Tax Cuts for the Wealthy

“Mr. Obama may have to give ground and agree to at least a temporary extension of expiring tax cuts for the wealthiest Americans, not just the middle class as he favors” – Somebody at the New York Times

It seems that the post-election mantra has become a discussion of whether or not to extend Bush-era “tax cuts” for “the wealthy” – with Republicans in favor and Democrats opposing.

Without rehashing, let me remind the reader that I believe what we ought to do is start with a discussion of “the right tax policy” and then move in that direction, instead of having Republicans always favoring lower taxes and Democrats always favoring higher taxes. There has to be a right answer – let’s figure out what it is and work toward it. Even if we all disagree on what the right answer is, we ought to at least figure out the goal before trying to get there.

This however is an aside to the true point of today’s post. What I want to point out is that the rhetoric is wrong. In fact, (in my humble opinion), the rhetoric is an outright lie. An intentional, brazen, pride-and-envy-laced lie.

We do not, in this country, tax wealth. We do not. We tax income (at the federal level anyway). This is an important distinction. The tax cuts at the heart of this grand debate are not, expressly not, tax cuts for the wealthiest Americans. They are tax cuts for the highest wage earners. These are different groups of people. Oh, there is some overlap – but probably not as much as you think.

The wealthy, the truly opulent wealthy people in America do not make their money via a paycheck. They make money on investments, tax-deferred bonds, “carried interest” (a great term). They don’t draw a paycheck from some employer to whom they are beholden. These means of earning money are not taxed in the same way that wages are.

If we let the Bush-era tax cuts expire for the highest wage earners (which is exactly who the tax applies to), Warren Buffett and Bill Gates will not miss a beat. They don’t earn their money that way. In fact, Buffett (a liberal) often laments that he pays a lower effective tax rate than his secretary. It is the secretary (I assume he pays his secretary well) that will get hammered by this tax increase, not Buffett.

So why the hype? Why the deception? Aren’t the progenitors of this rhetoric aware of the inconsistency? Of course they are. They have a political end and need public support. So, they rely on the innate pride and envy of humanity to explain that “those Republicans are out to help the wealthy at your expense.” It’s nonsense, of course. But it doesn’t sell as well to say “those Republicans are out to let the most productive members of society, who earn the highest wages, keep more of their own productive labors.”

According to Forbes, the top 400 wealthiest Americans paid an effective tax rate of 17.2%. How can this be if the top federal tax bracket is 35% – and that doesn’t include payroll taxes, property taxes, state income taxes, and all the rest. How can the uber-wealthy pay only 1/2 of the top rate? Because their income isn’t defined as income – it’s taxed by a different system.

Outside of the politics, what can we infer about our tax system? What could we say about a tax system that gives a very low (in fact negative) tax rate to the poor, increasing steadily through the middle class to a very high tax rate for the upper-middle class, then dropping dramatically again for the wealthy? Is this a tax system designed to redistribute the wealth, to spread it around? No. Clearly the effect of the system is to keep the poor and middle class from climbing into the wealthy class. A mound is put in front of them, lest through the sweat of their brow and the efforts of their hands they should acquire wealth and become a part of the upper class.

It seems like an all-too-common theme, but we see once again that the progressives are liars and hypocrites. The very thing they claim to hate – a widening gap between rich and poor with people forever consigned to remain in the class of their birth – is precisely the thing their tax program will accomplish.

And what of the current argument for Bush-era tax cuts? The position taken by the Democrats is that the taxation mound preventing class transition from low to high needs to be built even higher. Apparently it was not high enough in the past decade. Apparently too many of the lesser classes worked hard and acquired wealth to become self-sufficient. Apparently too many nouveau riche have appeared in their stately progressive clubs and sullied the place. (“Such miscreants ought to learn their place!”)

So don’t fall for the hype or the rhetoric. It is rhetoric and no more. The tax system is designed to keep everybody in their place, and to extort as much work and effort out of the aspiring middle class as possible. There is nothing new under the sun.

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4 Responses to Tax Cuts for the Wealthy

  1. Stuart West says:

    You make some very interesting points, in particular your discussion of the taxation of wealth versus the taxation of income.

    I do think, however, that your blanket description of progressives as “liars and hypocrites” is unfair and needlessly inflammatory. Are there progressives who lie? Of course. But there are also conservatives that lie and do bad things as well (Newt Gingrich, Tom Delay, Ted Haggart, and David Vitter, to name just a few). Does David Vitter’s penchant for wearing diapers while cavorting with a prostitute mean that all conservative ‘family values’ Republicans do the same, or even that they cheat on their wives? No, of course not. It would be unfair to suggest as much, but the same thing applies to those on the other side of the political divide.

    I think that, in a broader sense, both sides of the widening schism in this country need to, at a minimum, stop the name-calling.

    As to the taxation system, your point about taxation of wealth is a good one. I am all for revision of tax laws so that those laws hit the opulently wealthy at a fair rate. The truth is that the fabulously wealthy are, in many instances, a drain on society. Take, for example, Paris Hilton. She contributes nothing worthwhile to our culture. In fact, given her baseless notoriety, I think she harms our culture by undermining the virtues of hard work and personal responsibility. I would love to see her fortune stripped and her be relegated to an actual job. My personal preference would be to see her flipping burgers at McDonalds (my first job).

