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Thursday, April 30, 1998 - Page updated at 12:00 AM

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Setting The Record Straight On Capital-Gains Tax Relief

Special To The Times

During the week of April 15, The Seattle Times ran an editorial claiming that the middle class is feeling the pinch of capital-gains taxes and is joining basketball millionaires in "clamoring for a full-court press on this wealth tax."

In truth, capital-gains taxes are not inciting hordes of soccer moms to storm the barricades, and a look at the lopsided distribution of wealth in our society helps explain why. According to economist Edward Wolff's study "Top Heavy," the richest 1 percent of Americans owned 40 percent of the nation's wealth in 1992, and the next 19 percent owned almost all the rest.

The middle and lower classes - encompassing four out of every five Americans - controlled only 16 percent of the nation's wealth, leaving them in poor position to benefit from capital gains, much less capital-gains tax relief.

Instead of explaining how this vast majority of Americans might benefit from lower wealth taxes, or tackling the even trickier question of whose taxes should be raised to compensate for this $40 billion handout, The Times attempted to cover up the vast inequalities between the haves and the have-nots by:

-- Redefining the middle class. The editorial notes that "38 percent of all taxable capital gains reported from 1942 to 1992 were earned by taxpayers with under $100,000 in annual income." But when did $100,000 become a middle-of-the-road income? According to the U.S. Census Bureau, only 11 percent of households managed to bring in even $75,000 in 1992, and the median household income that year barely exceeded $30,000.

Make a more reasonable definition of the middle and lower classes - the 75 percent or so of households who earned less than $50,000 in 1992 - and it turns out that these taxpayers shouldered less than 13 percent of the capital-gains tax burden.

-- Claiming that things are changing. The Times makes much hay about droves of middle-class Americans investing in the stock market. But the very study they cite remarks on "how stable the distribution of the capital-gains tax burden has remained across all income groups over the decades."

Indeed, the changes that have occurred point toward increasing rather than decreasing inequality between the rich and the rest: Of the wealth created in the 1980s, 58 percent went to the wealthiest 1 percent of Americans and 41 percent went to the next 19 percent, leaving the bottom four-fifths of America with only 1 percent of the gain.

-- Launching rhetorical flights of fancy. The editorial's claim that "the socialist doctrine of redistributing a set pie of wealth has been relegated to history's dust bin" is simply not true. Our very state, for instance, is a shining example of how to take money from the poor and give it to the rich. According to the nonprofit group Citizens for Tax Justice, Washington state has the most regressive tax system in the nation, with the poorest 20 percent of working households paying over three times as large a share of their income in state and local taxes as do the richest 20 percent. The middle 60 percent pay almost twice as large a share of their income as do the rich.

-- Pushing the grandma button. The Times argues that "soak-the-rich advocates" ignore the fact that reducing capital-gains taxes is "grandma's tax relief, not just Gates's." Most senior citizens, though, are apt to have the same question I have: Capital gains tax relief may be good for Gates and his grandma, but what's in it for the rest of us?

Despite the editorial's shortcomings, tax reform is worth considering, even for capital-gains taxes. As the editors note, "punishing the creation of wealth . . . is no way to sustain a dynamic economy."

And, although The Times didn't find the time to point this out in its three-part series on taxes and families, punishing the poor isn't so great either. The U.S. Census Bureau estimates that the burden of payroll taxes on young working families pushes one million American children below the poverty line each year.

Fortunately, there are some pretty good ideas for "tax shift" reforms that can relieve the burden on workers and investors without crippling the nation with debt. To achieve these common goals we need balanced and thoughtful analyses of our tax system. Now that the annual spleen-venting ritual that is tax day has come and gone, The Times should abandon its misdirected tirades and join the serious discussion already in progress.

Yoram Bauman is a researcher at Northwest Environment Watch in Seattle and co-author, with Alan Thein Durning, of "Tax Shift: How to Help the Environment, Improve the Economy, and Get the Tax Man off Our Backs."

Copyright (c) 1998 Seattle Times Company, All Rights Reserved.

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