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The Fortunate 400

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David Cay Johnston, Pulitzer Prize winning journalist and author, writes about the taxes the richest people in 2009 paidDavid Cay Johnston, Pulitzer Prize-winning journalist and author specializing in taxes and tax policy, reports in Reuters on the taxes paid by the richest 400 in the country:

The annual report, which the IRS typically releases with a two-year delay, covers the 400 tax returns reporting the highest incomes in 2009. These families reported an average income of $202.4 million, down for the second year as the Great Recession slashed their capital gains.

In addition to the six who paid no tax, another 110 families paid 15 percent or less in federal income taxes. That’s the same federal tax rate as a single worker who made $61,500 in 2009.
Overall, the top 400 paid an average income tax rate of 19.9 percent, the same rate paid by a single worker who made $110,000 in 2009. The top 400 earned five times that much every day.
Just 82 of the top 400 were taxed in accord with the Buffett rule, which proposes a minimum tax of 30 percent on annual incomes greater than $1 million.

Let’s return for a moment to the single worker who made $61,500 in 2009 and paid 15 percent of his salary in federal income taxes. The top 400 made more every three hours than he did in a year, and yet many of them paid the same or a lower tax rate, according to the data in the report.
On top of his $9,225 federal income tax, he also paid $9,409 in payroll taxes, which include Social Security and Medicare taxes. Half of the payroll tax was deducted from his check. His employer paid the other half, which was really hidden wages taxed at a 100 percent tax rate.
His total federal tax burden was 30.3 percent, exactly 50 percent more than the 20.2 percent tax burden, measured the same way, on the 400 at the top.

TWO TAX SYSTEMS

This comparison illustrates how Congress has created two income tax systems, separate and unequal, burdening millions much more heavily than the few, those with gigantic incomes and a propensity to make campaign contributions.
One system is for wage earners and pensioners, whose taxes are withheld from their checks. This rigorous, efficient system taxes them fully.
The other system is for business owners, executives, managers of hedge and private equity funds, name brand athletes and entertainers, and many others with huge incomes. Congress lets them put unlimited amounts of income in sheltered accounts and put off paying taxes for years or even decades.

Deferral does not prevent these super rich Americans from spending their money. Hedge fund managers and others can borrow against their untaxed wealth, currently at interest rates close to zero. So long as their wealth grows faster than their borrowing their net worth continues to increase.

The IRS report covers only the 400 highest incomes reported on tax returns, not the 400 highest actual incomes, which I am certain are much larger on average because of deferrals. That means the report overstates the tax burdens of the richest Americans pay.

The issue we need to debate is not how much you earn — make all you can. The issue is that everyone should pay their taxes now, not in some far-off tomorrow, and as you go up the income ladder so should your tax rate.

By what economic, political or moral standard should working stiffs be forced to pay their taxes immediately, while plutocrats pay their taxes by-and-by? And why should anyone who makes more than $200 million live tax-free?

Those are questions to ask candidates on the hustings, insisting they give specific, focused answers.

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Written by Valerie Curl

June 11, 2012 at 9:39 AM

The GOP’s Bizarre, Disturbing Passion for Raising Taxes on the Poor

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James Kwak, co-author of 13 Bankers and White House Burning: The Founding Fathers, Our National Debt, and Why It Matters to You and the popular economics blogBaseline Scenario, rightly Congressional Republicans for wanting to increase taxes on the poor while making certain the rich see not one dime of tax increase.

Eric Cantor

As Bruce Bartlett reminds us in his latest Economix column, leading Republican figures, including Eric Cantor, as well as a majority of party members, argue that taxes should go up … on the poor. They are talking about the famous “47 percent” who don’t pay federal income taxes.

This overlooks several facts. One, which Bartlett points out, is that many people don’t pay income tax because of the child tax credit and the earned income tax credit, both of which were increased in the Republicans’ 2001 tax cut. (The child tax credit also originated in the 1997 budget bill, when Republicans controlled both houses of Congress. The earned income tax credit has a longer history, but has been periodically expanded by both political parties.)