    As to progressive income taxation, where those who earn more money pay a higher tax rate, I don’t see how this is unfair. After all, we live in a society where taxes pay for things like police, firefighters, universal public education, impartial courts, basic research and development, higher education, and the like. Those expenditures create a society unlike any other on earth, by providing a baseline of infrastructure and human capital that fuels our economic prosperity. Those of us who earn more money take greater advantage of the benefits our society has to offer, and therefore should be willing to pay more to support that society. For example, I am in law school right now in a state school (UNC-Chapel Hill). I am the beneficiary of a society that values education so much that tax dollars are spent to support the institution I attend. My tuition is not the full cost of my education. When I am making a decent salary, then, how can I complain when that salary puts me in a position to pay more (as a percentage of my income) than someone flipping burgers? I’m still making more money, and I still have a professional job that provides me with satisfaction and a good living.

    It’s also worth noting the nature of the income tax system. The way tax brackets work ensure that those with higher incomes do take more home than those with lower incomes. As a hypothetical, suppose there are two tax brackets: 10% and 20%. Those making less than $50,000 are taxed at 10%, while those making more are taxed at 20%. Most people believe that our tax systems works by taxing all income, so that someone making $55,000 a year pays the 20% tax rate on that entire amount, leaving them with $44,000, compared to someone making $49,000 a year, taxed at 10% and keeping $44,100. That doesn’t seem fair, and it isn’t fair. It also isn’t how our tax system works. Because of the marginal rate system, our hypothetical $55,000 per year wage earner pays 10% on his income of $50,000 or less, and then the 20% rate on income above $50,000 per year. Thus, our wage earner at the higher salary keeps $49,000 per year under the marginal system (90% of $50,000 [$45,000] + 80% of $5000 [$4,000] = $49,000). Thus, those who earn higher salaries do take home more money, in a literal sense, than those who don’t. No one is going to turn down a raise because it raises his marginal tax rate, because to do so would literally cost him money.

    As a further point, if everyone (including the wealthy who don’t earn ‘income’ in the traditional sense) are taxed in truly progressive fashion, everyone is subject to the same rules. What is unfair about that? Sure, someone making more money pays a higher percentage of their salary in taxes, but they’re taking home more money, they’re benefitting more from the expenditure of tax dollars on things like infrastructure and education, and they’re paying the same rate as people in comparable situations.

    Your argument about income taxes could be read as a call to increase taxation on those who earn the bulk of their money through investments, which I would be all for.

    I am not so arrogant, however, as to think that there aren’t other valid arguments that cut against mine. I could very easily be wrong. But to convince me that I’m wrong requires careful reasoning, not sloganeering (something both sides of the political debate are guilty of).

    If you feel that any of the points I have made are incorrect, by all means please let me know. Thanks for the interesting post.

    • nomasir says:

      Stuart, welcome to the conversation. Some thoughts in response:

      (1) When I say “progressives” I generally don’t mean “all Americans who would label themselves progressives” – rather, I mean those who ascribe to the Fabian Socialistic notion of progressivism, the early 1900s progressives. These are the “live your life for you and make society better off” types. It is they who are liars and hypocrites, erecting a system that does exactly the opposite of their claimed benevolent goal (an outcome they fully understand and embrace – just not publicly). As for inflammatory name calling, sometimes making a cutting statement about the true nature of one who claims moral superiority is the only way to turn the conversation in the right direction. (See John the Baptists’ “brood of vipers” comment.)

      (2) I’m no defender of Paris Hilton. That said, she actual does work hard at being a model/celebrity/who-knows-what. That people are willing to pay money for her “services” whatever they are is an unfortunate commentary on America, to be sure. But, I’d hardly classify her as a drain on society. Nor do I feel it appropriate for me to relegate her or anyone to a “real job” – people have freedom to choose what they will do with their lives.

      (3) One doesn’t need a progressive tax rate for those who make more to pay more. A flat tax accomplishes that quite nicely. The simple mathematics of it show that progressive taxation is a disincentive to marginal work rate – which is marginal productivity rate. Thus, progressive taxation does not lead to a more productive society. No, nobody will turn down a raise because of marginal tax rates. But people do choose to work and produce less because of marginal tax rates. I see it quite often in my business – people who are very productive choosing to work 32 or 24 hours a week and get paid less because the additional hours they could work will pay them less due to taxation. They’d rather have the time off than lose so much of the paycheck to taxes.

      (4) I also went to UNC

      (5) You are correct, in general the post did not claim one direction or another on the nature of progressive taxation. Yes, amping up the tax rate on non-income forms of income would at least break the “barrier to entry” of the wealthy class. Of course, I do not prefer that – I prefer a flat tax, no exemptions, no deductions.

      (6) Ultimately, much of the disagreement over what government should and should not do in our lives devolves to “who owns your life?” If your life is your own, then what right does the government (which in a democracy is only an aggregation of your neighbors) have to take of the produce of your life and spend it to the benefit of another. That these benefits are benevolent is irrelevant. You are free to spend your own money on benevolence (and I certainly encourage you to do so). In this country though, we have taken to trampling all over rights and self-determination for the betterment of the whole. I would argue that the whole has not become as better-off as we like to think, and that we leave ourselves open to loss of freedom – the very thing that made this place great.

      Thanks for reading, enjoyed your comment.

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