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Accelerated Depreciation$37 Billion a Year
In 1971, the Nixon administration issued an executive order allowing, for the first time, accelerated depreciation--that is, writing off the costs of equipment and buildings faster than they actually wear out. This led to a massive decline in corporate tax payments.
When the write-off was expanded in Reagan's 1981 tax plan, an even more massive decline occurred: by 1983, the percentage of total federal tax revenues paid by corporations was half of what it had been just three years earlier.
Of the 250 largest and most profitable companies in the US, a quarter--whose pretax profits totalled $50 billion--paid no federal income tax at all between 1981 and 1983, and half of them didn't pay in one or more of those three years.
The 1986 tax reform disallowed the accelerated depreciation of real estate, but left the loophole for machinery and other equipment. So the accelerated depreciation scam is still with us, and costs us an average of $37 billion a year.
A company can even generate a negative tax rate by buying equipment and leasing it to another company, in return for tax deductions the other company can't use. (Being able to trade deductions and credits is a leftover from the huge 1981-86 Reagan corporate tax pig-out.)
Company A never sees the equipment, but they accelerate depreciation on it; company B gets to write off the leasing costs. GE was one company that used this strategy; it saved them a billion dollars in taxes between 1986 and 1992. And they weren't the only ones.
Business leaders like to argue that tax breaks like accelerated depreciation stimulate the overall economy. But the evidence runs the other way.
As a former Reagan Treasury official told Business Week magazine, "In 1981, manufacturing had its largest tax cut ever and immediately went down the tubes. In 1986, they had their largest tax increase and went gangbusters [on investment]."
In the heyday of accelerated depreciation (1981-86), the economy grew an average of 1.9% a year. After accelerated depreciation was limited (1986-89), the economy grew an average of 2.7% a year.
That's not surprising, since corporate tax savings are seldom used to boost the economy. For example, Westinghouse got a $215-million tax break from accelerated depreciation in 1993; over the next two years, it cut 24,700 jobs. Accelerated depreciation reduced American Brands' 1994 tax bill by $115 million; in gratitude, it laid off 10,780 workers.
There's one final problem with accelerated depreciation: because it's such a gigantic tax break, it distorts business decisions. The tax benefit it confers often outweighs the actual risks and rewards of an investment, and in the long run, that sort of distortion is very bad for the economy.
During the extended wrangling over the federal budget for fiscal 1996, a group of business leaders fired off a stern letter to President Clinton and Congress, urging them to get their act together. Seven signers of the letter were the CEOs of Ford, Exxon, General Motors, Chrysler, IBM, Amoco and Chevron--companies that had each used accelerated depreciation to defer a billion dollars in tax payments. When consumer advocate Ralph Nader asked them if they'd consider forgoing tax loopholes of this kind to help balance the budget, their reply was a stony silence.
In addition to benefiting corporations, accelerated depreciation also helps wealthy individuals (who own most of the stocks and bonds the corporations issue). On average, tax breaks from accelerated depreciation are worth more than $13,000 a year to households making over $200,000, but less than $70 a year to households earning under $50,000.
Lower Taxes on Capital Gains
$37 Billion a Year
(not counting home sales)
The larger someone's income is, the larger the portion of it (on average) that comes from investments rather than a salary. Some investment income takes the form of dividends and interest, but a major part of it is capital gains--profits made from the sale of assets like stocks, bonds and real estate whose value went up while the investor owned them.
People who aren't rich sometimes have capital gains too--when they sell houses that have appreciated in value, for example--but less than 8% of all capital gains income goes to people who make $50,000 a year or less (three-quarters of all taxpayers). 69% goes to people making over $100,000 a year, 40% to those making over $500,000, and 32% to those making a million dollars a year or more (about one person in 6600).
As Citizens for Tax Justice put it, "more than any other kind of income, capital gains are concentrated at the very top of the income scale." 97% of the benefit from the 1993 capital gains tax cut went to the richest 1% of the population. But that's not enough for them--they want to pay nothing. Thus the "flat tax" plans of Dick Armey and Steve Forbes exempt capital gains from taxation completely! Two kinds of taxes--low or no One of the slick things about capital gains (for those who have them) is that they aren't taxed until the asset is sold. But you can still cash in on them in the meantime--all you have to do is borrow money, using the appreciated value of the asset as collateral. (You do have to pay interest on the loan, of course, but interest on business loans is tax-deductible.)
When capital gains are taxed, they get special treatment. For the 65 years from 1921 to 1986, the capital gains rate was lower--often enormously lower--than the rate for salaries and other "ordinary income." The 1986 tax reform bill made the rates the same, but that radical idea was eliminated in the tax "reform" bill of 1990, and the 1993 tax "reform" bill cut the capital gains rate even further. As of this writing, it's capped at 28%, while the top rate for ordinary income is 39.6% (39% for corporations).
