The government is on a desperate search to put as many shekels as it can in its coffer. Is raising taxes on the rich the answer?
Most people don’t think so. AP conducted a poll to find out what the best solution was for the deficit problem. 62% think the government should cut spending. Only 20% think the solution is tax hikes. Also, in a recent Investor’s Business Daily poll, 92% of Americans think it’s important to cut government spending. If we want to put something away for our future or start saving money for a house, we have to make changes to our spending. Shouldn’t the government do the same? Many of us think they should.
But “we” might be wrong. Maybe “we” just don’t understand. Let’s take a look at the numbers to determine what the best course of action might be.
Here’s a graph that shows the top 1% pay almost 40% of all the taxes.
So what? They can afford it. Maybe they can afford to pay some more. They’re good at creating wealth. Let them share some of it. Let’s see if an increase in income tax on the wealthiest Americans would solve our problems. Since the most recent data we have is for tax year 2008, we have to look back to get some answers.
Let’s assume that the top tax rate in 2008 was 50%. According to the IBD, that would have added $114 billion to the U.S. Treasury. Assuming that didn’t put the brakes on business growth, entrepreneurial ideas and hiring (a fantasy), that $114 billion isn’t enough to solve trillion dollar deficits.
Sure, that extra $114 billion would be a nice down payment and a help, but it’s not enough. And of course there’s always the little issue of what such a tax rate would do to the economy, which some economists argue would be counterproductive. We’re a pretty mobile economy. It wouldn’t be too tough for the wealthy to pick up their laptops and run their business offshore.
So why do some of us point our fingers at the “rich” when it comes time to bail out the system? Because “they” have more money they we do. I heard a story on the radio the other day. A speaker held town hall meetings with Fox News listeners – a relatively fiscally conservative group. You would have expected these people to be anti-tax hikes, but they weren’t. The speaker asked the group if people earning more than $500,000 should pay higher income taxes. Over 90% of these people supported increasing the income tax rates on people earning over $500,000. Why? Because the people in the audience didn’t earn $500,000.
Lots of people today think they benefit by raising taxes on the rich. That’s because the government generates revenue and distributes it to them. They don’t think it costs them anything and they get something out of it. Taxes are the ultimate free lunch for many people. Why wouldn’t they be for it? But there are two problems with this.
First, the people taking from the system are relying on the wealthiest. At some point, those wealthy people won’t have the resources to prop the system up. Then what happens? Then who is going to provide the jobs and tax revenues? Nobody. And at that point, those in the lowest segment of our economy will be left in a much worse situation.
I’m not asking you to throw a fund raiser for your local millionaire. I’m simply pointing out that if you’re interesting in reducing our budget deficit, raising taxes on the wealthy won’t solve your problem.
I say we remove ALL taxation on every level and fund the government threw a voluntary means.
re: the claim that 50% don’t pay taxes, looks like they don’t count Medicare and Social Security payroll taxes.
When you consider that, it’s more like 25% don’t pay federal taxes according to this Tax Policy Center analysis: http://www.taxpolicycenter.org/UploadedPDF/1001289_who_pays.pdf
I’d imagine once the economy picks up, that percentage will naturally drop even lower.
David Rodrigues says
The problem with todays debate on how to solve the debt crisis we see is one caused by misinformation and lack of creative problem solving. We simply can not “cut only” our way out of this mess, nor can we soak the rich in taxes. We need to balance the two.
On the cuts side, the defense budget is a prime place to start, and I’m not talking about reducing R&D and capibilities. Get out of Iraq and Afghanistan IMMEDIATELY, and withdraw from bases around the world in countries where they can afford/provide for their own defense (i.e. Germany and parts of Europe).
Entitlements like S.S. and medicare need to be addressed, but not in the draconian style of the Ryan plan. Raise the retirement age by a few years (as life expentcy and quality of life increases), means test benefit payouts (the rich can afford to pay for their own retirement, why should they recieve any pay outs? – and yes I know they paid into the system but still, those resources could be better used else where as opposed to granting them to a millionaire who could care less-). On Medicare, a hard look at end-of-life care needs to be made. I’m not advocating “death-panels” here for all you tea-drinkers, but the writings on the wall that our health care industry spends exorbant amoutns of money to keep sick/dieing people alive/life support for another week or so – and for what? And with no professional or edical expert oppinion on the matter but simply the family’s wishes? I know it’s a tough subject and I don’t support govt deciding who lives and who dies, but we simply cannot keep the status quo on end of life care.
