A group of investors is clamoring to lower the taxes they pay. There’s nothing new here; wealthy people and businesses are always trying to shift the tax burden onto working families. What is surprising is how easily they have used weak claims to push their proposal to the top of the agenda.
Not to put too fine a point on it, but there is simply no good reason to cut the tax on income from dividends and interest from out-of-state banks. The state has a backlog of important capital investments and there are a variety of programs in education, public health and safety, local aid, environmental cleanup, and other public services that would improve the quality of life in Massachusetts. Any budget surplus available for tax cuts should be targeted to working families, not wealthy investors.
Against this common-sense case to leave the tax on dividend income alone, what do proponents of the tax cut offer? Here are their claims:
Six out of every seven taxpayers with incomes over $200,000 — the richest one percent of taxpayers — would benefit from the tax cut. In contrast, three-quarters of taxpayers with incomes below $100,000 — and 95 percent of taxpayers have income below that level — report no dividend income and would get no tax cut. · Over half the tax break would go to the richest five percent of taxpayers, and over a third would go to the richest one percent. · The average annual tax cut for taxpayers with incomes below $100,000 would be less than $35, while those with incomes over $200,000 would save $1,900.
The 2,000 taxpayers with incomes over $1 million a year would save $13,000 annually from the tax cut. Collectively, this tiny elite would save as much from the tax cut as the 750,000 taxpayers who earn between $25,000 and $50,000.
2. No one is harmed if we use the surplus to pay for the tax cut. Any tax cut going to the wealthy is a tax cut — or public investment — not available to the middle class. If you want to cut taxes by $300 million, there are far more equitable ways to do it than cutting this tax paid primarily by high-income investors. Senate President Birmingham’s proposal to double the personal exemption is a fair and simple way to make sure that working families get the bulk of the benefits from a tax cut, but it’s not affordable if we give wealthy investors a big tax break first.
3. We need to lower the rate for retired seniors living off their lifetime savings. Again, Sen. Birmingham shows us a better way. Rather than a tax cut for wealthy investors, he has proposed a targeted tax cut on dividend income for low- and middle-income seniors. Birmingham is on exactly the right track here: Use tax cuts to help those who need them, not to shower tax breaks on those at the top of the income scale.
4. Income from various sources should be taxed at the same rate. It’s an interesting proposition, but they don’t really believe it. Why do I say that? Capital gains income is taxed at lower rates than earnings. If the rhetoric about simplicity and a single rate on all income were more than demagoguery, the proponents of the tax cut would be just as concerned about the low rate and complex provisions of the existing capital gains tax. House Speaker Finneran actually called their bluff recently by proposing a swap: Lower the tax on dividend income and raise the rate on capital gains so that everything is taxed at the same rate as wages and salaries. But Republicans who support lowering the tax on dividends voted unanimously to preserve the tax preference for capital gains income. Apparently this “principle” only applies when it lowers taxes.
5. The tax rate on dividends is too high, and keeps wealthy people from locating in Massachusetts. This one is at least partially true; the rate on dividend income is high. But it’s disingenuous to single out just one small piece of the income tax system while ignoring the full picture. In fact, Massachusetts does not have particularly high taxes on high-income families. Of the 41 other states that impose personal income taxes, 15 have higher effective rates on the richest one percent of families and 23 have lower rates. That puts us right in the mainstream, not off on the fringe.6. The tax cut will spur the economy. This is perhaps the silliest of all shibboleths used by the anti-tax crowd. In the first place, there is no evidence that the tax cut would increase savings. During the 1980s, the private savings rate fell while the after-tax rate of return increased. More important, the tax cut isn’t linked to investments in Massachusetts. Who really thinks investments in Microsoft or Mitsubishi, or in some mutual fund with worldwide holdings, will launch a new wave of growth in Massachusetts?
So that’s their offer: Massachusetts will be fine; it’s just the people who will be worse off. We can do better than that. Actually, it’s hard to imagine doing any worse than that.
Jim St.George is the executive director of TEAM (The Tax Equity Alliance for Massachusetts).