The Tax Rate Racket
The flap over whether to extend present tax rates for the rich finds its center in a cultural proposition: Liberals, including rich liberals, either don't like the rich or feel obliged to pretend they don't.
The argument official Washington will have this month over tax rates—Republicans on one side, President Obama on the other side—is perhaps the oldest argument in politics. They had it 2,500 years ago in Rome: plebes vs. patricians. They'll have it 2,500 years from now (assuming no Second Coming of Christ disarranges worldly affairs). At least the language will be familiar: fat cats, plutocrats, the middle class, the poor, compassion, justice, fairness, highway robbery, grrrrrrrrr.
Nothing ever changes in this dreary context: which is why whatever Congress decides to do during the lame duck session about extension of the rate reductions voted in 2001 will decide nothing in the end, there being no end to the dislike of those who have more. Such is human nature.
Alas, because endless ranting over "income distribution" policies diverts attention from the more useful goals of maximizing opportunity and promoting growth for all, if at the unequal pace that nature and luck have decreed. You'll figure this out by watching the wrangling in Washington, D.C., this month.
Iago counseled Othello, "O! beware, my lord, of jealousy; It is the green-eyed monster ... "—an apt image for modern times, in that we talk of dollar bills as "green." The really monstrous part of the equation is the blindness it induces. The wealthy pay most of our taxes right now. Can't we see that?
The Tax Foundation, which exercises impartial oversight over the numbers, says the top 5 percent of taxpayers in 2008 (adjusted gross income, $156,619) earned 34.7 percent of AGI while paying 58.7 percent of federal individual income taxes. The top 1 percent paid 38.02 percent of all taxes, whereas the bottom 1 percent (adjusted gross income of $33,408) paid 2.70 percent. Without those rich people paying taxes, where would we be? Ask around in California, whose economy—heavily dependent on revenues from the fat cats of Silicon Valley and like venues—is underwater in large measure due to the recession's effects on those same fat cats.
Taxes on income, first levied in Britain in 1895 and in the United States after 1913, have a patina of fairness and equity. Why shouldn't those with the most pay the most? They can afford to. Warren Buffett often make this point. As we see, even so, they pay more already. Equally to the point, as Congress commences debate on extending the 2001 rates, tax hikes don't always bring in the revenues their proponents project. This is because changes in tax rates cause changes in behavior.
As Milton Friedman was wont to say, in propounding an important rule of thumb, if you want more of something (e.g., work, investment), you reward it (e.g., cut taxes); if you want less of it, you penalize it. You raise the cost. You make harder, more creative, more imaginative work less pleasant by grabbing more of the reward that comes from success at it. As you do so, you unnecessarily depress revenues. The more you grab, the less you get.
That's to speak broadly, of course. Life can't be reduced to an equation. It remains a safe bet all the same that incentives outrank penalties when it comes to policies that bear on job creation and economic expansion.
Extension of all, not just some, of the tax rates isn't the Platonic solution for our current economic woes. It better fits the present case than does presidential desire to grind the faces of the rich, mostly to please Democratic constituents who get a kick out of such spectacles—and often reward those who stage them.
See how this tax rate game stirs both sides to activity? Liberals troll for votes. Proponents of economic freedom seek job growth, opportunity and the creation of things that never before existed. On which basis was America made? Guess.
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It doesn't even matter what the tax rates are.
Every so-called tax cut has been followed by a huge increase in the monetary base by the central bank and a huge outflow of it by the government. An inflation tax is thus imposed and better yet, inflation boosts up people's incomes and pushes them into higher tax brackets. Thus, people earning the same in real terms also pay more after a tax rate cut. Happened in the so-called "neoliberal" era of Thatcher and Reagan.
Pure socialist nations have the lowest taxes and the lowest deficits (see Cuba, Venezuela, former German Democratic Republic,.etc). Is that a likable situation? Nope, their banks were seized by the government who could use the vast pool of capital in them howsoever they wanted wastefully. And then they can inflate as much as they want, except all the prices are controlled anyway. And to prevent long lines in the grocery store that betray shortages, the wages are also controlled. All interest rates, prices, wages,.etc become an artifice, since where loans, raw materials, and goods go is already pre-ordained. A nice way of avoiding higher taxes by bearing a cut in all your living standards.
So we all can look at the brighter side and consider that paying 60% of your income as taxes is not a big deal when it indulges governments that are capable of taking away incomes and standards of living through other means. Maybe taxes are a price of being in slightly free-er societies.
Actually, Mr. Sanjay, the opposite is true. From the nation's founding until 1913, we had no income tax and the gold standard, as the nation grew at a rapid rate. The exception that proves the rule was the Civil War, when Lincoln imposed an income tax and floated his greenbacks, which cut the dollar's value in half. After the war, the gold standard was restored and the income tax abolished.
