money is left over from the purchase of annuities goes to the company.
There's just one catch: annuities are not guaranteed by the PBGC or any
other government agency. It leaves the worker wide open to the possibility
of pension failure. It leaves taxpayers vulnerable to picking up the bill.
Another victory for corporate lobbyists was a new law allowing companies
to raid the pension funds to cover the soaring costs of employee health
care insurance. Health care has represented an increasing drain on corporate
profits, but rather than pass legislation designed to reign in runaway
health care costs, Congress has stuck it to the little guy once again --
companies can now cover their health care costs by robbing pension funds.
The bottom line is that virtually all workers in this country are going
to see reduced pensions. The gains from this untaxed capital are going
to corporations, not workers.
Return to Overview
Endnotes:
1. Donald Barlett and James Steele, America: What Went Wrong?
(Kansas City: Andrews and MacMeel, 1992), p. 216.
2. Paul G. Merski, "Give the Middle Class a Break: Cut the Capital
Gains Tax Rate," Senate Joint Economic Committee, November 1995.
3. Statistical Abstract of the United States, 1991, Tables 596
and 597. Tables show employee pension assets increasing $385 billion in
1989, with the principal declining by $24 billion, for a net increase of
$409 billion in net profits.
4. Reporting on pensions funds summarized from Barlett and Steele,
pp. 162-188.