Myth: A capital gains tax cut will help the little guy.

Fact: Only 1 percent of all taxpayers claim two-thirds of all capital gains.



Summary

Only 7 percent of all taxpayers report capital gains in any given year, and over two-thirds of the gains reported went to people making over $100,000 a year. Although it's true that most Americans own capital assets (like homes or businesses), they sell them only a few times in their life. The rich, on the other hand, make most of their annual income in capital gains, and deal in them constantly. That is why a capital gains tax cut would overwhelmingly benefit the rich.



Argument

According to IRS records, 93 percent of all Americans filing tax returns receive no capital gains income in any given year. Of the 7 percent who do, two-thirds of the gains go to those making over $100,000 a year. Here is a more complete breakdown on capital gains income: 

Breakdown of Capital-Gains (CG) Earners, 1989 (1)

               Number of    Percent    Total CG    Percent
Type           taxpayers    of all     reported    of all CG
Taxpayer       (millions)   Taxpayers  (billions)  Reported
------------------------------------------------------------
Total             112.3      100%      $150.2       100%
CG earners:
  Over $100,000     1.3        1        108.2        72
  Under $100,000    7.2        6         42.0        28
Non-CG earners:   103.8       97          0.0         0

As you can see, 1 percent of all taxpayers collect over two-thirds of all capital gains. A study of tax returns between 1989 and 1991 found that this is even more concentrated than it first appears: one twenty-fifth of 1 percent of working Americans collected 32 percent of all capital gains income.

A person must be careful in this debate, because deception runs rampant among those promoting this tax cut. Listen to Paul G. Merski, an economist on the Senate's Joint Economic Committee:

Of course, if you're familiar with the above chart, the deception here is obvious: his wealthiest 16.3 percent of all capital-gains earners is really only 1 percent of all taxpayers, and they're pulling down over two-thirds of all capital gains.

Many are surprised by how disproportionately the rich deal in capital gains, because most Americans own capital assets, like homes and small businesses. But owning a capital asset is not the same as selling it. It is only when the asset is sold -- and only if it collects a profit -- that it is taxed. Middle class owners usually sell their homes or businesses only a few times in their lives. However, the very rich make most of their annual income in capital gains -- precisely because it is taxed at lower rates than normal salaried income.

Others criticize the above figures because the government does not tax the largest pool of capital in the U.S. economy: namely, employee pension funds. In 1989, pension funds saw a profit of $409 billion, 82 percent of which benefited the middle class. (3) Critics therefore charge that the tax on capital gains is selective taxation of the rich.

But corporations have been raiding pension funds increasingly in the last 15 years, and new laws by Congress make it even easier for them to do so. (4) The tax-free status of these pension plans is actually a boon to corporations, because it makes raiding them all the more profitable. That is why corporate lobbyists (who have been so effective in persuading Congress to raise regressive state and payroll taxes on the middle class) have allowed Congress to keep the pension plans tax free.

Unfortunately, pension funds are approaching a state of crisis in this country, and it looks like a massive taxpayer bailout is on the horizon, much like the Savings and Loan fiasco.

For corporations, recent laws put them in a win-win situation with pension plans. When a pension fund is overfunded -- that is, it has more than enough money to meet its pension obligations -- companies have seized the excess cash with the justification that the company or portfolio manager made it profitable. (This, despite the fact that many employees take pension benefits in lieu of pay raises, and the pool of capital belongs to the employees.) But if a pension fund is underfunded, then companies usually refuse to pitch in to make the plan solvent again. It therefore becomes the problem of the Pension Benefit Guaranty Corporation (PBGC), a quasi-government agency that issues pension checks to retired workers in case the company reneges on its pension commitments.

However, corporate membership in the PBGC has been steadily dropping, frightened off by soaring premiums used to cover the growing number of bankrupt companies and underfunded pensions. In 1988 (the last year for available figures) the share of the workforce enrolled in pension plans covered by the PBGC was only 30 percent, and falling. The vast majority of workers in pension plans are unprotected against failure (and we should not forget that half of all American workers have no pension plans at all). If the PBGC eventually fails (as it is appearing to do), then taxpayers will be called to bail out underfunded pensions.

Meanwhile, corporate lobbyists have convinced Congress to rewrite the pension laws so management can raid pension funds much more effectively. This is a profitable endeavor, since most pension funds are overfunded. The law now allows companies to terminate a pension plan and replace it by buying "annuities" that will pay workers the accrued benefits. What money is left over from the purchase of annuities goes to the company. There's just one catch: annuities are not guaranteed by the PBGC or any other government agency. It leaves the worker wide open to the possibility of pension failure. It leaves taxpayers vulnerable to picking up the bill.

Another victory for corporate lobbyists was a new law allowing companies to raid the pension funds to cover the soaring costs of employee health care insurance. Health care has represented an increasing drain on corporate profits, but rather than pass legislation designed to reign in runaway health care costs, Congress has stuck it to the little guy once again -- companies can now cover their health care costs by robbing pension funds.

The bottom line is that virtually all workers in this country are going to see reduced pensions. The gains from this untaxed capital are going to corporations, not workers.

Return to Overview

Endnotes:

1. Donald Barlett and James Steele, America: What Went Wrong? (Kansas City: Andrews and MacMeel, 1992), p. 216.

2. Paul G. Merski, "Give the Middle Class a Break: Cut the Capital Gains Tax Rate," Senate Joint Economic Committee, November 1995.

3. Statistical Abstract of the United States, 1991, Tables 596 and 597. Tables show employee pension assets increasing $385 billion in 1989, with the principal declining by $24 billion, for a net increase of $409 billion in net profits.

4. Reporting on pensions funds summarized from Barlett and Steele, pp. 162-188.