In addition to the basic unfairness of penalizing people for working (by taxing earned income at a higher rate), the tax code is riddled with exceptions and special treatment for various groups. For example, coal, timber, iron ore and certain agricultural enterprises are allowed to cut their tax bill by treating part of their normal business profits as capital gains, rather than as ordinary income.
Certain "small business corporate stocks" get another special break--they can deduct capital losses up to $100,000 from ordinary income (for everyone else, capital losses beyond the first $3,000 can only be offset against capital gains). In 1993, another special exclusion was added--half the capital gains from certain risky ventures (deemed "likely to fail") aren't taxed at all.
Real estate speculators get an especially sweet deal. They can avoid capital gains taxes on appreciated properties indefinitely, simply by trading them in what are called Starker or 1031 exchanges. Not until they finally sell a property without buying another do they have to pay capital gains tax on the increased value of all the properties in the chain.
But there's even a way around that. If they keep trading properties until they die, their heirs can sell the property without paying any capital gains tax on the accumulated appreciation. And when property is bestowed as a gift, no capital gains tax is due on it until the person receiving the gift sells it. Low rates are bad for business As with accelerated depreciation, defenders of a lower capital gains tax rate argue that it encourages greater savings and more investment, which results in more jobs, a higher rate of economic growth and even in higher tax revenues (since the wealthy have less incentive to hide their income in tax shelters).
But by cutting the rate, the government is simply creating a new and better tax shelter, one that's more attractive to the rich than the ones they've been using. And using tax rates to encourage investments that otherwise make little business sense ultimately sabotages economic growth.
The jobs-and-growth argument is even less convincing. As you can see from the chart below, when the top capital gains tax rate goes down, employment and the growth rate of the economy also tend to go down; when the capital gains rate goes up, employment and the economy tend to also. That's exactly the opposite of what's predicted by supporters of lower capital gains taxes.
| Year of Change | Change in Top Capital Gains Rate |
Change in Employment Next Two Years |
Change in Growth Rate Next Two Years |
|---|---|---|---|
| 1976 | +3.4% | +1.9% | +1.3% |
| 1978 | -11.9% | -1.5% | -5.5% |
| 1981 | -8.0% | -2.0% | -2.5% |
| 1987 | +8.0% | +1.6% | +1.6% |
Now, obviously, other factors than the capital gains rate affect employment and the growth of the economy. But we find it amazing that people can blithely make the argument that lower capital gains taxes mean more jobs and a healthier economy when so much of the evidence goes in the other direction.
The lower tax rate for capital gains isn't a trivial matter. Between 1996 and 2002, it will cost us almost $37 billion a year--and that doesn't include capital gains on home sales.
Other books by Mark Zepezauer
The Nixon Saga: A Pathography in Twelve Parts
The Press of Time, 1989The Nixon Saga is a labor of loathing, more than three years in the making. A hand-printed limited edition art book, it is illustrated with 13 hand-carved linoleum block prints. The text deals with, among other things, Nixon's ties to Organized Crime and expatriate Nazis, as well as his possible connections to the JFK assassination. This kind of hard-hitting content got its author expelled from the Nixon Library in Yorba Linda, CA on opening day, an event he describes as "one of the proudest moments of my life." A few copies of The Nixon Saga are still available at $150.00 apiece. Email the author at TomPainlss@aol.com for more information, and/or watch this site for future excerpts.
The CIA's Greatest Hits
Odonian Press, 1994The CIA's many attempts to assassinate democracy all over the world are described in 42 crisply written, two-page chapters, each accompanied by a cartoon. Among the topics are the interventions in Iran, Guatemala and Greece; assassination attempts on leaders in Chile, Cuba and the Congo; possible involvement in the domestic assasinations of Malcolm X, Martin Luther KIng and the Kennedy brothers; and CIA efforts at mind control and media manipulation. "A concise, appealingly written introduction to the Agency's misdeeds." -Covert Action Quarterly. Available at bookstores everywhere; 96pp, $6.00.
Bi Men's Lives: Bisexual Men Speak Out
See Sharp Press, 1997This book is tentatively scheduled for publication in July of 1997. It features verbatim interview transcripts with a variety of bisexual men of various ages and backgrounds. Some are more gay than straight, some are more straight than gay, some are closeted, some are open. All of them speak frankly about their lives and their desires, and in so doing, help to shatter some of the myths and stereotypes surrounding bisexuality. A companion volume, Bi Lives: Bisexual Women Speak Out, edited by Kata Orndorff, will be published simultaneously.
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