WHEREAS:

Federal tax revenues have fallen far below the level required to finance federal expenditures. The bulk of the tax burden is now falling on working people and the poor, creating justified anger and undermining public support for adequate funding of public services. There is an urgent need for fundamental tax reform; and

WHEREAS:

The basic purpose of the federal tax system must be to raise adequate revenues in as broad, fair and progressive a manner as possible, based on ability to pay; and

WHEREAS:

The tax system has proven to be an inefficient and ineffective vehicle for promoting specific types of economic — corporate or individual — behavior. The selective reductions in and deferrals of tax have, in too many instances, encouraged unproductive investments; they have become so numerous that it is questionable whether they are any longer effective; they contribute to complexity and to noncompliance; they lead many people to think, rightly, that our tax system is unfair; and

WHEREAS:

The individual income tax cuts enacted by the Reagan Administration have primarily benefited the wealthy. A household earning $80,000 or over will get an average tax break of $9,430 by 1985, while those earning $10-20,000 will have gained only $320 — an amount that has largely been offset by higher Social Security taxes, and increased state and local taxes and user fees that have been enacted to compensate for reduced federal funding for state and local services; and

WHEREAS:

The trickle-down justification for giving such a windfall to the already wealthy was that the rich could afford to save their tax breaks, thus expanding the pool of capital available for investment. Never has a policy so clearly failed. Personal savings as a percent of disposable income stood at 4.8% in 1983, which is the lowest savings rate this country has known since the post World War 11 spending spree reached its climax in 1949; and

WHEREAS:

The share of federal taxes paid by corporations dwindled to 6.2% by 1983, down from 12.5% in 1980 and 23.5% in 1960. Corporate income taxes as a share of Gross National Product have also long been in decline — from 4.4% in 1960, to 2.5% of GNP in 1980, to 1.1% of GNP in 1983; and

WHEREAS:

The Accelerated Cost Recovery System (ACRS) depreciation rules enacted in 1981 amount to a windfall for the largest corporations; the tax write-offs they allow far exceed a reasonable allowance for economic depreciation or replacement costs. In 1983, the depreciation allowed for tax purposes exceeded "economic" depreciation by $31 billion, or nearly one-quarter of all net after-tax corporate profits. Such a system amounts to nothing short of a massive redistribution of income from workers to profitable corporations; and

WHEREAS:

The massive giveaway of federal funds to corporations did not increase investment, as the "supply-siders" insisted it would. Supply-side economics was advertised as unleashing capitalism, giving management the cash to make new and productive investments. Despite the fact that taxation on new business investment was virtually eliminated by investment tax credit and depreciation changes, investment as a share of GNP fell for two years in a row after enactment of the 1981 tax bill; and

WHEREAS:

Loopholes used by corporations and wealthy individuals to avoid taxation continue to proliferate. Revenues of $63 billion have been lost over the 1981-84 period because of new unproductive loopholes added to the tax code during the Reagan Administration; and

WHEREAS:

The supply-side corporate tax benefits were layered on top of many longstanding inequities and loopholes in corporate taxation. A glaring example is the failure to tax the income of U.S. foreign subsidiaries on a current basis. Multinational companies that do not choose deferral of foreign income benefit from the generous provisions of the foreign tax credit, which allow the shifting of "excess" credits from country to country to reduce U. S. tax liabilities. These major loopholes are exacerbated by provisions that treat oil company royalties as taxes, and that facilitate the tax-free transfer overseas of the fruits of U.S. tax subsidized research and development, as well as the inability of the Treasury to enforce the arm's length pricing standard for intra-company transactions, and the recognition and encouragement of tax haven operations through tax treaties; and

WHEREAS:

The total cost of supply-side tax cuts — corporate and individual — was $206 billion from 1982 through 1984. These revenue losses accounted for one-third of the federal deficits in those years; and

WHEREAS:

The belief that the tax code is unfair is spreading. When people believe that others are not paying their fair share, tax avoidance and evasion increase. According to the best present estimates, only 85% of federal income tax which is owing is in fact collected — and the "compliance gap" of 15 percent is growing by about a percentage point each year. Workers cannot escape paying their share of taxes; wage and salary income is subject to withholding. It is investment and business income that is undertaxed; and

WHEREAS:

One of the most serious structural biases in the Federal Tax Code which hurts the average worker is the concept of a tax deduction. Wealthy individuals benefit more from our extensive system of deductions and exemptions, since the higher the individual's tax bracket, the higher the value of a deduction or exemption. A $100 charitable contribution is worth $50 to the wealthy individual in the 50 percent tax bracket, while the same $100 contribution is worth $22 to a worker who is in the 22 percent bracket; and

WHEREAS:

Such an inequity could best be dealt with by substituting a system of tax credits for all deductions and exemptions. This would mean that the personal exemption would be worth the same to all people — regardless of tax bracket. It would also mean that mortgage payments, charitable contributions, and medical expenses — to name a few — would be just as valuable to lower and middle income wage earners as they are to the very wealthy; and

WHEREAS:

One of the most costly non-corporate tax preferences is the favorable treatment of capital gains. Under current law, 60 percent of capital gains is excluded from taxable income. With the tax bracket reduced to 50%, the maximum tax rate on capital gains is 20%, costing the U.S. Treasury over $19 billion. The distribution of benefits from these loopholes is extremely inequitable: 83 percent of the benefits go to those earning $50,000 or more; and

WHEREAS:

Another item that provides large tax breaks is the interest earned on tax-exempt bonds. Subsidizing tax-exempt bonds will cost the federal government $16 billion in 1984. Studies have shown that only about one-half of this subsidy benefits state and local governments through reducing the interest rate they must pay on borrowing; the other half — or about $8 billion — goes to the wealthy individuals and corporations that purchase the bonds. Fiscally hard-pressed state and local governments would be much better off if they had an option to float taxable debt — with the federal government directly picking up 50 percent of the interest cost. This could expand the market for state-local securities and significantly restrict this blatant subsidy to the wealthy and to corporations; and

WHEREAS:

Every new loophole in the federal tax code has a double impact; it reduces revenue both for federal government and for every state and local jurisdiction that bases its own tax on federal definitions of income and deductions. When the federal government gives away its tax base, it creates both fiscal and political problems for state and local governments; and

WHEREAS:

The disarray in the present tax system has led many politicians and analysts to call for sweeping changes such as taxation of all income at a single flat rate, or abandonment of taxation of income in favor of taxation of consumption; and

WHEREAS:

The only beneficiaries of a single tax rate would be the wealthy. The average worker would experience a large tax increase at any single tax rate that would raise approximately the same amount of revenues as the current system; and

WHEREAS:

Consumption taxes, which are similar to value-added or sales taxes, are inherently regressive. So-called "progressive" consumption taxes retain the trappings of an income tax, but allow a deduction from income for money saved or invested and add back to income money either borrowed or taken out of savings. A "progressive consumption tax" taxes most heavily individuals, for example, who are using precious savings to send children to college or who are unemployed and depleting their savings in order to eat. At its core, it is still another expression of trickle-down principles; and

WHEREAS:

There is no reason to abandon the income tax as the cornerstone of the federal tax system. There is every reason to make that income tax fairer and more progressive.

THEREFORE BE IT RESOLVED:

That the federal tax code be restructured with the goal of providing as broadbased, simple and a fair mechanism as possible for the collection of needed revenues, through a simplified tax system firmly rooted in the concept of ability-to-pay; and

BE IT FURTHER RESOLVED:

1. That AFSCME urge Congress to redress the inequities between corporate and individual taxation, and insist that corporations bear their fair share of federal revenue needs by actions to:
   1. Repeal the Accelerated cost Recovery System (ACRS) of unjustifiably accelerated depreciation allowances in favor of a system based on the economic life of an asset;
   2. Require a full basis adjustment for the investment tax credit;
   3. Require that all income of foreign-based subsidiaries of U.S. corporations be taxed on a current basis;
   4. Impose a per-country limitation on the foreign tax credit;
   5. Limit foreign tax credits to payments that on their face are clearly income taxes, and disallow credits for royalties and other types of payments;
   6. Repeal expensing of intangible drilling costs in the first year for oil and gas wells;
   7. Require a reasonable royalty or realization of taxable gain when U.S. tax subsidized patents and know-how are transferred abroad;
   8. Require U.S. Treasury Department to study alternatives to the arm's-length transfer-pricing system of determining the source of corporate profit-,, including "unitary" formula systems such as those used by many states, in order to improve tax administration and enforcement;
   9. Close other unproductive loopholes; and
   10. Ensure an effective rate of corporate taxation of at least 25 percent.
2. That AFSCME urge Congress to make the personal income tax truly progressive by eliminating unproductive loopholes and unnecessary deductions, and enacting a simpler personal tax system in which the well-to-do pay their fair share and average taxpayers receive real relief. Elements of such a change could include measures to:
   1. Repeal the 1984 changes in taxation of gifts and estates;
   2. Treat all capital gains as regular income and establish that all capital gains accrue at death;
   3. Change current deductions and personal exemptions into partial credits, which would enable taxpayers at all income levels to enjoy the same amount of tax benefit;
   4. Cap the deduction (or credit as in "c") for non-business, non-mortgage interest payments;
   5. Extend a tax credit to renters for property taxes paid as part of a rent payment.
3. That AFSCME urge Congress to require very wealthy individuals, who frequently avoid paying any personal income taxes, to bear a fair share of the cost of financing government by enacting legislation to:
   1. Limit the amount of tax loss write-offs that individuals may now use on income earned from different sources;
   2. Work toward the elimination of the tax-exempt status of state and local bonds by permitting these governments to issue taxable debt with a federal subsidy equal to 50 percent of the interest cost of such securities; and
   3. Require withholding on all types of income from all sources.
4. That AFSCME urge Congress to reject all proposals for regressive flat taxes or consumption taxes.
5. That AFSCME endorses the approach taken by Senator Bradley and Congressman Gephardt in their Fair Tax Act, as a good start toward fair and effective federal tax reform.

SUBMITTED BY:

Jason Justice, Jr., President
Nancy Martivez, Recording Secretary
Loca1 1624
Austin, Texas

International Executive Board