In 1913, the Federal Reserve Board and the income tax both were imposed, leading to a century of inflation, with the dollar now worth about 2% of its 1913 value; and of income tax robbery, with the middle-class now paying about 25% in federal income tax, another 15.3% for Social Security/Medicare (really an income tax), and state income taxes as high as 9.55% in California. Total: a 50% tax on middle-class incomes.
No wonder we keep having recessions and depressions that get longer and deeper.
The income tax, debt and fiat currencies go together because, when the government can't rob and borrow enough, it debases the currency to get even more money to waste. That's what we're suffering now.
Actually, the real situation is never discussed. It is not the rich who suffer from the income tax but the middle class. The Social Security tax also is regressive on the middle class and barely touches the rich.
In Louisiana, we assert that every political quip, saying or proverb of humor and essence came from the lips of Huey P. Long. Huey is alleged to have coined and said the following:
"Tax reform means don't tax you, don't tax me, just tax that boy behind that tree! (The middle class is "the boy behind the tree.")
The three ways that the general government steals our money under the color of law are the three I's: Income tax, Interest of debt and the Inflation tax.
I have been told, although I cannot verify, that of the three I's, the Income tax contributes only about one third of current revenues to the general government, the other two thirds of the three-I revenue coming from borrowed money and from "money" prinited "ex nihilo," as if the Federal Reserve were God himself.
Apropos of Mr. Wilson's comments, and depending upon how one defines the word "rich", the latter don't even PAY social security. Social Security is indeed regressive, which is the tradeoff the middle class has made in consideration for what amounts to America's largest single entitlement program.
I have been told, although I cannot verify, that of the three I’s, the Income tax contributes only about one third of current revenues to the general government, the other two thirds of the three-I revenue coming from borrowed money and from “money” prinited “ex nihilo,” as if the Federal Reserve were God himself.
It is too late here to verify, but that would not surprise me in the least, as I have read in mainstream newspapers that the "official" size of the deficit does not take into account many budgetary items that the government WOULD be required to take into account if it were held to the same standards as are private corporations, and moreover that if it were, the deficit would be SEVERAL TIMES LARGER than what is published.
Time for some SERIOUS cuts to the U.S. military.
Comment by Clyde Wilson on 16 November 2010:
"Actually, the real situation is never discussed. It is not the rich who suffer from the income tax but the middle class. The Social Security tax also is regressive on the middle class and barely touches the rich."
This reminds me of the point I was going to bring up in my comment
yestersday about Social Security on another thread: has any study been done as to what would be the effect of making everyone pay the SS tax? There must be hundreds of billions, if not some triliions, of untaxed {by Social Security} income out there, and my impression is that not only would this new stream far outweigh any increase in payouts, it would have a much greater beneficial effect on the solvency of SS than any other measure, setting aside the question whether this is a good thing.
Yeah, every accounting report published by a government may as well be fiction, because who is going to hold a government accountable for false information? Nobody.
Anyway, the so-called "rich" are defined by all gross receipts of incomes. If you sold your house for $1,000,000 this year in order to pay back your debts, you are considered to be in the millionaire category. And then the egalitarians complain about the sudden rise in millionaires in a recession. If an actually rich guy simply did not draw out his salary from his own company this year or if he simply bought tax-deductible bonds or put it in his own nonprofit, he could be in a much lower category.
And he might not fork that money over unless there is a tax rate cut.
Define Rich
As long as we have an income tax, yes, why not tax for SS and Medicare on ALL income?
And why not eliminate ALL elective office retirements. Let the hacks live off SS and their own savings as the rest of us do. In fact, how about ALL Civil Service employees too, and the Military. If we are going to have SS, let EVERYONE participate and contribute.
Ah, the pleasures of a rant.
@3 Comment by Clyde Wilson on 16 November 2010:
"Actually, the real situation is never discussed. It is not the rich who suffer from the income tax but the middle class. The Social Security tax also is regressive on the middle class and barely touches the rich."
This reminds me of a question I meant to ask yesterday on the PJB thread "Has History Passed Obama By?" There are obviously vast sums of income that remain untaxed by Social Security, the cutoff being $106,800. Has any study been made to determine the likely effect of making everyone pay on every dollar earned, just like the working and lower middle classes do now? I strongly suspect that the increased intake to the program would far outweigh any added payouts, and probably maintain its solvency for the foreseeable future.
I have no answer to the question of whether this is a good thing. The ideal is to return to higher rates of saving and to extended families within which the elderly should be cared for, and maybe the answer to the question hinges on whether maintaining SS makes this more or less likely. But isn't there also an argument from fairness and based ultimately on Christian charity? Don't the owners, managers and professionals owe something to the servants and producers who wore themselves out making them comfortable, protecting them, meeting and exceeding their production quotas, and watching all but a tiny fraction of the wealth they thus produced disappear into the estates of their masters?
