Wednesday, July 20, 2011

Dishonest Debt Debate

As we come nearer and nearer to the supposed economic Armageddon of not raising the debt ceiling, everyone is being stirred to action in support of their side. Letters to the editor are flying, but I am becoming particularly annoyed by those whose only solution is to raise the taxes on "the rich." This is the favorite topic of those on the Left and Democrats in general as a solution to the problem because it fits in with their narrative of class warfare. Even if you confiscated all the wealth of millionaires and billionaires, you would only be able to pay the deficit for one year, and the next year they would have all quit and the Treasury will receive $0 from them, and still have the deficit. Since this makes no sense at all for generating revenue, why is it that our “leaders” are proposing such a thing. My answer is that this is not about raising revenue, but social engineering. And we have sufficient evidence in support of this proposition.
For instance, the tax code is more than 70,000 pages of rules and regulations which set forth not only tax rates but exceptions. That is how General Electric was able to make $6 Billion in profits and pay no income tax. And they did it legally, because their lobbyists were able to get the government to subsidize activity for them that you and I can never get.
The progressive rate of taxation is another example of social engineering. I am always amazed and amused at people who take the notion of progressive taxes as a given. President Obama wants all of us to pay “our fair share, even millionaires and billionaires.” Now, I may not be that good at math, but the fact that he wants to raise taxes on those making $250,000 a year in addition makes me wonder what he thinks a million really is. But the idea is that people making more than you should contribute more. Well, they already do.
In 2011, Federal income tax rates were set to increase to pre-2001 levels, but the renewal of the Bush Tax Cuts left the existing tax brackets in place through 2012. Below are the resulting tax rates and income ranges for 2011:
Filing Status and Income Tax Rates 2011
Caution: Do not use these tax rate schedules to figure 2010 taxes. Use only to figure 2011 estimates.
Tax rate Married filing jointly
or qualified widow(er) Single Head of household Married filing separately
10% $0 - 17,000 $0 - 8,500 $0 - $12,150 $0 - 8,500
15% $17,000 - 69,000 $8,500 - 34,500 $12,150 - 46,250 $8,500 - 34,500
25% $69,000 - 139,350 $34,500 - 83,600 $46,250 - 119,400 $34,500 - 69,675
28% $139,350 - 212,300 $83,600 - 174,400 $119,400 - 193,350 $69,675 - 106,150
33% $212,300 - 379,150 $174,400 - 379,150 $193,350 - 379,150 $106,150 - 189,575
35% over $379,150 over $379,150 over $379,150 over $189,575

Looking at the lowest rate, one could argue that $17,000 for a couple is pretty low for being taxed, and you would be right, unless you remember that this number considers taxable income after deductions. So say the married couple have only one earner and a child. If I remember correctly, you get a $3700 deduction per person plus an additional $1,000 for the kid. And if they are buying a house, they get to deduct the mortgage interest. Suppose that they are smart and put money into a 401k and a flex plan and give to charitable organizations, all of which is not considered to be income for the purposes of computing taxes, and pretty soon you could be looking at some real coin before deductions. Throw in the Earned Income Tax Credit and a family like the one above could easily end up paying no taxes on their income.

For the higher earners, a lot of those exceptions of the family above are not available, and the richer ones have to cope with the Alternative Minimum Tax in addition, and that’s not even taking into account that their base rates are three and a half times higher than the lower earners. Do the rich drive on roads that are three and a half times better, or are they defended by the military three and a half times as much? Why no, they’re not. So the rich are already paying more than their “fair share.”

Why then is there such a hue and cry from Obama on down for what is effectively redistribution? Well, it seems that they have arbitrarily decided that the rich have too much, and can part with it more easily. There is a certain logic to it, for example, the family that lives on $45,000 could argue that if they can make it on that, so can anyone else. But let’s just hope that that family doesn’t work in any kind of industry which produces goods that the rich would buy, since they would no longer be able to do so, and the $45K family will then be out of a job. Even if they don’t work in that industry, whatever work that they do will be affected by all the ones that are engaged in producing products that the rich buy, since when they are laid off, those people will no longer be able to purchase goods or services either. The cascading effect of unemployment will be ameliorated somewhat in that the increased tax collections will be used for the most part as unemployment insurance for all those that lost their jobs.

Maybe, that is too extreme of an example. Let’s say that someone who is working and bringing home $450,000 dollars a year is our subject next. People who earn that kind of money are doing something right, since the general rule is that you provide more in value than you cost. Let’s say that the $450K earner only produces $400K in value for the company. There is a net loss of more than $50K (don’t forget all of the supplemental costs beyond salary) and eventually the business will either have to lay them off or go bankrupt, in which case there is no longer that amount of income for the household. But if the worker is meriting their higher salary, they usually have some incentive to keep working at that job. Making them pay more in taxes, will have an impact on their incentives to keep working at that level, and if they should decide that enough is enough, and live off their investments at the level of the $45K family, the government has been shortchanged all that income when they were working for a net loss to the Treasury.

So, soaking the rich doesn’t solve our debt problems. Then what do we do? My suggestion is to return the tax code to an instrument of collecting revenue and do away with trying to use it to coerce or reward behavior. If we went to a two step flat tax, with everyone making less than $50,000 paying 10% and everyone above that paying 20%, with absolutely no deductions or tax havens or anything else, we would have a solid and steady source of income, greater employment because business will finally feel that investing is not the same as gambling.

The problem with this solution is that it doesn’t allow the government to reward or punish people, and that is why the Democrats oppose such a common sense approach and are only interested in soaking the rich. And that is why Obama will never give up on his irrational need to raise taxes in the middle of a recession.


laughing-at-you said...

The only way to deal with a dishonest tax system is to be a dishonest taxpayer.

Steve said...

You are spot on. That is exactly how people do it.

David said...

I don't get the argument that there is no point in raising taxes on the rich because if you took all of their wealth, it still wouldn't pay for everything.

So what? Nobody is arguing for killing the goose. We just want a few of those golden eggs.

Steve said...

Every egg that you take is going to be used to pay unemployment checks.

How did you miss the part about who pays the taxes in this country? I am sure as a journalist you are aware of incentives, do you think that the ones who create jobs are immune from the influence?

David said...

Of course there is a trade-off, but the wealthy, perhaps even more than ordinary citizens, use the benefits that government provides: paved streets, police and fire protection, strong national defense, amenities such as national parks and museums. These things go hand in hand, and somebody has to pay for it.

Steve said...

David, I could write a response to yours, but I would just suggest that you read the post, since your points are all addressed there.