On taxation, the rich (which I would classify as indiv. making $250,000+), should definitely pay a bit more in taxes. How much more? How about going back to the Clinton era marginal rate of 39.5%? People seemed to be doing just fine back then, why wouldn’t that be acceptable now? In exchange, a tax cut for the middle class should be enacted, so overall, one could say there is “no tax increases”, which should satisfy all you crazy tea-partyers.
Austerity is not the answer, it will only drive defecits even higher (sounds counter-intuative, but if you come to the realization that demand is the problem, not supply, then it makes perfect sense). More govt. spending in fact, is needed, more specifically, in infrastructure, education, and R&D investment that will pay out in the long term (our national highway system under Eisenhower-a Republican! – which provided a quanutum leap in national productivty).
The point is, we cannot “shrink” our way out of this economic/defecit crisis. We need to grow, and how do you grow without sufficient demand? Govt. needs to provide the initial capital and resources for private enterprise to get started on new, real, long term benefit projects. Additional tax cuts to the rich will not work this time around and will only continue to make matters worse.
A strong and prosperous middle class is the ONLY way we get this country back on its feet.
Neal Frankle says
David, you make many strong points…and I agree with much of what you say.
However, I am absolutely convinced that the government wastes a tremendous amount of money. I don’t see any evidence to support that the government can do a better job than private industry when it comes to investment in private enterprise.
I can only speak for myself, but I can tell you that I’d have no problem with a higher tax rate IF :
a. government waste was addressed seriously
b. more people would be brought into the the tax system — 49% of Americans DON’T pay any tax right now. This is a terrible and dangerous reality.
c. entitlements where changed -many of your recommendations sound pretty good to me.
Thanks for your thoughtful comments.
David Rodrigues says
I agree with you on the problem of govt. waste. Absolutely, with any bureaucracy, there will be reduntancys, fraud, and abuses. The Fed could and should find places to trim down and become more efficient. But how come whenever we talk about this topic, it always come to wastes in entitlement spending and programs to help the poor? How come, you NEVER hear Republicans wanting to trim down the fat in the Military and Defense budget, but will slash federal entitlements to Seniors and the disabled in a heart beat to balance the books? This is so morally unexcusable and wrong, and any look into Fed waste should take a much broader range and cut in the areas that will cause the least amount of pain who can’t afford to take the financial hit.
I agree with you that everyone should send something to the Fed in taxation, but as one of your fans here corrected you, 49% of Americans may not pay Fed incoem taxes, but still pay state and local, Medicare/S.S. taxes, so they aren’t getting away skin free either.
The problem is, since the 1980’s, power and wealth in this country has been slowly trickling upwards, towards the wealthy and well to do, the exact opposite of what Reagan and conservatives promiss as “trickle down economics”. That is a complete farse. The wealth gap in this country has never been greater, that is recipe for disaster. As you site in your article, the top 1% pay 40% of the tax burden, and some may argue that they pay already their fair share. That is BS though, as the top 1% control something like 90% of this nation’s wealth. There are many other statisitcal ways of supporting this enormous gap, but essentially what it is telling us is that the rich are not paying their fair share, and that in times of record debts and sluggish economic growth, they need to help support a resurgence of the middle class to get this economy moving again.
As I said before, our economic difficulties are cuased by a problem in demand, as middle class Americans are straddled with huge debts caused by the housing bust and high unemployment. This isn’t a supply problem, where if we just give the big corps and rich more tax cuts, somehow the jobs will magically appear. It’s just not going to happen.
So true on the military costs. Did you see the latest estimates? Probably conservative: up to $60 billion (so far) in Iraq and Afghanistan has gone to waste and fraud:
Got the wrong link for Jon Stewart’s clip: http://www.thedailyshow.com/watch/thu-august-18-2011/world-of-class-warfare—the-poor-s-free-ride-is-over
Basic message: “The government could raise $700 billion by either taking half of everything earned by the bottom 50% or by raising the marginal tax rate on the top two percent.”
Neal Frankle says
How much would they have to raise the tax rate on the top 2%?
About 3 percentage points. Or more accurately, letting the Bush tax cuts expire.