Another is that focusing on federal income taxes is misleading, especially now that payroll taxes bring in almost as much money as the individual income tax. If you include payroll taxes, it turns out that only 18 percent of households pay no direct federal taxes.

The “47 percent” figure also ignores the question of why some people don’t pay direct federal taxes. The majority of people who don’t pay either income or payroll taxes are the elderly–largely because (a) Social Security benefits aren’t taxable for most beneficiaries and (b) many of the elderly no longer work. If Eric Cantor wants to solve the “problem” of people not paying federal taxes, he should push to make Social Security benefits taxable. Good luck with that.

Almost all of the other households that don’t pay direct federal taxes make less than $20,000 per year. So, it turns out, the only people that Republicans want to raise taxes on are the very poor — and they want to do it so much that they are willing to consider breaking the Pledge.

Kwak argues that this dramatic change in Republican tax policy results in Class Warfare against the poor and those struggling in this economy.

Two explanations jump to mind. The first is that the modern Republican Party is funded by the very rich. Since the 1970s, electoral politics has gotten much more expensive (in real terms). As political scientist Thomas Ferguson and others have argued, modern political parties have adapted by granting leadership positions to those members best able to bring in large contributions–a strategy pioneered by Newt Gingrich but since slavishly imitated by the Democrats.

The result is that the parties’ platforms now reflect the wishes of their major funders, not their median voters. This is why Republican presidential candidates spent the primary season competing to offer the most generous tax breaks to the rich–while Paul Ryan’s budget slashes Medicare, a program supported by the Tea Party rank and file. For the rich people who call the shots, it’s simply in their interest to lower taxes on the rich and raise them on the poor. End of story.

The other, even-more-disturbing explanation, is that Republicans see the rich as worthy members of society (the “producers”) and the poor as a drain on society (the “takers”). In this warped moral universe, it isn’t enough that someone with a gross income of $10 million takes home $8.1 million while someone with a gross income of $20,000 takes home $19,000.* That’s called “punishing success,” so we should really increase taxes on the poor person so we can “reward success” by letting the rich person take home even more. This is why today’s conservatives have gone beyond the typical libertarian and supply-side arguments for lower taxes on the rich, and the campaign to transfer wealth from the poor to the rich has taken on such self-righteous tones.

This just goes to show how pathological the Republican Party has become. It would be so much simpler, more logical, and more politically appealing if they would just draw a line against higher taxes for anyone. That’s what the Taxpayer Protection Pledge does, and it makes a certain amount of sense, even if I think it’s bad policy. The fact that Eric Cantor feels compelled to go out of his way to talk about raising taxes on the poor shows how the nasty instinct for class warfare is undermining what should be a simple, small-government agenda.

*Those are at 2011 tax rates, including the employee’s share of payroll taxes, assuming that the rich person makes $2 million in salary and $8 million in capital gains. Note that the effective rate of 19 percent is still significantly higher than those of Mitt Romney and Warren Buffett.

Personally, I find increasing taxes on the poor so they have “some skin in the game” morally offensive. Increasing taxes on poor people quite literally means taking food out of children’s mouths or clothes off their backs. What kind of morality is that says poor families should suffer even more, especially the innocent children?

If Republicans and others are really concerned poor people not paying any taxes, then why aren’t they working to increase the educations and skills of poor people so those people can get better paying jobs? Why aren’t Republicans pushing to increase wages for the lowest paying jobs so low income people can afford to pay taxes without harming the health and welfare of their children?

Written by Valerie Curl

June 8, 2012 at 8:47 AM

Four GOP Presidential Icons on Tax Fairness and Values

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Three Republican Presidential Icons Who Advocated Tax Fairness

Bruce Bartlett, in the Fiscal Times, makes a really good argument for raising taxes on the wealthy, especially on those who receive capital gains, dividend, and inheritance tax breaks.

What is novel about Bartlett’s argument is that he uses four Republican Presidential icons to make his case.

At least through the 1980s, special tax breaks, such as those for dividends and capital gains, were viewed as unfair and unjustified. Indeed, Ronald Reagan was among those who decried the capital gains break because it meant that rich people, who get most of their income from capital, paid less taxes than the average working man. Consequently, as part of the Tax Reform Act of 1986, he agreed that income from capital gains and wages ought to be taxed at the same rate.

