A Closer Look at Income Tax and the Rich 24 comments
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The WSJ published an article on taxes I somehow missed. Here's an interesting statement from the article:
Taxes paid by millionaire households more than doubled to $274 billion in 2006 from $136 billion in 2003. No President has ever plied more money from the rich than George W. Bush did with his 2003 tax cuts.
To that I say, "Pfffff." If you bring in an extra billion but increase spending by two billion, I am not patting you on the back.
Unfortunately, the article's failure to incorporate Pres. Bush's expenditures reduces the impact of its more stunning statistics:
1. In 2006, the top 1% of Americans (making $388,806+) paid 40% of all income taxes; and
2. The top 10% (making $108,904+) paid 71%. That means 90% of all Americans only paid 29% of all income taxes, indicating their income tax burden is relatively low (compared to the affluent).
The article states that "Americans with an income below the median paid a record low 2.9% of all income taxes" in 2006. Some argue such a *relatively* low tax burden creates a moral hazard, because poor and low income residents receive as many benefits as the rich--police and fire protection, schools, access to courts, FDA protection (food and drugs), FAA protection (air travel), and so on--but pay almost nothing for it. One might reasonably argue the lower income brackets should be taxed more to create a more fair understanding of the high costs of government and public services.
My opinions on this issue of "fair taxation" is evolving, but I support Obama's stated plan to raise the payroll tax threshold. While the poor don't get taxed much on their income, their income is still taxed relatively high if you factor in the the payroll tax. The payroll tax is used to finance Social Security and other social programs, but it taxes income only up to a certain amount of wages/salary. In 2007, if you made more than $95,000, you paid the same amount in payroll taxes as the hedge fund manager who made $1 billion. And if you made $1 billion, your wages were deducted the same percentage in payroll taxes as the person who made $30,000. That scenario doesn't appear equitable when the Social Security program is underfunded.
One bipartisan solution would be to increase the payroll tax threshold (thereby saving Social Security) while also instituting a national sales tax (which would affect poor and rich alike). This way, current income tax rates would be maintained, and the poor would have an incentive to spend less, perhaps saving more of their money and moving up. I remember telling a friend who protested the sales tax because it hurt the poor, "Get the tap water (pointing to my free glass of water), not the Coke." In other words, at least the sales tax is a tax I can avoid most of the time. I realize this makes me sound like Marie Antoinette, but I don't see a better compromise. It would be helpful if all taxes collected actually went into a "lockbox" the government couldn't tap for anything other than benefit payments.
Still, reading an article like this inspires me to try harder to think of a more equitable and effective scenario (Thanks to creditslips.org for the tip).
It's no secret that the poor and middle class spend their money, while the rich save it and try to live off their interest and dividends, which are taxed at a lower rate (now 15%). As a result, any decent economist is going to want to try to get as much money into the hands of the poor and middle class as possible.
At the same time, as a Californian, I want more people outside the state to pay their fair share. It is not unusual in Santa Clara County to see people making 109,000 dollars or more (top 10% income bracket). It's incredible to think Californians pay so much in federal taxes, basically subsidizing Middle America, and yet are looked down upon by so many of our compatriots. For example, Texas took money from (robbed?) California through Enron. New Yorkers consider Californians soft. Dan Gable, from Iowa, reportedly refused to enroll California wrestlers because they were lazy. I dislike the status quo, which breeds resentment among the states and pits classes against one another while government spending runs amok. There has to be a better way.
More below on taxation.
McCain on Social Security (from http://www.csmonitor.com):
Americans have got to understand that we are paying present-day retirees with the taxes paid by young workers in America today. And that's a disgrace. It's an absolute disgrace, and it's got to be fixed.
An Example re: What Happens When You Tax One Group Too Much (taken from internet comment board):
Suppose that every day, ten men go out for tea and the bill for all ten comes to $100. If they paid their bill the way we pay our taxes, it would go something like this:
- The first four men (the poorest) would pay nothing.
- The fifth would pay $1.
- The sixth would pay $3.
- The seventh would pay $7.
- The eighth would pay $12.
- The ninth would pay $18.
- The tenth man (the richest) would pay $59.
