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Why Is Bill Clinton Cultivating Envy?

by Stephen Moore

This article appeared on cato.org on July 31, 1997.

The biggest winner in the tax-cut passage that Congress and the White House have agreed on might be the greed and envy lobby.

For weeks the Clinton administration has assailed the GOP tax plan as unfair and heavily skewed toward the wealthy. In order to inoculate themselves from this class-warfare virus, Republicans have now made concessions that make the tax bill worse. These concessions include dropping the proposal to index capital gains for inflation, providing income tax "cuts" to low-income families that don’t pay taxes, and imposing a $75,000 income cap on the child tax credit.

Republicans shouldn't have wilted so easily. They should have met the class-warfare argument head-on. This is not -- nor has it ever been -- a nation principally motivated by greed and envy. Most Americans don't hate rich people as much as Dick Gephardt apparently does. Americans don't begrudge billionaires like Microsoft's Bill Gates or Federal Express's Fred Smith their fortunes. The vast majority of Americans don't want to tax the rich out of existence; they want to become rich themselves.

What does it mean for a tax plan to be "fair?" According to President Clinton's definition, a tax cut is equitable if the least productive people in the economy get the largest tax break and if the most productive people get no tax cut at all. Four years ago he made the amazing statement that his tax increase plan was "fair" because "70 percent of the taxes would be paid by the wealthiest 2 percent of the families."

Americans do want a fair tax system. But by "fair" they do not mean the Clintonian notion of requiring the rich to bear almost all the tax burden. Rather, most Americans think of a "fair" system as one in which everyone plays by the same rules. (That is why a flat rate tax system with no special-interest loopholes is the fairest tax system of all.) What offends Americans is not a tax cut that benefits all but a tax cut that carves out sweetheart deals for powerful political groups at the expense of the rest of us. This is precisely why the Reagan tax cut was so politically triumphant: everyone got an equal percentage reduction in their tax burden. There were no windfalls, and there were no losers.

The Republicans have unwittingly fallen prey to the class warfare argument partly because of their own political timidity. By agreeing to such a small tax cut in the first place ($85 billion over five years is one percent over total revenues), the tax debate predictably has generated into a battle over how the pie should be divided.

The White House complains that "two-thirds of the benefits of the Republican plan go to the richest 20 percent of Americans." It turns out that in calculating family income, the Clinton Treasury uses a bizarre notion of income that includes fringe benefits, imputed rental value of one's home, Individual Retirement Accounts and other forms of non-cash income. A family with earnings of $28,000 a year can easily appear to be making $40,000 under the Clinton definition of income. A family with earnings of $70,000 can easily be converted into a $100,000-plus income family. The reason that the Clinton administration says that the GOP tax plan benefits the rich is that according to the White House model, if you have a full-time job, you're rich.

Once phony indicators of income -- like the rental value of one’s house -– are eliminated, the Institute for Policy Innovation calculates that three-quarters of the tax reduction benefits help Americans with incomes under $75,000. Only 7 percent of the benefit goes to Americans with earnings over $100,000. Most of the benefits of the tax cut go to middle-income families with children through the $500 per child tax credit.

Polls show that many Americans mistakenly believe that the rich today pay very little in federal taxes. The Internal Revenue Service just released data on the distribution of tax burdens in America that offer some surprising results. The richest 1 percent of Americans today -- the Steven Spielbergs, Michael Jordans, Warren Buffetts and Madonnas -- earned 16 percent of the total income in 1995. How much of the income tax did they pay? Two percent? Five percent? Try 30 percent. That's right! One percent of Americans pay almost one-third of the income taxes. The top 5 percent pay almost half. How is that fair?

On the lower end of the income scale, the numbers are even more shocking. Americans who fall below the median income level (those in the bottom 50 percent) pay only 5 percent of all income taxes. Those in the bottom 25 percent pay no income taxes -- zero! Bill Clinton complains that the Republicans don't cut income taxes for Americans at the bottom of the income scale. But how could they? Those Americans don't pay any income taxes at all. Clinton wants to send non-taxpayers a government check. That's welfare, not a tax cut.

Ultimately, to win the tax fairness debate, tax cutters need to make the case that they want to expand the economic pie, whereas the Clintonites are mainly focused on dividing it. An agenda of wealth creation always trumps an agenda of wealth redistribution. Not long ago a New Jersey painter was quoted in the Washington Post as saying, "You're looking at a poor man who thinks the capital gains tax [cut] is the best thing that could happen to this country. People say capital gains are for the rich, but I've never been hired by a poor man."

Republicans will win the tax fight this summer and fall if they can learn to speak with such simple eloquence.