The Class War's Next Attack

The tax cut is just the beginning

by Geov Parrish

In These Times magazine, July 2001


Cameras clicked away on June 7 as George W. Bush signed into law one of history's largest tax cut measures, shoveling an astonishing percentage of its benefits into the pockets of the country's wealthiest taxpayers. Despite four months of bleating from the left side of the aisle, the tax cuts faced only token congressional opposition-almost all of it focusing on the size of the cuts, not their economic structure. Congressional Republicans guided the plan through a docile Senate and worked out a compromise with the House version of the bill, which passed in a matter of days. While the networks focused on the "drama" of Bush's self-imposed deadline for cementing the deal, Treasury Secretary Paul O'Neill was quietly sketching out what he hopes will be the next set of radical economic victories.

In an interview published on May 18 in London's Financial Times, O'Neill laid out in some detail his desire, among other things, to privatize and rework Social Security and Medicare; to eliminate the capital gains tax on businesses; and, most strikingly, to abolish the corporate income tax. As the Financial Times put it: "Mr O'Neill ... says he 'absolutely' wants to eliminate corporate income tax. He also wants to do away with capital gains taxes on businesses, and indicated the administration was prepared to put this on a shorter-term agenda.... The fact that one of the most senior cabinet members would lay out such a detailed and radical programme is a sign that the administration has not been deterred by opposition to its initial tax-cut plan." In the article, O'Neill implied that Bush himself was "intrigued" with the ideas.

Before O'Neill joined the Bush administration, he was chairman of Alcoa. But like his friend Dick Cheney, the bulk of O'Neill's career- dating back to his days as a deputy director of the Office of Management and Budget under Gerald Ford-has been spent as a Washington insider. Generally considered a moderate Republican, O'Neill cited his philosophical desire to abolish the corporate income tax during his confirmation hearings in January; he was then confirmed with overwhelming bipartisan support. A philosophic preference by a nominee, however, is not the same as a plan advocated by a senior cabinet member. His comments to a foreign newspaper were the first time a ranking Bushite has laid out abolition of the corporate income tax as a specific policy goal.

In his interview, O'Neill acknowledged that abolishing the tax would probably mean both lower government spending and higher personal income tax rates. The corporate income tax now accounts for about 10 percent of the federal budget. According to Chuck Collins of Boston's United for a Fair Economy, that's down from a peak of about 33 percent in the mid-'50s. "It's part of a long-term strategy of shifting the tax burden," Collins says. "It's a shift of the burden from corporations to individuals, from the rich to the poor, from big business to small business. It's an overall trend toward regressivity."

While tax cuts for wealthy individuals, such as efforts to rip away at the capital gains tax, have been visible and often contested, the tax code changes that have reduced corporate taxpaying have been quiet, bipartisan affairs. Perhaps the most important came late in the Reagan era: the Tax Reform Act of 1986. It popularized the "S Corporation," a vehicle by which corporations could channel profits directly to individuals, avoiding corporate tax rates and enabling the individuals to pay lower rates and use deductions unavailable to companies.

Bob Mclntyre, director of the Washington-based Citizens for Tax Justice, says O'Neill's idea is going nowhere. "He's just talking through his hat," Mclntyre scoffs. "I don't know what his motivation is, other than he shoots from the hip constantly." Mclntyre is dismissive because of the difficulty of attributing corporate income to individuals, when ownership (the shareholders) continually changes.

But O'Neill skirts the problem by simply proposing that income not be taxed at all. "I think there is a conservative ideology that says, 'let's tax income at the point of transfer,"' says Collins. "Corporations as entities have responsibilities, and [like individuals] benefit from each transfer. They don't seem to have any compunction about receiving subsidies and corporate welfare."

O'Neill, like many conservatives, argues that the corporate income tax is really a personal tax, as corporations simply pass along the cost to consumers. This is only partly true. Companies such as Microsoft, military contractors or pharmaceutical giants price their products not based on overhead and production costs, but on how much the market will bear. The chances that retail prices will drop if corporations no longer pay income taxes are slim to none.

O'Neill's comments reveal the full extent to which the Bush radicals want to rewrite the rules. But the U.S. media almost completely ignored the Financial Times interview. Only the Washington Post carried an account devoted to the London story two days later. The foreign interview seemed designed to alert financial and political players, while keeping the public in the dark. Neither the Financial Times nor the Post challenged O'Neill's rosy arguments that his desired reforms would "promote economic growth" and "improve U.S. global competitiveness." Nor did either outlet mention the likely exacerbating effect on America's record income gap between rich and poor.

Is abolishing the corporate income tax just a wild O'Neill pipe dream? Perhaps. But the odds that such sweeping reforms could become law-even with the Democrats now controlling the Senate-are far better than they seemed in January, when the Senate gave O'Neill's visions a nice pat on the head at his confirmation hearing. Since then, a stunningly regressive tax plan has been signed into law with the approval of 46 Senate Republicans (including subsequent turncoat Jim Jeffords) and 12 Democrats.

Could another radical plan-to privatize Social Security, revamp Medicare or abolish the corporate income tax-win approval? It seems almost certain that the Bush White House will propose still more regressive reforms. And many Democrats are happy to go along with the program- making the wealthy much, much wealthier, at the expense of everyone else.

Class War watch

Index of Website

Home Page