In short, I believe the correct way to see Social Security, (if it should come to be properly funded, by the contributions of every income earner on every dollar earned) which after all, was enacted under the rule of one of our more aristocratic presidents, is as a paternalistic type of noblesse oblige, which paleos and lovers of the old republic can support while we work toward a return to the family-based way.
Sorry for the semi-duplicated post. The one I sent yesterday was from someone else's machine, and thus went into moderation, and I didn't notice it had come out.
Provisions do need to be made for large-scale disasters (the Whig approach to the Irish potato blight, the assumption that a dead peasantry was preferable to a temporarily disincentivized one, was both morally and economically wrong) and there is perhaps a case to be made for a public health insurance scheme. People go on about being "forced" to buy health insurance, but the failure to carry such insurance creates many external bads in the event of a debilitating disease or accident, and telling the poorer classes to "join the military" just puts them on the taxpayers' payroll anyway (as well as bolsters the bloated and horrid US worldwide occupation).
The problem with the noblesse oblige approach is the technocratic nature of a centralized social security net. Two points are to be made here. First of all, incentives to work and not to waste need to be preserved somehow: for example, doctor visits should not be, as they are in the UK, free at the point of delivery, and public retirement schemes are just plain idiotic in themselves, not the least because they will never be perennial. Second, in the Middle Ages this was the tithe on the grain.
Payroll taxes, of all things, should not be raised--it would be very bad for ordinary wage-earners. Yet the Obama administration wants to raise payroll taxes. What needs raising is inheritance ("death") taxes for the extremely wealthy and capital-gains (parasitic earnings) taxes. A no-brainer, I would think. But not sure our libertarian friends have any good sense on this. The Obama plan to raise taxes on family incomes over $250,000 isn't terrible but it's a copout--the ones who should have their taxes raised first are the extremely wealthy (family income of over $1,000,000), who benefit disproportionately (whether because of their talents or their family connections hardly matters) from a society in which education and public safety and social stability exist in the first place, and who should pay (via taxes) for the privilege of living in a country with such prerequisites of wealth-making or move elsewhere, where their opportunity to make money will be very chancy and will depend largely on the whims of the powerful.
@13 NGPM 18 November,
I'm not sure what the reference to the practice of tithing is meant to indicate, unless it is for the questionable purpose of using the Middle Ages' undeserved bad reputation to smear something; but for my money, I'd be delighted to see a flat tax, and 10% for everyone sounds fair enough to me.
Whatever bad consequences may attach to Social Security, it has one great thing to recommend it: eventually, some of the money it takes in must be passed along to real people, people who have worked, whereas the revenue from the income and most other taxes becomes the government's and the government's alone. For those who object to supporting SS, suppose, for every new dollar taken into SS by the removal of the cap, a dollar of income tax be removed from the taxpayer's burden. In one stroke, the situation of the commons is greatly improved, and Leviathan is much weakened.
@14 Ken Zaretzke,
I don't know or care what Obama wants, but my suggestion - eliminating the cap on Social Security contributions - is not a "raise" and would not be bad for ordinary wage earners, who are already paying on every dollar earned, and would continue to pay exactly what they pay now, 6.2%. And I stand by my statement that SS is the least bad of all our taxes, in that it returns the most cash to the people. Unintended consequences of relying on the government for retirement security are another subject.
Our corrupt and distorted taxation system is not going to be improved by inventing new taxes or reimposing old ones. Socking it to small-business owners via the death tax, wringing more out of the already double taxed capital gains, raising income taxes on the wealthy and on people making over 250 grand are the wrong way to go. None of that will matter if the root of the problem is not exposed and pulled out - that being the myriad ways people have of calling a dollar made by some other name. Only when all the accounting wizardry of front organizations, shell games, off-shore shell companies, hedging from seashell strewn islands, etc., is abolished and everybody, everybody, pays, will we be able to approach tax fairness. Fiscal sanity - what is done with the money - is, again, another subject.
Mr. Jacobi,
I appreciate your comments and defenses. I do not pretend to understand it as well as you, but your posts appeal to my two remaining rules when dealing with duopoly at the national level:
1) "If the GOP supports legislation,always oppose the same.
2) "If the Democrats support legislation, hide your wallet and try to get women and children out first.
#11&16--Gilbert Jacobi:
I hold no briefs for the Social Security system, but I have to say that even if it is a sort of paternalistic noblesse oblige, it has the virtue of being based on a common pool of resources--everyone is supposed to be in the same boat, for broadly "democratic" reasons. (An unusual kind of noblesse oblige, but not any worse for that.)
