“Taxing The Wealthy” Leads to Greater Economic Distortions
After reading that one percent of the households in New York City, roughly 40,000 people, pay 50% of the income taxes in this city of more than 8 million inhabitants, it made be begin to wonder where we were headed as a nation. This astonishing figure brings home the practical consequences of relying on taxes from a small group of high-earners to fund city, state and national budgets. In the case of New York City, the Mayor can only hope that this small group does not become weary of their burden and move to Connecticut or West Palm Beach. If even only a small percentage does, the financial impact on New York in a recession would be devastating. If that problem isn’t enough New York City and State will be the biggest tax revenue losers from the populist uprising against “Wall Street Bonuses”. Moreover, it was the tax revenue from those same “Wall Street Bonuses” that the politico’s thought would never end that permitted such fiscal irresponsibility in the first place.
California is in even worse shape, with tax revenue shortfalls that may cause it to curtail State services. Despite its 9.3% income tax on income above $47,056 and 1% surcharge, 10.3%, on income over $1.0 million, California with 10.1% unemployment rate is about to make a financial slide into the Pacific Ocean. As the epicenter of the “Tech Bubble” and then the “Housing Bubble” the state became addicted to those large checks from the Tech and Housing millionaires and spent like it would never end. Total state expenditures have grown to $145 billion in 2008 from $104 billion in 2003 and California now has the worst credit rating of any State in the nation.
But, bubbles always burst and fiscal plans that are dependent on them collapse with a whoosh. The 1% surcharge on the California millionaires seems pathetic in light of a recessionary tsunami. California’s high rate of taxation has created tax refugees out some of its most productive citizens and corporations. Roughly 1.4 million more nonimmigrant Americans have left California than entered over the last decade, according to the American Legislative Exchange Council.
New York and California are merely microcosms of the nation as a whole. The top 1% of US taxpayers earn 22% of the income and pay nearly 40% of all income taxes. The bottom 50% pay just 3%. We are told that this is unfair, and the “rich” should pay their fair share. It would probably not overburden the top earners to pay 43% and eliminate all taxes on the bottom 50%. After all, it would only take a 5.5% increase in the amount the top 1% already pay to eliminate the need to collect from the bottom 50%. Can the rich afford it - yes, but can the poor. Could a country so divided prosper? We cannot reverse the inequality of income distribution with a soak the rich tax scheme; we need to change the dynamic. There are no “high paying” jobs in the 21st century for unskilled laborers. Education and training are the only answer. It takes longer, it’s harder and we will not have instant gratification, but it is the real answer to this dilemma.
Table 1 Summary of Federal Individual Income Tax Data, 2006 (Updated July 2008)
- Source Wall Street Journal
Federal outlays will soar in fiscal 2009 to $4 trillion, or 27.4% of our $14 trillion GDP, from $3 trillion or 21% of GDP in 2008, and 20% in 2007. If we take the administrations rosy recovery scenario at face value fiscal 2010 spending will still be 24.1% of GDP with a breathtaking $3.6 trillion budget. In 2009 the budget deficit of $1.75 trillion will be a staggering 12.4% of GDP and the $1.2 trillion deficit in 2010 is forecasted to be 8.5% of GDP. The administrations blueprint predicts that this will fall back down to $ 581 billion or 3.5% by 2012, but this is based on very optimistic budget. Behind this ostensibly responsible sober budget are rather aggressive assumptions about GDP growth. One could be forgiven for being skeptical about a budget that assumes that the next 10 years of GDP growth will be better than the previous 10.
What impact will this have on the national debt? Debt held by the public as a share of current-dollar GDP ran at 58.7% in 2009. Yet, even based on the President’s rosy scenario, the outstanding debt is projected at 67.2% of current-dollar GDP by 2019. Will China find us a credit worthy borrower? Approximately 50% of US debt is owed to foreigners, up from 31% in 2000 and it will undoubtedly continue to climb. If China and other sovereign wealth funds loose their appetite for US debt the result would be catastrophic for the dollar and the US economy.
As the liberal columnist Michael Kinsley astutely observed in a column in the Washington Post, on the hidden dangers of deficit spending:
“If it’s not the actual, secret plan, it will be an overwhelming temptation: Don’t pay the money back. So far, even as one piggy bank after another astounds us with its emptiness, there have been only the faintest whispers about the possibility of an actual default by the U.S. government. Somewhat louder whispers can be heard, though, about the gradual default known as inflation. Just three or four years of currency erosion at, say, 10 percent a year would slice the real value of our debt — public and private, U.S. bonds and jumbo mortgages — in half.