So, that’s what they decided to do. The ten men drank in the bar every day and seemed quite happy with the arrangement, until one day, the owner threw them a curve. ‘Since you are all such good customers, he said, ‘I’m going to reduce the cost of your daily tea by $20. Drinks for the ten now cost just $80.
The group still wanted to pay their bill the way we pay our taxes so the first four men were unaffected. They would still drink for free. What happens to the other six men - the paying customers? How could they divide the $20 windfall so that everyone would get his ‘fair share?’ They realized that $20 divided by six is $3.33. But if they subtracted that from everybody’s share, then the fifth man and the sixth man would each end up being paid to drink his tea. So, the bar owner suggested that it would be fair to reduce each man’s bill by roughly the same amount, and he proceeded to work out the amounts each should pay.
And so:
- The fifth man, like the first four, now paid nothing (100% savings).
- The sixth now paid $2 instead of $3 (33% savings).
- The seventh now pay $5 instead of $7 (28% savings).
- The eighth now paid $9 instead of $12 (25% savings).
- The ninth now paid $14 instead of $18 (22% savings).
- The tenth now paid $49 instead of $59 (16% savings).
Each of the six was better off than before. And the first four continued to drink for free. But once outside the restaurant, the men began to compare their savings.
‘I only got a dollar out of the $20,’ declared the sixth man. He pointed to the tenth man, ‘But he got $10!’
‘Yeah, that’s right,’ exclaimed the fifth man. ‘I only saved a dollar, too. It’s unfair that he got ten times more than I!’
‘That’s true!!’ shouted the seventh man. ‘Why should he get $10 back when I got only two? The wealthy get all the breaks!’
‘Wait a minute,’ yelled the first four men in unison. ‘We didn’t get anything at all. The system exploits the poor!’
The nine men surrounded the tenth and beat him up.
The next night the tenth man didn’t show up for drinks, so the nine sat down and had tea without him. But when it came time to pay the bill, they discovered something important. They didn’t have enough money between all of them for even half of the bill!
And that, boys and girls, journalists and college professors, is how our tax system works. The people who pay the highest taxes get the most benefit from a tax reduction. Tax them too much, attack them for being wealthy, and they just may not show up anymore. In fact, they might start drinking overseas where the atmosphere is somewhat friendlier.
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A great post, but I think there's something missing. If you want to make it like the tax system we have now, in the first example the richest person would pay $69 and the four poorest would get $2.50 apiece. AND eat for free.
In the lowest income brackets, many people receive much more in credits and benefits than they paid in taxes. I know a person who paid $900 in income tax but received a $5,400 refund. Why? Child tax credits and disability income that is sheltered from tax.
There's a wealth transfer effect to the tax system that hides under the umbrella of 'helping the poor.' I submit that one reason people are poor is because they are unable, unwilling, or unconcerned about becoming 'unpoor'--that is, becoming more productive and valuable to society as a whole, thereby raising their income-earning potential. And eventually, their incomes.
The chart above tells in stark detail how munificent the government is with the wealth transfer effect.
Pretzel Logic -- great album, btw.
Clearly, the supply side argument has proved to be nonsense just as it did under Reagan. While we DO get higher growth (just as Keynes predicted 80 years ago), it has NEVER been enough to generate enough tax revenue to pay for itself.
Since Bush reduced the taxes, he has gone on a reckless spending binge (including starting a war which he refuses to pay for). The markets are starting to enforce their discipline, and this will be reconciled with higher taxes, or we will see the same financial crisis we saw in early 1990 when we had to deal with Reagan's mess.
Bush seems to think that history will be kind to him, like Harry Truman, but I think there is a huge difference: Truman had integrity.
I predict that G W Bush will go down in history as one of our worst Presidents -- not as bad as Nixon, but worse than Harding and far, far worse than his father.
Financial incentives are powerful, whether they be positive or negative. Higher taxes lead to tax evasion or apathy among the formerly ambitious. The nanny state is a great incentive to vacation for months and dwell in the fields of the type of illegal income streams unseen by the IRS. Why is it that Western Europe shuts down every Summer? Hostels are packed for the Summer. Trains are full of cheap Euro travelers. The time bomb in the Western world has its roots in demographics. Western nations are not reproducing while lifespans are still expanding. As average age grows, far fewer people will be supporting more and more.