Reagan was building on long tradition by Republicans of demanding fairness in the tax code, which, among other things, meant making sure that capital and labor were treated equally. For example, in his first State of the Union Address in 1861, Abraham Lincoln said, “Labor is prior to and independent of capital. Capital is only the fruit of labor, and could never have existed if labor had not first existed. Labor is the superior of capital, and deserves much the higher consideration.”

In 1910, Theodore Roosevelt excoriated big corporations and wealthy men for rigging the system in their favor and not paying their fair share of taxes.

    The true friend of property, the true conservative, is he who insists that property shall be the servant and not the master of the commonwealth; who insists that the creature of man’s making shall be the servant and not the master of the man who made it. The citizens of the United States must effectively control the mighty commercial forces which they have themselves called into being….

    We grudge no man a fortune in civil life if it is honorably obtained and well used. It is not even enough that it should have gained without doing damage to the community. We should permit it to be gained only so long as the gaining represents benefit to the community. This, I know, implies a policy of a far more active governmental interference with social and economic conditions in this country than we have yet had, but I think we have got to face the fact that such an increase in governmental control is now necessary.

    No man should receive a dollar unless that dollar has been fairly earned. Every dollar received should represent a dollar’s worth of service rendered – not gambling in stocks, but service rendered. The really big fortune, the swollen fortune, by the mere fact of its size acquires qualities which differentiate it in kind as well as in degree from what is possessed by men of relatively small means. Therefore, I believe in a graduated income tax on big fortunes, and in another tax which is far more easily collected and far more effective – a graduated inheritance tax on big fortunes, properly safeguarded against evasion and increasing rapidly in amount with the size of the estate.

In 1954, Dwight Eisenhower said that everybody should pay their fair share and denounced unjustified tax cuts. “An unwise tax cutter, my fellow citizens, is no real friend of the taxpayer,” he said.

In short, the real debate on the Buffett rule is about fairness. Its particulars are less important – especially since it has no chance of passage at this time – than the debate that will accompany it. If Republicans are successful in conveying the message that it’s okay for rich people to pay less than working people then this will frame the forthcoming budget debate in a particular way….

If history proved any answers, the one answered by these four Republican presidents is that labor should be taxed at the same or lesser rate than capital gains and inheritance because labor is inherently worth more to society.

Something to think about as discussions on taxes and tax rates continue throughout the year.

Related:

Have the Rich Ever Paid a Fair Share of Taxes? (Part 1)

Have the Rich Ever Paid a Fair Share of Taxes? (Part 2)

Written by Valerie Curl

April 20, 2012 at 10:35 AM

How The GOP Became The Party of Tax Cutters (Hint: It wasn’t economics!)

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The following quoted text duplicates in it’s entirety Bruce Bartlett’s Tuesday, 3/20, NYTimes Economix blog but without all the links in the original blog post. You can go to the original for those.

I’ve often wondered where and why Republicans derived their tax cutting dogma…and how it took hold. It’s doubtful many others know either because until Reagan’s Administration, Republicans had been the party of fiscal responsibility and spending austerity.

Prior to John Kennedy’s Administration and even during it, the GOP maintained a strict policy priority of keeping deficits under control, even if doing so meant higher tax rates. For example, when President Kennedy wanted to cut taxes (from a top marginal rate of 91% to 65%) to spur growth and investment, Republicans rebelled saying the tax cut would increase the deficit far too much.

According to the Washington Monthly, “Keep in mind, unlike contemporary GOP policy, Kennedy’s plan distributed “peace dividends” broadly across the wage spectrum. As the Joint Committee on Internal Revenue Taxation explained at the time, the bottom 85% of the population received 59% of the benefits of JFK’s tax cut. The top 2.4% received 17.4% of the tax cut, and the top 0.4% received just 6% of it.”

Nevertheless, now I know the genesis of current GOP “tax cuts solve every economic problem” dogma. Once again I thank Mr. Bartlett for putting policy ideas in accurate historical context. As that often used phrase goes, the more we know….

