Fox in the Boston Sunday Globe: "Workers Who Spend Are More Deserving of Relief"

Monday, February 24, 2003 - 12:00

This opinion piece ran in the Boston Sunday Globe on Sunday, February, 23 2003.

If ''double taxation is wrong,'' as President Bush declared in his current proposal to reduce taxes by $670 billion, why did he limit relief to investors? Had he addressed the double taxation of wages used to pay Social Security and Medicare taxes (FICA), he would have given more relief to moderate- and middle-income workers than to high-income stockholders.

He also would have given the economy a bigger bang for the buck.

Let me be clear. Double taxation is not inherently wrong. It occurs in useful ways all the time, such as when we use our already taxed wages to pay excise taxes on gas, property taxes on our homes, and sales taxes.

On the other hand, if you believe double taxation is wrong, it also seems wrong to devote all the relief - at a price of $364 billion - to stockholders and nothing to workers, as the president has chosen to do. Workers pay double federal taxes on their wages used to pay FICA taxes because, since 1964, they may not deduct FICA taxes on their income tax returns.

Take Chris Lisle, a carpenter in South Hadley. He earned $50,000 last year. His FICA taxes (7.65 percent of his wages) amounted to $3,825. He then paid over $1,000 in income taxes just on the $3,825 because it was not deductible. That is, he paid a tax on a tax.

By ignoring the plight of workers, Bush also shortchanges our economy. To help pull the country out of its economic doldrums, any fiscal stimulus should encourage immediate consumption, not long-term saving and investing. Companies already have an excess capacity to produce goods and services; what they need is more customers.

Eliminating the double tax on corporate profits will generate little consumption. Too much of the tax savings will flow to high-income stockholders who will save and invest the money because they already can satisfy most of their consumption needs.

According to the Tax Policy Center of Washington, D.C., the top 3 percent of taxpayers (those with $200,000 or more of income) would get 53 percent of the tax savings this year. By contrast, if FICA taxes were deductible, we know most of the tax savings would be for moderate and middle-income workers, who are more likely to spend them.

Bush attempts to deflect these observations by claiming ''double taxation [of corporate profits] falls especially hard on retired people.'' But which retired people? According to the Center, while many of the beneficiaries can use the relief, nearly 40 percent of the tax savings would accrue to those elderly with over $200,000 of income - not exactly the elderly who live from month to month on their income and would be most likely to consume any tax savings.

Critics of the double tax on corporate profits also argue it is unfair to stockholders. It is not. As conservatives like to point out, markets evaluate the condition of goods being sold; and the stock market has long recognized that stocks, because of the double tax, are a form of damaged goods, like a damaged refrigerator. This means the price we pay for our stock has been discounted to reflect that damage. It follows, as Bush has stated, that eliminating the double tax would cause the price of stocks to rise; he might have added that the rise would be a windfall to current stockholders and an additional cost to new stockholders, who would have to pay higher prices to acquire the newly reevaluated stock.

Paul O'Neill, Bush's former secretary of the Treasury, has joined a growing chorus of critics who maintain that eliminating the double tax on corporate profits is the wrong medicine for today. ''I would not have done it,'' O'Neill said in a recent interview in which he attacked Washington politics as being ''all about sound bites, deluding the people, pandering to the lowest common denominator.''

Let's hope Congress returns the president's plan to the drawing board. Any new plan should focus on opportunities to promote our economic recovery over the next year or so and on the central role to be played in that recovery by the American worker, for the good of the country.

John O. Fox is a visiting professor at Mount Holyoke College and the author of If Americans Really Understood the Income Tax (Westview Press, 2001). He teaches a course on ''Taxation and the Values of Democracy.''