A closer look at the tax issue

Just a little more than two months ago, about the time regular people begin paying attention to political candidates, Hennepin County Attorney Amy Klobuchar unveiled her economic plan.

Key to Klobuchar's proposal is elimination of the income tax cut for families who make more than $336,500 a year -- the wealthiest 1 percent of Americans.

Standing before a podium in a University of Minnesota classroom, Klobuchar said pulling back just that one part of what are often called the Bush tax cuts, would generate tens of billions of dollars a year.

"If we rolled back the tax cuts for the wealthiest 1 percent of the people in this country -- this is the tax bracket that starts at $336,000 -- we could raise $63 billion each year that we could put toward deficit reduction and the big bold challenges that confront us like affordable health care and energy independence," Klobuchar said.

Listening from the back of the room and waiting to give reporters the Republican response was state party spokesman Mark Drake.

"First off, I'll just say a massive new tax increase on our small businesses is just not something I think we should be doing," Drake maintained.

Drake quickly made the case that what Klobuchar and other Democrats are calling for goes well beyond taking away a tax break from the wealthy. Instead, Drake said that if the tax cut on the wealthiest 1 percent of Americans were reversed small businesses would be hit hard.

"And you know a lot of folks work underneath the small business and the small business owner files as a sub-chapter S, so this would hit them directly," Drake said.

Meaning, according to Drake, that small business would have to cut jobs and refrain from hiring new workers.

From Minnesota's U.S. Senate campaign to races for the state's eight congressional seats, Republicans are sounding alarm bells about Democrats' calls to pull back any or all of the tax cuts. And Republican candidates broadly link the tax cuts, including the roll back for the top 1 percent, to economic growth and job creation.

Here's 6th District Rep. Mark Kennedy, R-Minn, who's also a candidate for U.S. Senate.

"We've created nearly six million new jobs. We've grown this economy the size, our growth has been the equivalent of the size of the Chinese economy," Kennedy said. "That's the path we need to continue to go on, not have a reckless approach towards a tax increase that would filter down to all Americans and put job growth at risk."

According to the Small Business Administration, over the past 10 years, small businesses accounted for between 60 and 80 percent of all of the nation's newly created jobs. But, just a tiny percentage of small business owners make more than $336,000 and can take advantage of the tax cut. Even the Bush administration's Treasury Department acknowledges that. One Treasury estimate said fewer than four in 100 small business owners would qualify in 2006. That's about 600,000 of the nation's nearly 17.5 million small businesses.

Bob McIntyre is the director of the Washington D.C.-based labor-affiliated group Citizens for Tax Justice.

"What we know from the IRS in terms of what kind of income people have who are in the top tax bracket is that most of it has nothing to do with business," McIntyre says.

At least nothing to do with owning a business in the context Republicans often use to defend the top 1 percent income tax cut.

"In fact the biggest piece of it -- 40 percent --is interest dividends and capital gains and the second biggest piece is wages which is about a third," says McIntyre.

In 2001 as President Bush lobbied Congress for the first round of tax cuts, he implied that many small business owners would directly benefit if Congress cut the tax rate for the wealthiest one percent.

Here's the President addressing the Hispanic Chamber of Commerce in March of 2001.

"And so when you hear us talking about dropping the top rate from 39.6 to 33 percent, I hope Americans understand the positive effect this will have on the small business communities," said President Bush.

Although the vast majority of small businesses do not directly benefit from the tax cut on the wealthiest 1 percent of Americans, the chief economist for the U. S. Chamber of Commerce, Martin Regalia, defends it. Regalia says pulling it back would mean less investment and fewer jobs.

"The Democrats want to go through and they want to cherry pick that and say, 'OK, well we're going to pick a certain class of individuals that we don't like and we're going to tax them more." And I'm sorry but we don't find that to be a benefit either for those people or for the economy as whole, that going through and reducing the amount of investment by taxing people that save and invest is something that's conducive to economic growth," Regalia says.

But Robert McIntyre from Citizens for Tax Justice says the debt created by the tax cuts will eventually have to be repaid. There's little dispute the cuts are generating an increase in tax revenue. But even supporters concede they will not pay for themselves.

And McIntyre says, in the end, it is not the wealthiest Americans who will be left with the bill.

"The bottom line for people on the tax cuts is this: the administration went out borrowed trillions of dollars, gave most of it to very wealthy people and the rest of us are going to have to pay that money back," McIntyre says. "So it's a little like if somebody grabs your credit card from you, went out and charged up $10,000 and then sent you a check for a thousand dollars and said you should be happy even though you're facing a $10,000 bill to pay."

According to McIntyre's analysis, over the last five years, the average Minnesota family in the top 1 percent received more than $79,000 in tax cuts. After you figure in the cost of repaying their share of the national debt created by the tax cuts, McIntyre says those families are left with $25,000.

As for the remaining 99 percent of Minnesotans, McIntyre says they received an average of nearly $3,000 per person from the tax cuts, but their share of the added debt will amounts to about $7,000.

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