New Tax Bill Spells Relief: R-I-C-H

Congress calls the tax reduction bill signed into law last week the Taxpayer Relief Act of 1997.

But which taxpayers get the most relief?

The bill brought a flurry of attention for its gifts to middle-income Americans - tax breaks for college, children, retirement, and home ownership.

But number crunchers find that most of the benefits will land in the bank accounts of the rich.

"From the beginning, this tax bill has been intended for the upper middle class," says Stanley Collender, a budget expert in Washington for Burson-Marsteller, a communications group.

But that aspect of the tax bill is not the part played up in the press conferences. The Republicans have long regarded the rich as a key constituency, but the Democrats, rather than raising the issue of tax equity, now want some of the same support.

Both parties, says Mr. Collender, are competing for upper-income, white, suburban voters. Most of this group see themselves as middle-income, though many have household incomes of $100,000 or more, far above average.

In dollar terms, the average tax cut for middle-income families and individuals will be less than $200, says Citizens for Tax Justice (CTJ), a liberal-leaning Washington think tank, while the richest 1 percent will save more than $16,000 a year.

According to CTJ, almost half of the tax cut goes to the richest 5 percent of Americans. The richest 20 percent get 78 percent. Those making less than $100,000 a year get a quarter of the benefits.

President Clinton had accused Republicans of favoring the rich with their tax-cut proposals. But that bias remains in the final tax bill, signed by the president with a rhetorical flourish.

When the tax changes are fully phased in, the richest 1 percent will receive 32.3 percent of benefits, CTJ finds. That's down from 38.4 percent under the House plan and 34.1 percent for the Senate, but much more than Clinton's original proposal of 8.7 percent.

CTJ director Robert McIntyre says the president "completely collapsed."

But will the Democrats make a big fuss over the numbers in congressional elections next year, engaging in what Republicans call "class warfare?"

Probably not, says Robert Shapiro, an economist at the Progressive Policy Institute, a Washington think tank. "It is hard to make it much of an issue because of the breadth of the support for the final bill."

In the House, 164 Democrats voted for the tax bill; only 42 opposed it. In the Senate, only eight Democrats voted against it.

In effect, Mr. Shapiro says, the Democrats are giving up charging Republicans with belonging to the party of the rich. Republicans are forgoing labeling Democrats as the tax-and-spend party.

That may change in the year 2000, if Rep. Richard Gephardt of Missouri challenges Vice President Al Gore for the Democratic presidential nomination.

"It is more likely that Gephardt would raise the issue than Gore," says William Gale, an economist at the Brookings Institution in Washington.

Mr. Gephardt voted against the tax bill. "It does not address the deficit of principle, the deficit of fairness, the deficit of tax justice...," he stated.

Robert Greenstein, director of the Center on Budget and Policy Priorities, sees little immediate outcry over the bill's bias, but eventually, perhaps a decade from now, the issue will emerge, he says.

It could be prompted if tax shelters spread like wildfire, taking advantage of new tax benefits. It could occur if corporations use loopholes to dodge taxes altogether, or if a recession squeezes government revenues and spending on programs for moderate-income families.

Charles Gabriel, at Prudential Securities, expects Republicans to defend the bill over the next 15 months with what he terms "a more accurate analysis of the tax plan" than CTJ's.

Where CTJ takes a 10-year perspective on the bill's impact, a five-year analysis looks better for the middle class.

But Brooking's Mr. Gale describes a five-year analysis as "misleading."

According to analysis by Congress's Joint Committee on Taxation, benefits for the well-to-do show up primarily in the second five years.

Cuts in the the estate tax, for example, add up to $6.3 billion between 1997 and 2002, but $34 billion in the 1997-2007 period. For capital gains: $1.8 billion the first five years and $20 billion over 10 years.

Other provisions that benefit those with lesser incomes - such as the child and education tax credits - take effect quickly but do not increase much over time.

Why does the bottom part of the income scale carry so little clout in Washington?

"They don't vote in high numbers," replies Collender. "They are not organized. They don't make campaign contributions. They don't have the cash."