IRS Reform Bill Loaded With Favors For Political Contributors

Just under five percent of the public makes $100,000 a year or more, according to the IRS By contrast, a whopping eighty-one percent of donors to congressional campaigns have reached that comfortable plateau. That second statistic comes to us via the Joyce Foundation and a group of academics who polled a large pool of people who contributed $200 or more to a candidate for Congress in 1996 .

That one fact explains a lot about the priorities of the IRS reform bill just passed by both houses of Congress and awaiting the President's willing signature. The "Internal Revenue Service Restructuring and Reform Act of 1998" has been touted as providing relief for average taxpayers who have suffered from bureaucratic abuse in their dealings with the agency.

But average taxpayers are not the bill's primary beneficiaries. Instead, members of Congress have just voted to bestow two new tax breaks on a very select group: the wealthiest five percent of all Americans. It cannot be a coincidence that these people dominate the ranks of Congress' campaign contributors.

One little-noticed provision of the bill cuts the length of time an investor must hold a stock, bond or other investment in order to qualify for the lowest capital-gains tax rate. While more Americans have gotten into the market in recent years, this provision will mean little to the six out of ten who still do not own any stock. But it will mean a lot to the favored five percent. The Federal Reserve reports that eighty-four percent of the $100K+ crowd owns stock, with a median value of $91,000. More than three-quarters of the benefits of the capital-gains tax cut will end up in their pockets.

And then there is another provision which is aimed solely at elderly taxpayers with annual incomes above $100,000. It will allow them to convert their conventional IRAs to Roth IRAs, in the long run sheltering billions of dollars from income and estate taxes. (Nearly half of the big donors to congressional campaigns are over the age of sixty.)

Over the next twenty years, these two new tax subsidies will cost the Treasury $30 billion -- with most of the benefits flowing to the favored five percent. Last spring, as the IRS reform bill was being deliberated, lobbyists for business and the wealthy swarmed all over Capitol Hill. Meanwhile, as one Senate aide complained to the Wall Street Journal, "the poor average taxpayer [couldn't] afford to send anybody up here to talk to me for 20 minutes."

Nineteen million people filed their taxes electronically last year. The new law calls on the IRS to try to quadruple that number in the next ten years. But, instead of directing the agency to produce more and better software free to the public, the legislation specifically carves out a protected arena for private software publishers -- telling the agency to coordinate its plans with the private sector. Why? As the Wall Street Journal reported, lobbyists from Intuit Inc. and H&R Block Inc., two top makers of tax-preparation software, "argued the effort would undercut their franchise." (Can you imagine the publishers of all those how-to tax manuals demanding that the IRS stop printing and distributing free tax forms and guides because it took away from their business?)

The bottom line: $39.95 if you purchase Intuit's "Turbotax" program; $19.95 for H&R Block's "TaxCut" software. (Plus the cost of buying a new, updated version of the program every year. And the long-distance charges for calling for help. The IRS doesn't charge for calls to its 800 line... yet.)

H&R Block has been a generous donor in recent years. It gave $58,250 in soft money in the `95-'96 election cycle, split between the Democrats and Republicans, while its PAC and various employees gave another $67,290 to congressional candidates. In the current cycle, the company seems to have sworn off soft money, while its PAC and employees have already made some $32,750 in contributions. Meanwhile, Intuit CEO Scott Cook seems to be one truly turbo-charged donor: In '96 he gave $50,000 to the Democratic National Committee, plus another $1,000 to California Republican Tom Campbell. And in this cycle, as the drafting of the IRS bill heated up in the Senate Finance Committee, he gave $25,000 in soft money to the DNC, $5,000 to Senate Majority Leader Trent Lott's Leadership PAC, plus $2,000 to Republican Senator Al D'Amato and $1,000 to Senate Minority Leader Tom Daschle.