Anyone who regards the prospect of double-digit inflation with insouciance is either too young to have lived through it the last time (the late 1970s) or too old to remember. Among other problems, inflation works only as a surprise or betrayal. It can never be part of any public, official plan. Plan for 10 percent inflation, and you’ll get 20. Plan for 20 and you’ll need a wheelbarrow to pay for your morning Starbucks. But if that’s not the plan, what is?”
Dare I say Mr. Kinsley, there is a grand vision but no rationale plan will be forthcoming. I am afraid that unless cooler heads prevail you will have to take it on faith that there is a secret plan.
The big solution “Tax the Wealthy”. All it takes is to move the top rate on personal income from 36% to 39.6%, raise the top rate on dividends and capital gains from 15% to 20% (except on stock of companies with less than $50 million in sales, on which there would be no tax), keep the estate tax at 45% on estates of more than $3.5 million, reduce some deductions for the wealthy and all our problems will disappear. This Robin Hood approach of having the “wealthy” pay their fair share never works and worse it makes government budgets and deficits more vulnerable to greater undulations in economic cycles. The increased receipts and spending results in higher highs in good times and the loss of revenues results in a cut back in services and bigger deficits in recessions – the lows are lower.
Implicit in this budget is the assumption that even if you tax investing at a higher rate, it will be just as attractive. It takes a great leap of faith to bet on that pony. If their wrong, the administration will loose more jobs and economic growth than could ever be offset by increased capital gains and dividend taxes. Worse, given the loss carry-forwards and cut in dividends from the recent market slide, taxing capital gains and dividends at any rate may yield little revenue in the next few years. A better bet would be entrepreneurial incentives – In the short run we should help finance innovative ideas in all areas, including green technology, telecommunications, biotechnology, nanotechnology and all other embryonic inventions that will improve our lives create jobs and expand the economy.
Since so much capital is sitting on the sidelines in Treasury Bills, let’s suspend future capital gains tax on any investment that is made in new technology in the next year. We have absolutely nothing to lose. If capital stays on the sidelines we will create no jobs and collect no additional taxes. If, however, the money is invested, we could create hundreds of thousands of permanent jobs and collect income taxes from every employee rather than paying them unemployment benefits. Yes, we can create jobs without spending the taxpayer’s money and simultaneously help all those budding entrepreneurs currently starving for capital.
Hogwash!
The maldistribution of purchasing power in America promotes poverty and degrades our society. The higher the disparity between rich and poor in any country, the poorer the quality of life. Witness Llatin-America and many of the oil-rich nations.
No one can usefully spend more than $1.5 million a year. To invest any excess over that amount just compounds the problem of conspicuous consumption and Madoff style greed. And, the rich are notable for giving the lowest percentage of their incomes as contributions to worthy causes.
In the current economic crisis with reduced spending and reduced consumption, we need to put more spendable money in the hands of people who will spend it instead of those of corporate execs, investors, and banks. That will stimulate the economy without diverting money to the self-serving schemes of the affluent or adding to the destabilizing credit burden.
We should use the excess spendable income of the rich to educate the 40 million mostly unskilled American poor. Their families teach each succeeding generation to be non-productive and a costly burden for society. If we are to advance as a nation, instead of “one-size fits all K-12 education” for everyone but the rich, every American must get tailored (often socially remedial) education, even at college level if they can handle it, so they reach their full productive potential. When that happens nearly all of the 40 million poverty-stricken Americans will be productively employed and many more Americans will have more discretionary income.
Every added dollar spent by a less affluent American returns far greater value to him than each extra dollar spent by a multi-millionaire has to him. And, as for production incentives, does anyone really think that Bill Gates would not have worked as hard to develop the IBM PC operating system if he would only have gotten a middle class income for doing it?
So, with a properly progressive tax structure, it would not be unreasonable to have no tax dodges and 98 % total taxes for billionaires; or, better yet, a progressive conspicuous consumption tax (PCCT) to replace all other taxes (sales, income, inheritance, social security, corporate, etc.). With PCCT’s, basic needs could be tax-free but the tax on a yacht, mansion, vacation home, or gas guzzling and polluting vehicle would be a large multiple of its purchase price.
