The Bush years gave America’s rich new and unprecedented preferential treatment at tax time. The fiscal cliff deal enacted in the early moments of 2013 leaves that preferential treatment in place.
Who won the New Year’s eve standoff over the “fiscal cliff”?
In one sense, everyone “won.” The deal that Congress blessed last week includes scores of provisions. Most Americans can point to at least one specific provision that works to their financial favor.
But the biggest winners from last week’s deal really don’t come into focus until we step back from those scores of specific provisions and take in the big picture.
President Obama, back two months ago in the early stages of this latest federal budget debate, insisted on a solution that would raise $1.6 trillion in new revenues over the next decade, with most all of those revenues coming out of the pockets of Americans making over $250,000 a year.
The final deal raises a bit over $600 billion in new revenue. In other words, the final deal essentially saves America’s most affluent nearly $1 trillion over what the White House initially sought.
That $1 trillion in tax savings, all by itself, would be enough to make America’s wealthiest the heftiest winners in the fiscal cliff showdown. But the magnitude of the victory for America’s wealthy runs even greater than that $1 trillion.
Consider this: Even if Congress had given the President every tax increase on the rich he initially sought, U.S. taxpayers in the nation’s top tax bracket would still be paying federal taxes at less than one half the rate that top-bracket Americans faced in the 1950s, under Republican President Dwight Eisenhower.
In other words, America’s wealthy won this latest battle over who bears the federal tax burden even before the battling began. But they also did mighty well after that battling started.
Take the matter of dividend income. Until 2003, income from corporate dividends enjoyed no particular tax preference. Dividend income faced the same graduated federal income tax rates as income from wages and salaries.
The George W. Bush years changed all that and slashed the tax rate on dividends — income that flows overwhelmingly to America’s wealthy — all the way down to 15 percent.
Wealthy Americans expected this preferential treatment for dividend income to end on December 31, 2012, the last day before the expiration of the Bush tax cuts. America’s top corporate executives, anticipating that expiration, had the corporations they run rush to post dividends before the year-end deadline.
Overall, in 2012’s final quarter, over 100 major U.S. corporations announced over $22 billion in dividend payouts, more than triple the dividend payout these same corporations distributed in the last quarter of 2011. Among the beneficiaries: Larry Ellison, the CEO of business software giant Oracle. Ellison personally pocketed $198.9 million of Oracle’s $800 million dividend surge.
The early payout, Ellison no doubt figured, would save him over $50 million in federal income taxes, the difference between the Bush 15 percent preferential tax rate on dividends and the tax rate he would face once the Bush dividend preference expired on January 1.
But the Bush preferential tax rate on dividends didn’t expire. The “fiscal cliff” deal that Congress passed last week keeps the preference in place. Ellison and his fellow billionaires will pay only a 20 percent federal income tax on their dividends, not the 39.9 percent the deal applies to other income over $450,000.
The same dynamic played out with the fiscal cliff deal’s treatment of the Bush-era estate tax cuts. In fact, under the deal, America’s wealthy will be paying even less in estate taxes than they paid in any year of the George W. presidency.
In 2013, a wealthy couple will be able to totally exempt $10.4 million from any estate tax liability and face only a 40 percent rate on any estate value subject to tax, after deductions.
In 2001, the year before George W. Bush entered the White House, a couple could only exempt $2 million from the then 55 percent basic estate tax rate.
The fiscal cliff deal, in short, makes permanent the most notorious Bush-era tax breaks for the wealthy. Meanwhile, notes Robert Greenstein of the Center for Budget and Policy Priorities, the deal extends the tax credits for working families first enacted in 2009 only for five years.
“In essence, this agreement locks in a tax structure that is grossly unfair to middle class Americans, one which provides permanent tax assistance to wealthy Americans, and only temporary relief to everyone else,” senator Tom Harkin from Iowa, a Democrat who voted against the deal, noted on New Year’s Day.
“Every dollar that wealthy taxpayers do not pay under this deal,” added Harkin, “we will eventually ask Americans of modest means to forgo in Social Security, Medicare, or Medicaid benefits.”
Veteran labor journalist Sam Pizzigati, an Institute for Policy Studies associate fellow, writes widely about inequality. His latest book, The Rich Don’t Always Win: The Forgotten Triumph over Plutocracy that Created the American Middle Class, has just been published.