First of all, moron, I do support Obama, but I am not a Democrat. I would be willing to bet that I have contributed A LOT more to the Republican candidates than you have. I get letters from George and Laura even now.
Second, if lower taxes are such a great idea, why don't we lower taxes to ZERO?Why don't we borrow the ENTIRE amount of the budget each year? Or do you think that might be a problem.
Third, we DID raise taxes in an environment WORSE than this--remember GHW Bush and "read my lips". We went on to almost a decade of strong economic growth.
Fourth, the tax proposal is to replace the top brackets to the level they were in the 1990s. NOBODY is talking about a nanny state.
Fifth, this is the first major conflict where we did not raise taxes to pay for the war. Even in Vietnam under Nixon, we kept tax revenues high enough to pay for the war. Talk about dishonest patriotism.
Finally, I would be willing to bet that YOU would pay less taxes under Obama than McGeezer.
Great suggestion on lowering income taxes to zero. I'm all for it. We didn't have any income taxes in this country for years, and as a result we built a stong and resilient economy. Now, after years of expanding government, we are being choked to death by the selfsame government that avows to protect us. Instead of fixing the budget by raising taxes, how about fixing the budget by going back to some semblence of a Constitutional government? Let's eliminate 90% of the crap we're paying for that we don't need. SSI being one.
Do you realize there are more Americans employed by government than in all manufacturing jobs combined? In light of this, it should be no mystery as to why our economy is in trouble. We have too many managers standing around the watercooler congratulating each other, and not enough people actually PRODUCING anything to support them.
I agree that Bush has betrayed conservatives. But that's irrelevant to this discussion. We're so far off course that the whole system is broken. I honestly don't see a way out, at this point. This is exactly why the founding fathers didn't want a democracy (we're *supposed* to be a republic) to begin with. In a democracy, politicians quickly discover that socialism becomes the way to attract votes -- the poor will always vastly outnumber the rich, so the politicians redistribute the wealth from the productive members of society (the rich) to the non-productive members. They buy their votes with OUR money. It's disgusting.
Hence democracies always move closer and closer to socialism, until they implode. We're more than half-way there already. Our forefathers gave us the best government in the history of the world, and we have virtually destroyed it.
I have no problem with less government as long as we start from a balanced budget.
The arguments as to how we got here, whether through recklessly funded social insurance programs (especially the recent Medicare prescription program passed only by the White House and Denny Hastert strong arming the Republicans), a hugely bloated pentagon or wars we do not pay for are irrelevant.
But, we start by balancing the budget, and THEN reduce expenses and taxes.
And if we want to get all the way to zero, including not wanting to spend for infrastructure, schools, and the enormous amounts it takes to be a superpower, so be it.
EVEN if we cut current expense to ZERO, we would still pay at least a third of what we now pay. You can thank G W Bush for half of this.
Yes, the rich are generally the most productive members of society. They are the ones creating jobs and powering our economy. Production is what creates the real wealth in this country. It's fashionable to attack people like Bill Gates and companies like Wal-Mart -- but the reality is, we should all be thanking them. They are the ones raising the value of our economy and the value of our currency, and supporting our tax system (as an example, Exxon alone this year will pay more taxes than the first 50% of taxpayers combined). Our currency has been hammered the past few years because we've gone from being a nation of producers to a nation of consumers. But nevertheless, to this day, every single American is living on the wealth the producers (who are now rich as a result of their production) have created. They raise the standard of living for ALL of us.
When's the last time you were offered a great job by someone who WASN'T either already rich, or on their way to becoming rich?
Anyway, are you suggesting it is fine to overtax the *children* of the rich ("winners of the genetic lottery"), because they aren't as productive as the families they spawned in? Membership has its priviledges, and that's the way it should be. I don't know about you, but I work hard to make my family confortable -- and if I am fortunate enough to create enough wealth in my lifetime to leave them a legacy, I will die a happy man. My children should not be punished for this.
I agree we desperately need a balanced budget. My argument is that we can't get there through higher taxes (we've proven that already). We need to get there through cutting spending, and returning to some modicum of our intended form of government.