Also, tax policy should not stab itself in the eye with respect to the major longterm social problem we have nowadays: the huge and growing gap between the very wealthy and everyone else. I favor using tax policy to address economic obscenities, such as the stunning gap between the top 10%--especially the top 1%--and the bottom 90%. The capital-gains tax and the inheritance tax are merely the first things that come to mind. Corporate taxes--on multinational business firms--might also be a good idea, but I'm less sure about that.
@Gilbert Jacobi: I did not qualify myself so well. What I meant was that the tithe was 1. not an unreasonable percentage, and 2. went to a societal operation that was anything but technocratic.
"I favor using tax policy to address economic obscenities, such as the stunning gap between the top 10%–especially the top 1%–and the bottom 90%. The capital-gains tax and the inheritance tax are merely the first things that come to mind. Corporate taxes–on multinational business firms–might also be a good idea, but I’m less sure about that."
There is no such thing as the top 10% or even top 1%.
95% of the people who are in "the top 10%" of a given year will not be there the next year. When you sell your house, you enter the top 10%. When a small business owner decides to draw out his money from his business in lean times and keeps it to meet his expenses when there is no guarantee of earnings for the next few months, he enters the top 10%. And he won't be there the next year. Those fatcats in Wall Street who do draw out huge salaries are few enough to be only 0.01% of the top 10%.
I seriously feel all of us common folk would benefit alot from a good statistics course, because we are a group too prone to making hasty conclusions from statistics. Journalists are worse and especially so are columnists.
As for inheritance tax and capital gains tax, there is no proof that those have done a single thing to reduce the number of obscenely rich and decadent people in the past 100 years, and capital gains tax in the US had forced businesses to invest abroad (making America a "creditor" nation) and reducing it had brought that money back to America (making America a "debtor" nation).
@17 Robert,
Indeed, I am pretty good at pretending to understand things, if I do say so myself. One thing I know for sure, though, and that's that Americans expend entirely too much energy trying to hide their wallets, which results in those who are not clever or quick enough at hiding it getting caught staring into the taxman's headlights at midnight on the road from subsistence to penury. Or as Mr. Peters has Huey Long putting it, shifting the burden to "that boy behind the tree".
"those who are not clever or quick enough at hiding (the wallet) get caught staring into the taxman’s headlights at midnight on the road from subsistence to penury."
Very well put, Mr. Jacobi. I myself am at the glad poverty subsistence level but heading fast towards desitition and penury. As a young man I did not so much misread the future, as much as put too much faith in my own abilities; so instead of taking my own advice and retreating with wife and one child to a small cottage or apartment in New Zealand, I tried going back to my own home and raising a large family. I don't regret the effort or the mission, just the utter defeat and refrain from the crowd at the door and backroom chorus of "I told you so!"
God Bless and keep up the good posts. We must now simply try and shoot our way out from the duopoly siege until relief comes from death and exhaustion or grace from heaven.
God bless you, too, Robert, and please accept my thanks for contributing so many good new Americans.
The reason why America is a debtor nation is that our trade policy is recklessly utopian; our debtor status has little to do with business incentives, especially business "incentives" like reduced capital-gains taxes (it's clear that the very rich do not spend their extra money on business expansion or research and development, at least not with the tax policies we've had).
Of course there's a difference between the top 1% and the bottom 90% in the esential sense of the relative share of the national wealth held by each, and it's a difference that historically sticks out like a sore thumb.
I think it's quite wrong to say that 95% of the people who are in the top 10% will not be there in the next year. The top 10% has moved out of reach of the vast majority of other citizens. And even within the top 10%, the top 1% is reachable only by a very small number of people, overwhelmingly consisting of bankers, financiers and major-firm CEOs.
The problem started in the mid-70s, but Ronald Reagan greatly exacerbated it. I'm a former foolish supply-sider myself: mea maxima culpa.
... Robert... please accept my thanks for contributing so many good new Americans.
America's only hope for the future.
@24 KDZ 22 November,
I think you make an important point: though the identity of some of the people making up the top 1% may change as fortunes rise and fall and as they make various accounting moves, the important fact is, there is always this top 1%, and this segment always controls the economy and much else.
I think a larger point is being missed when it comes to the "middle class" and taxation.
The obvious, but unspoken message in all of this phony love for the middle class that we hear from both the Republican party and the DemocRats is that we of the hoi polloi should aspire no more than to be middle class- and that our betters will do what is necessary to crush anyone who dares succeed at rising above middle class.
This country stepped over the edge of the cliff when it adopted the income tax in 1913. Without it all this warmongering and waste of the last 97 years would have been impossible. The funding of governments by tariffs and excise taxes only could provide funds for a more limited government. The tariffs also had a good effect on protecting American workers.
The 1913 income tax, as Paul Craig Roberts described it, was not out of proportion. Only those earning above $500,000 a year paid it, and never more than 3% of it.
Roberts was dead correct when he asked why the poor don't mind giving away third of their income as long as the rich gave away half of it.