Bill Clinton is depending on people like Joy and Harvey Warren to make the bottom line of his plan add up. The Warrens, Hollywood screenwriters who will make about $220,000 in 1993, represent the largest single source of new taxes. If Congress approves, they and other upper-income Americans earning more than $135,000 a year will contribute more than half of the proposed $305 billion in additional revenue over the next five years. Because they would move from a 31 to a 36 percent tax bracket, their federal tax bill, with itemized deductions, would increase by about $2,200, from $69,900 to $72,100, according to estimates supplied by the accounting firm KPMG Peat Marwick. The new energy tax would likely cost them at least the average of $17 a month because they live in Los Angeles and drive a lot.
It could be worse for the Warrens. Because they’ll probably earn less than $250,000, they won’t be hit with the 10 percent surtax that would effectively raise their marginal rate to 39.6 percent. If a rich relative left them a bundle of money, under Clinton’s plan they’d be paying more in estate taxes (the top rate would rise from 50 to 55 percent). The Warrens are better positioned than many high-income Yuppie couples to take the hit. They have no children and live in a modest rented condominium on the edge of Los Angeles’s pricey Hancock Park neighborhood. That makes them different from Hollywood types who live in high-priced homes, drive expensive cars and travel all the time.
During the 1980s the Warrens paid low taxes and watched the deficit grow. Only one of the Warrens-they won’t say which–voted for Clinton last November. But now, with Clinton calling on the country’s spirit of patriotism and shared sacrifice, both say they are willing to pay more. They want two things in exchange for their money, however. First, it has to go directly to paying down the deficit or to funding programs that will spur the economy. “What we are not willing to do is throw our money down a sinkhole,” says Harvey. Second, they want fairness. Asking more from the rich is fine. But they would like to see the tax code recognize the feast-or-famine nature of their work, perhaps with a return to income averaging. What the Warrens fear is that Congress will squander the tax revenue and fail to cut spending. “When you get into trouble, the first thing a financial adviser tells you to do is to cut up the credit cards,” says Harvey. “Congress never does that.” At the moment, the Warrens are behind the president, but their support depends on his ability to deliver tangible results.
Retired Educators Income: $33,000 Tax Increase: $180
Senior-citizen groups vigorously objected to Clinton’s proposal for higher taxes on social-security benefits. But if it is approved, nearly 80 percent of seniors will actually make out like Irma and Robert Allen of North Lauderdale, Fla.: more or less unscathed. The Allens-Robert, 82, a retired school principal, and Irma, 79, a teacher for 42 years-live on $33,000 a year in social-security payments, pensions and investment income. Under the administration’s proposal, senior couples would face an 85 percent tax liability (up from 50 percent) on adjusted social security income that exceeds $32,000 when it is added to adjusted other income. The measure would raise $21.4 billion over four years. The new arithmetic is in the Allens’ favor. Their adjusted social-security income falls short of the $32,000 threshold. If they were over that line, the Allens would pay at the 85 percent rate only on that portion over the threshold. They will pay an estimated $180 a year in new direct and indirect taxes on energy, such as at the gas pump and in slightly higher prices at the supermarket. “It might increase our taxes a little bit,” says Robert Allen. “But raising five children and getting them through college, we didn’t do that ourselves. We believe we can contribute something to help somebody else.
Still, the Allens, who will make the last mortgage payment next year on the three-bedroom home they purchased in 1977, are cautious. Rising property taxes (up 25 percent in the past five years), Medicare payments and supplemental-health-insurance premiums eat up an increasing fraction of their fixed income. They were impressed with Clinton’s call for fundamental reform. Irma says she recently paid $1,400 for three half-hour outpatient visits. Robert fell last Halloween, cutting his eye. “I waited in the emergency room for six hours. They cauterized it, gave me six stitches, a tetanus shot and an IV, and the bill was $2,100. Something has to be done.”