Also, why must it be that with privacy protected, the government and others know all about my credit rating, income, investing, and spending but so little about those of the crooks? We should get rid of paper exchange, so every transaction is efficiently electronic, can be properly taxed, and so immoral or illegal acts like risky Wall Street investing, drug trade, employment of illegals, terrorist activities in the U.S, and off shore investing, can be properly controlled.
March 3rd, 2009 at 5:58 pm
@G.H.A - Although I agree with your point about education (that it will in the end benefit all parties involved to have a highly educated general public), the doctrine that you present here is deeply communist. You do not deserve the euphemism of socialism on this one buddy!
Capping salaries - fine (but MUCH higher than 1.5 M), increasing taxes on certain categories of luxury goods - fine
Although you might have many valid points, your method of expressing them is very radical and does not do justice to actual socially conscious political reform. Please be responsible and refrain from making outlandish statements, this kind of expression of political dogma does more harm than good to its cause!
If you have that deep rooted of a moral conundrum with our political and financial systems, maybe you should move to a communist country like China! Assuming they’ll take you.
March 4th, 2009 at 2:13 pm
[...] in 2019 based on the Obama budget, but alas expenses will grow to nearly $5.2 trillion and “taxing the rich” will not pay for [...]
March 10th, 2009 at 7:01 pm
[...] in 2019 based on the Obama budget. However, expenses will grow to nearly $5.2 trillion and “taxing the rich” will not pay for [...]
March 22nd, 2009 at 11:20 am
[...] in 2019 based on the Obama budget. However, expenses will grow to nearly $5.2 trillion and “taxing the rich” will not pay for [...]
March 29th, 2009 at 11:13 am
[...] in 2019 based on his budget. However, expenses will grow to nearly $5.2 trillion and “taxing the rich” clearly will not pay for [...]
March 30th, 2009 at 12:56 pm
[...] in 2019 based on the Obama budget. However, expenses will grow to nearly $5.2 trillion and “taxing the rich” will not pay for [...]
April 19th, 2009 at 2:05 pm
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May 20th, 2009 at 7:58 am
In your first paragraph, you show your ignorance, and this makes your credibility about as good as Obama’s ‘change’.
"This astonishing figure brings home the practical consequences of relying on taxes from a small group of high-earners to fund city, state and national budgets."Uh, the “Income Tax” pays for NOT ONE DIME of government services. Go back to school, and/or follow that money.
May 28th, 2009 at 2:13 pm
Soaking the rich will not work. The last time the rich were soaked was in the 1970’s. The rich had time on their side and simply left the money in any tax protected account they could find, here or overseas. The government languished faster then the rich did because no young people were going to even try to build their fortunes in an investment climate like that. Eventually the voting public came to their senses and elected Reagan and economic growth continued.
This time its much worse then the 1970’s. Not only will the rich go into hiding over Obama style socialism but the were already IN HIDING due excessive money printing by Alan Greenspan and Ben Bernanke. The internet can now give rich and poor alike good economic numbers even if the BLS and Federal Reserve cooks the books.
What caused this economic crisis was central bankers and government officials abusing the public trust. Naturally in this corrupt era, those responsible will not be immediately punished but rather those who do not deserve punishment will feel the pain instead.
Want this crisis to end? Auditing then abolishing the Federal Reserve and returning to a precious metals standard with instant right of redemption at any assay office will bring back trust in the money. Forcing congressmen and senators to have no more then 4 years of service before rejoining the private sector (otherwise known as the real non-bull*hit world), would properly hinder ambitious politicians.
This crisis may appear to be about banking but its really about rank corruption allowing unproductive people to become wealthy via legal shakedowns. Clean out the criminals and have a standard of value that the does not confuse this stone age organ called “the human brain” and conditions will be ripe for productive individuals to build a new age of greatness in America and the free world.
August 1st, 2009 at 5:58 pm
As a quick addendum however….
I don’t mind extracting extra taxes from the rich to pay for education so long as public education is reformed so that the “pockets of excellence” around the country become the standard nearly everywhere. We can do much more in education with much less but AFTER reforms prove successful the rich could provide a return of detailed music, hands on science, and computer instruction (among other things).
August 1st, 2009 at 6:02 pm
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December 14th, 2009 at 11:38 am
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January 25th, 2010 at 4:24 pm
[...] “Taxing The Wealthy” Leads to Greater Economic Distortions: [...]
January 27th, 2010 at 4:01 pm
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January 29th, 2010 at 2:25 pm