Income taxes are relatively new to this country (less than 100 years). Before that we funded military and infrastructure, etc. through other forms of taxation (corporate taxes, etc.).
"I do support Obama, but I am not a Democrat."
First, of all, dickbrain, I never said you were a Democrat, I said you're an Obama groupie passing on misinformation and have brain-dead conclusions. Second of all, I could care less what anyone contributes to who might attempt to represent themselves as Republicans including George Bush. It is pretty apparent to me that my money is better spent not supporting a Presidential Administration that has not held the line on government spending at all. Nor has he put in near enough effort to reign in the GSEs that have bought the entire Congress and put us in this current situation Additionally, the tax increase of GHW Bush and the Clinton Administration have a lot less to do with the eventual balanced budget we achieved in the 1990's than you will ever understand. The fact of the matter is that the key was a divided government---a true conservative Congress, stingy with expenditures and a Democratic administration that didn't want to go down in history known as a do-nothing President. Do you remember how many years we had no budget which defaulted to little yearly growth in government? The media gave the Republicans hell, but now Clinton get the praise? What? Clinton didn't want this. The first two years of his administration with a democratic congress shows us he wanted a much larger governmental role. It turns out the default was the best option. What made the difference was his willingness to cut the capital gains rates in this second term just as the Republicans pushed him. That brought a big increase in government revenue. That was the last piece of the puzzle to bring us to a balanced budget.
As for your misinformation about "the tax proposal is to replace the top brackets to the level they were in the 1990s." We never had a payroll tax for income above 250K ever. Enough with this crap!
Or how about, "NOBODY is talking about a nanny state." What???? Is English a second language for you? Obama is now proposing no tax for Seniors up to 50K even though they all too often have no home mortgage left, no children in the nest, and already pay little if no tax on social security.
I can go much, much further here, but you're hardly worth any effort at all. Clearly, you've had few opportunities to develop your nascent ability to digest much information nor put together cohesive, complete thoughts.
I'm with Andrew Carnegie, who acquired a mountain of money: Put aside a little to make sure his wife and daughter wouldn't become streetpeople and spend the rest on church organs, peace studies, public libraries, and generally making the world a better place for his having been there.
PS: Conrad Hilton Jr., the first heir, made quite a public name for himself, too, and not as a hotelier.
Someone always has the power, in every society. In your socialist utopia, the *politicians* have all the power and all the wealth. In a capitalist society, the private citizens have the power and the wealth. There are plenty of rungs on the ladder in a capitalist society. There are lots of small business people, investors, etc. who have generated substantial wealth. Some of them evolve into your "mega-rich."
There is only one way to create wealth, and that is by producing more than you consume. By giving more than you take. This law applies to every form of wealth, incidentally -- be it spiritual, emotional, or physical wealth.
You know what the key difference is between capitalist and socialist societies? In a capitalist society, YOU can become the guy with wealth. But you would rather it be the government with ALL the wealth and ALL the power. Smart move.
Either you didn't read my entire post, or you lack the ability to understand it. I will restate one thing here, for emphasis:
When's the last time you were offered a great job by someone who WASN'T either already rich, or on their way to becoming rich?
The rich are generally rich for a reason (duh), and most of the time, it isn't because of daddy -- it's because they worked their asses off, went bankrupt at some point, and worked their asses off again.
But you go right on citing the handful of heirs and heiresses as "proof" that the rich are unproductive -- apparently you'd rather be self-righteous than be right. I am left only to assume that you favor redistribution of wealth (socialism). I also assume your rationalizations as to why it's okay to steal from the "rich" help you sleep at night. But do understand that they're still rationalizations, and your position is still morally wrong (and dangerous) -- no matter how much you resent the handful of Paris Hiltons in the world.
Be grateful I haven't mentioned lottery winners and celebrities.
You are trying to prove the rule by citing the exception. That's a non-sequitur.
Should we cite poor people who steal as "proof" that all poor people are immoral? That's the exact same reasoning you're using in your argument against the rich.
Yes, there are rich people who are completely non-productive... but they *are* the exception. Lottery winners, celebrities, and heirs make up only a small percentage -- most rich people become rich and maintain their wealth through lots and lots of hard work.
gon4beer -- thanks :)