Thursday, April 28, 2011

The Right Mix for the USA
Those Cats are Too Fat 

A Cocktail Party Position on Taxes

Now that some of the smoke and hot air has blown away and we are into serious discussions about federal budgets and how to stop the deficit bleeding, it is time to start talking sense about income tax rates. As usual, quite a few statements by politicians on both ends of the political spectrum twist the facts, or simply are not true.

One common assertion is almost true. The most recent Bush-era tax cuts are derided by political opponents as a gift to the wealthy. Actually, all taxpayers got a reduction. However, the very rich did benefit the most because the top dogs saw the maximum rate reduced from 44 percent to 35 percent, a huge advantage for them.

That brings up something often misunderstood about income taxes. Using an example that might apply to some of us mere mortals, let’s compare a couple filing jointly with taxable income of $50,000 and one whose income is $4 million. The tax rate for the little guys is 13.3 percent. The tax rate for the wealthy couple on the first $50,000 of their taxable income also is 13.3 percent—exactly the same. Higher rates for the high earners gradually kick-in at higher levels of income; the fat cat couple does not pay 35 percent on all of their income, only the amount that exceeds $379,150.

Consider President Obama’s income taxes this year. All recent presidents have made their return information public—a good thing. The Obamas filed jointly. Their income totaled $1.73 million. Most of it was the President’s $400,000 salary and royalties from three books he authored that sold millions of copies. The Obamas paid $453,770 in income taxes. That’s a lot of cash, but it is 26 percent and change, not 35 percent.

Knowing their tax records will be made public no doubt inhibits the Obamas from using tax loopholes to reduce their rate to an even lower level. Most wealthy folks have no such constraints. They can hire accountants and attorneys the little guys cannot afford. It is well-documented that the experts guide their clients to numerous legal ways to avoid a whole lot of income taxes. The rich don’t need much help in finding ways to profit from capital gains; these rates are lower than the income tax levels. People at the low end of the income spectrum have little or no ability to earn capital gains.

Some of the wealthy like to point out that they support millions of low-income people who pay no income taxes at all. It is true that nearly half of Americans pay no income taxes through their annual returns to the Internal Revenue Service, but some of those filers are quite well-to-do. And, everyone who works is liable for payroll taxes that finance Social Security and Medicare. These amounts are income taxes, even if we choose to call them something else.

Congress responded to an Obama proposal by using some trickery to give employees a gift throughout 2011. The usual 6.2 percent Social Security tax on wages was reduced to 4.2 percent. The difference, the legislation says, will be made up in transfers of funds from the treasury to the Social Security trust funds. The trouble with that is the treasury is broke, and the gift contributes to the ballooning deficit. The Social Security trust funds were doing just fine, with a multi-trillion dollar surplus, before this ruse went into effect. It is going to be difficult for Congress to take back this unnecessary gift at the end of 2011. If this tax reduction is not rescinded, it will seriously weaken the Social Security system.

Opponents of any income tax increase claim a return to the 44 percent top rate for the wealthy would retard the creation of badly needed jobs, and even contribute to increases in unemployment. That line of thinking is at odds with reality. The top rate peaked at 92 percent in the early 1950s. It was reduced to 77 percent in 1964 and later to 70 percent, where it stayed throughout most of the 1970s. The three decades when very high rates were in effect were among the most prosperous times in American history.

As the top income tax rate was lowered, we experienced a massive redistribution of wealth in the U.S. from the poor and the middle class to the rich. Reports based on Internal Revenue Service statistics show this clearly. One appearing in The Washington Post last summer said the average income for the top one percent of earners rose 281 percent, or about $973,000 per household, in the previous 10 years. The bottom 20 percent of earners saw their incomes rise only 16 percent, or $2,400 per household, during the same period. When inflation is factored in, poor and middle-class workers actually lost money while the fat cats grew much fatter.

The top one percent of Americans now take in nearly 25 percent of the annual income generated in the country. They control 40 percent of the wealth. These figures have risen dramatically recently as unemployment also rose to high levels.

Americans are fascinated by the rich and famous, and most of us admire those who climb up the economic ladder through their hard work, often coupled with risk-taking. We think they deserve to be well-rewarded. But we know instinctively that the current vast and growing gap between the rich and poor in the U.S. is unhealthy. Respect for the rich is turning to anger over huge Wall Street bonuses and outlandish salaries for corporate officers and a government that seems unable or unwilling to make adjustments to compensate for the excesses.

What we feel in our guts is bad for America has a scientific basis. A 2009 best-seller, The Spirit Level: Why Greater Equality Makes Societies Stronger, describes links between wide income gaps in nations and social problems. The problems including obesity, mental illness, drug and alcohol abuse, homicides, imprisonment rates, lowered life expectancies, over consumption of resources, teen pregnancy, and lack of upward mobility.

Surprisingly, the scientists state that many of the problems are experienced by the rich as well as the poor when wealth is very unequally distributed. And the connections to wealth inequality prevail in rich as well as poor nations. The scientists once again confirm the link between income gaps and poverty, which has been described many times.

Error rates can be high in studies involving the human condition and interpretations of data always are somewhat subjective in the social sciences. But if the authors of The Spirit Level are correct about only a few of the links they describe, we have compelling evidence that huge gaps in income and wealth within nations contribute to vexing problems that have high costs for all citizens. The ultimate solution when the gaps become too wide is revolution. No thinking American wants that.

The Cocktail Party endorses three actions to reduce the gap between the haves and have-nots in America to a more reasonable level, help reduce the federal deficit, and preserve Social Security:

1. Restore the top income tax rate to the 44 percent level when the current tax legislation authorizing the 35 percent rate expires.

2. Return the Social Security payroll tax rate for employees to 6.2 percent at the end of 2011.

3. Remove the cap on Social Security payroll taxation, which currently is $106,800, but leave the maximum payout where it is. Currently, the Social Security payout for workers who earned high salaries and retire at age 66 is nearly $26,000 per year. It rises through cost-of-living adjustments as do all payouts. That’s plenty of safety net for any destitute fat cats who manage to lose their millions. Removing the taxation limit coupled with minor changes in the way cost-of-living adjustments are calculated is sufficient to assure Social Security will be solvent for the foreseeable future.

The fat cats can well afford to slim down a little for their own good and the common good.

To review the announcement of the founding of the Great American Cocktail Party visit the August 5, 2010 post titled “Coffee, Tea, or . . .” in the archive on the right-hand column of this Blog.


Dick Klade said...

Bill Hamilton commented via e-mail:

At last! A blog on the income tax puzzles that we mere mortals can understand. Thank you, old friend, for the time and research you have devoted to giving us a lift.

Most of the hot air being blown by our politicians does nothing but discourage me, but your blog got me back on track. As you know, I'm a word person--all the twisting and lying about the numbers I can now look at objectively in the light shining from your blog.

Did I ever mention that the Cocktail Party was founded on my wife's 80th Birthday? August 5, 2011 will be a good time for us to review the truth of your blog as we celebrate her 81st.

JHawk23 said...

The Cocktail Party's three proposals make a lot of sense. I'm not certain they'd fully solve our problems, but they'd go a long way. The problem with common sense is that our politicians haven't demonstrated they possess much of that precious commodity. Some have trouble grasping that revenue is even a part of the equation. How can we get them on the right path?