Note: The bold emphasis throughout is mine, not Bartlett’s.

The Origin of Modern Republican Fiscal Policy
Bruce Bartlett
In 1976, the journalist Jude Wanniski wrote an essay, “Taxes and a Two-Santa Theory,” little noticed at the time and virtually unknown today, that put forward a theory that has had extraordinary influence on the Republican Party. Indeed, virtually everything Republicans say about taxes and spending today echoes that theory.

In 1974, Mr. Wanniski attended a conference sponsored by the American Enterprise Institute in Washington. One speaker was Robert Mundell, who had worked with the conference organizer, Arthur Laffer.

In his conference paper, Professor Mundell first articulated what came to be called “supply-side economics.” He said the mainstream economic view, based on the theories of John Maynard Keynes, was all wrong. Keynesians advocated easy money to stimulate growth and a tight fiscal policy to fight inflation.

This was the exact opposite of what was necessary, Professor Mundell said. He advocated a tight money policy to fight inflation and tax-rate reductions to stimulate growth.

Mr. Wanniski wrote a commentary, “It’s Time to Cut Taxes,” about Professor Mundell’s view that was published in The Wall Street Journal on Dec. 11, 1974. He wrote a much longer description of supply-side economics, “The Mundell-Laffer Hypothesis — A New View of the World,” that was published in the spring 1975 issue of The Public Interest, an academic journal edited by Irving Kristol.

Mr. Wanniski’s most important contribution to the emerging supply-side philosophy, however, was his “Two-Santas” article, published in The National Observer on March 6, 1976. The Observer was a weekly published by Dow Jones that folded in 1977; consequently, it has been pretty much forgotten. (The article doesn’t even appear among the archives of Mr. Wanniski’s work at the Polyconomics Web site; I retyped it myself from a reprint Jack Kemp used to hand out when I worked for him, and I posted it here.)

The essence of the Wanniski argument was that each political party needed to be a different sort of Santa Claus. The Democrats were the spending Santa Claus, promising more government benefits. The Republicans should be the tax-cut Santa Claus, he said.

Many of the nation’s problems in 1976 stemmed from the unwillingness of Republicans to play that proper role. Instead of being the tax-cut Santa, they had become the party of fiscal austerity. The balanced budget was the sine qua non of Republican economic policy. This was both bad economics and bad politics, Mr. Wanniski said.

Instead of worrying about the deficit, he said, Republicans should just cut taxes and push for faster growth, which would make the debt more bearable.

Mr. Kristol, who was very well connected to Republican leaders, quickly saw the political virtue in Mr. Wanniski’s theory. In the introduction to his 1995 book, “Neoconservatism: The Autobiography of an Idea,” Mr. Kristol explained how it affected his thinking:

I was not certain of its economic merits but quickly saw its political possibilities. To refocus Republican conservative thought on the economics of growth rather than simply on the economics of stability seemed to me very promising. Republican economics was then in truth a dismal science, explaining to the populace, parent-like, why the good things in life that they wanted were all too expensive.

Republicans didn’t immediately embrace the two-Santa theory, but began to after Ronald Reagan’s victory in 1980, when he ran mainly in favor of a big tax cut, with far less emphasis on deficit reduction. In office, Reagan pushed for domestic spending cuts but also sharply raised spending for favored programs such as the military.

Although the budget deficit rose to 6 percent of gross domestic product in 1983 from 2.7 percent in 1980, Reagan easily won re-election in 1984. This further convinced Republicans that the deficit was a losing issue and only tax cuts mattered for political success.

The final straw was George H.W. Bush’s support for a tax increase in 1990 to reduce the deficit, which many Republicans say sealed his defeat in 1992 by Bill Clinton.

Since then, fealty to tax cuts and lip service to deficits has become Republican dogma.

Among its enforcers is Grover Norquist of Americans for Tax Reform, which makes support for tax cuts and opposition to tax increases a litmus test for all Republicans.