Janitor and Teacher Income: $36,000 Tax Increase: $204
Michael and Kathleen Eslinger of Chicago embody Bill Clinton’s election-year description of the economically squeezed middle class he promised to help: they work hard and play by the rules. Michael makes $19,000 a year as a janitor at St. Clement’s parochial school. Kathleen, a first-grade teacher, pulls down $17,000. They live with their two daughters (ages 2 and 4) in a $660-a-month apartment on the city’s North Side. Concerned about steadily increasing higher-education costs, they’ve opened a mutual fund for the children’s college tuition. So far, they’ve saved $600. Clinton’s college loan program, which his plan funds only modestly, might someday be able to help the Eslinger children, but it’s much too soon to know for sure.
Clinton’s proposed energy tax will cost the family about $60 a year more in direct costs for items like home heating and gas for the car. They’ll also pay an estimated $144 more in higher indirect costs for many manufactured goods. “As long as it’s evenly distributed, I can live with whatever comes,” says Michael. Their biggest concern, and one that Clinton hasn’t yet addressed, is health care. Their employer, the Archdiocese of Chicago, covers only $800 a year in health spending for the entire family; they hold a supplemental policy with an HMO that costs $128 per month. “I’m not thrilled about the health-care problems in this country,” says Kathleen, “because I know that eventually we’ll have to pay more for that.”
Fledgling Company Sales: $6 million Tax Increase: $0
While small start-up businesses are supposed to thrive under Clinton’s plan, BioSurface Technology of Cambridge, Mass., will gain only modest advantage. If the administration has its way, investors who put money into fledgling companies and keep it there for at least five years would be taxed on only half of their capital gains. However, only firms with less than $25 million in capital are eligible. BioSurface, a five- year-old company with 100 employees that engineers new cell tissue for burn patients, is capitalized at $35 million. The new proposed investment tax credits wouldn’t matter much either. The company just bought $1.5 million in new equipment. By the time the firm is ready to make its next capital expenditures, it probably won’t be eligible for the credit. Only companies with less than $5 million in annual sales would permanently qualify. BioSurface did more than $6 million in 1991.
The firm’s 10-member sales force would be bruised by a cut in the deductions for business-entertainment spending (from 80 percent to 50 percent). “We’ve already been avoiding lavish entertainment, but the tax law will lead us to pay much closer attention to reducing those expenses to absolutely bare-necessity level,” says CEO David Castaldi.
Still, there will be some benefits. BioSurface has yet to earn any taxable income: start-up costs have put it $15 million in the red. So higher corporate taxes wouldn’t matter. Company officials, who plan to add 35 more jobs next year, expect a new product to put them comfortably in the black by 1996. But even when BioSurface does start to pay taxes, the company wouldn’t face the new 36 percent corporate rate right away under the Clinton plan. That would only apply to companies making more than $10 million. Because BioSurface spends about 60 percent of its income on research and development, it would also be happy to see the renewal of the research and experimentation tax that expired last year. “It’s been very important in our development to this point,” says Castaldi.
Ten-Month-Old Baby Income: $24,000 Tax Savings: $275-$325
President Clinton’s economic message didn’t interest Kenneth Cubra, born 10 pounds 14 ounces at Lyndon B. Johnson General Hospital in Houston last April. But much of what Clinton said was a warning about the future for this infant son of a $24,000-a-year video-rental salesman.
If nothing is done by the time Ken turns 10, the deficit will reach $635 billion. Twenty cents of every tax dollar will go toward paying interest on the national debt, making it the government’s costliest program. More than half of the budget will be earmarked for health care and other entitlements.
When Ken is 21, the deficit, if unchecked, will be more than $1 trillion. Federal programs to help him go to college would be impossible to find. Excessive government borrowing will “crowd out” private borrowing, which means interest rates might be so high Ken would be unable to buy a car or a house.
More immediately, Steve and Debra Cubra would receive modest tax relief under Clinton’s plan. The proposed new energy tax would cost them about $200 a year. But the Cubras would qualify for a $518 earned-income tax credit, for a net gain of $275 to $325 a year. (The administration also plans to expand the WIC nutrition and Head Start programs-but Ken is probably too well off to qualify.) Later, a national-service program might allow Ken to work off college loans. “If we tried to save money for him to go to college, we couldn’t enjoy life now,” says Debra Cubra. “This makes it sound like there’s some hope.”