In The Boston Globe’s Sunday magazine this week, Mr. Norquist explains that his famous tax pledge owes much to Mr. Wanniski’s two-Santa theory. Indeed, Mr. Norquist said he thought of the same idea himself when he was in the seventh grade.

I worked for Mr. Wanniski in the mid-1980s and know that he wasn’t obsessive about never raising taxes. He wanted economic growth and thought tax-rate reductions were the best way to achieve it, at least in the 1970s. But if higher taxes would raise growth, then he would support them. As he explained in an e-mail to Ben Bernanke, at the time the chairman of the president’s Council of Economic Advisers, on Aug. 11, 2005 (on which I was copied):

I for one am always ready to listen to arguments for higher taxes, more regulation and restraints on free markets, as I might be persuaded that under certain circumstances they would “invite,” not “stimulate” (a Keynesian idea), long-term growth. I’m not “anti-government,” in other words. (The Grover Norquist idea of opposing all tax increases is dumb, and Grover knows I believe that.)

Unfortunately, Mr. Wanniski opened Pandora’s box when he let loose the two-Santa theory. Republicans are now bound to it, whether they know it or not. As Keynes once put it, “Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back.”

Written by Valerie Curl

March 20, 2012 at 5:01 PM

Where Does Romney Stand on Taxes?

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Mitt RomneyNow that Mitt Romney is almost certainly to win the GOP nomination for the President, it’s time to examine his policies so we, as a nation, can decide if his ideas are better for us.

First, let’s discuss his tax policy.

Along with all of the GOP front runners, Romney’s tax policy relies on supply side economics – yes, trickle down economics which even Reagan’s two top economics policy advisers have said is the wrong policy for this economic environment. We do not have a labor shortage which is what supply side economic policy intends to address: High employment causes labor shortages that causes increased labor wages which increases inflation. In other words, it is intended to combat labor shortages, thereby making it less attractive though tax policy to hire additional workers or maintain those already employed at existing wages. Supply side economics, unlike common belief, was not first introduced by Ronald Reagan. It was introduced in Great Britain during the 1800s…where it failed miserably and was disregarded as a failed policy until Reagan’s advisers resurrected it in the 1980s.

Moreover, it was not Reagan’s supply side economics, which his main economics advisers have said failed, it was Federal Reserve Chairman’s Paul Volker’s interest rate changes that crushed inflation. However, we are not dealing with crushing inflation. Inflation has been steady at 2% or less, often dropping into deflation: a drop in prices as noted by current wage and housing prices. One cannot take current commodity prices – milk, bread and gas – into these figures on inflation because they are too subject to short term events such as weather, riots, etc.

So, history tells us that supply side, trickle down economics – an economics policy that shifts greater economic gains upwards towards the most wealthy – does not work to the greater economic good of a country. Yet, this failed policy is exactly what each and every GOP presidential candidate intends. Moreover, each one of them goes much further than GW Bush in advocating decreased taxes on the highest income earners. While Romney’s tax plan offers the least redistribution upwards of the other top tier candidates, it none the less reduces the tax burden on the top income earners while increasing the tax burden on lower income earners. Top income earners will see a tax decrease amounting to as much as $286,000 annually while lower incomes earners will see their taxes rise by over $4,000.

Romney tax plan

“As the Congressional Budget Office noted in a recent report, the top 1 percent of families saw a 278 percent increase in their real after-tax income from 1979 to 2007, while the middle 60 percent had an increase of less than 40 percent.”

Yet, Romney’s tax plan makes those conditions even worse. What his tax does is to make permanent the existing Bush tax cuts and then decrease the top tier tax brackets liability even further. To make up for this supply side push towards giving the already extremely wealthy minority a further income tax break, he intends to tax lower income brackets at higher or, in some cases, existing rates. Consequently, if you’re in a middle or lower income bracket, you’ll likely see your taxes increase while those in very high income brackets will see their taxes decrease.

We must all remember that the original intent of tax policy was that it was intended as a moral, even Puritan, document: those that have most owe more to society – the commons which is all of us and our nation – as a consequence of their good fortune.

Romney’s tax plan utterly fails to adhere to that original intent.

Written by Valerie Curl

January 13, 2012 at 9:40 AM

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