Hi Neal –
I enjoy your writings and thoughts greatly, but I hope you don’t mind me challenging a few points of this post:
1. Your use of surveys of “what the people think”: You lead with a survey that agrees with you, then a few paragraphs later you undercut another survey that doesn’t agree with you. The reality is you will probably never find the majority of people who agree they want to pay more taxes, but that means about as much as a survey on whether kids want to eat their vegetables.
2. Your table: a column on the total amount of income each percentile takes home as well would give your readers a better understanding of the issue. The US is a country where incomes are highly unequal. It’s only realistic to expect the burden of financing such a country to be unequal as well. But it is both numbers which give a better indication if we are striking that balance or not. http://en.wikipedia.org/wiki/Income_inequality_in_the_United_States
3. Your calculations of the wealthy: have you seen the Jon Stewart’s response to this? He makes a couple good points towards the end: http://www.thedailyshow.com/watch/thu-august-18-2011/world-of-class-warfare—warren-buffett-vs–wealthy-conservatives
Though nobody likes taxes, they have been used to help build our country since the civil war and have always (at least on paper) taxed the the rich more than others. Yet an astounding portion of the world’s rich still live in the US, pay taxes there, and start businesses here. If we tax their income a few % points more, do you really think this will change? Warren Buffet doesn’t. I think he has a better judgement of the current situation that Ayn Rand.
That being said, I think taxing income is outdated – it really is only done because it’s easy. Reducing income tax and shifting it over to consumption and pollution taxes would make so much more sense for the nation as a whole. A carbon tax like these guys describe http://www.carbontax.org would be a no-brainer if only our politicians used those to make decisions!
Neal Frankle says
thatenergygirl, I’m actually very happy you take exception and delighted you share it.
1. I actually don’t mean to base my argument on “what people think”. If I gave that impression, I apologize.
2. I think such a table would be helpful but I didn’t have one handy. But I just don’t see why it’s a problem for ME when YOU make more than I do? I don’t see that inequality of income is a problem all things being equal. I can tell you that my experience was that I was very very broke and worked really really hard. Now, my family and I enjoy the benefits of it. Why is that bad?
3. I absolutely agree that we should have a consumption tax and that income taxes are outdated. The only issue is the black market and the regressive nature of these taxes. On the other hand, it sure would help insure that EVERYONE pays,,,,including people here on vacation and people here illegally.
4. I don’t know enough about carbon tax.
I have a huge problem when close to 50% of the population have no “skin in the game” (pay no tax) yet they have an equal say in how resources are used. I love it that everyone in our country has a right to vote. I think anyone who takes advantage of that should also contribute to the system. And I know you’re not saying this, but I just don’t believe wealthy people should feel guilty for being successful.
Thank for the thoughtful reply (though my name is Monica :).
I understand the *feeling* that it is unfair that a significant number of Americans don’t pay income taxes, I would argue that raising govt revenues this way is not *realistic*.
Look at it from the government’s perspective: in order get the income needed to keep the country afloat, you can:
A. return the tax rate to where it was a few years ago for people making over 250k or
B. Take HALF of what the bottom 50% have
Kind of a no-brainier from that perspective.
But let’s just say we want the bottom 50% of people to pay just 10% income tax. Can you imagine the cost of compliance to ensure families that make and average of 20k/year scrape together in their 2k?! A significant share of that money would go to creating white collar jobs for an army of IRS agents and auditors to track these small amounts down.
Besides, imagine you as a young man having to send that money to the govt rather than investing in your future. I’d prefer that money does get invested in people’s futures so they have the opportunity to make the jump to higher income tax brackets later in life. Anyhow, almost everyone does end up paying taxes such as sales tax or property tax.
Finally, the fundamentals behind a carbon tax shift is beautifully simple: reduce taxes on things we want people to do (ie make money) and instead get that govt income by taxing what we don’t want people to do (ie pollute our common resources). It’s sad the politics today are so toxic they prohibit a policy like this would finally send the right signals to the market….
I do think we should make a progressive tax for capital gains, having it be about 10%-15% less than your normal tax bracket. Remove the ability for hedge fund managers to pay capital gains tax on their income and yes make another tax bracket for those making 1 million dollars in a year.
Neal Frankle says
Fascinating Ginger. I’ve never heard of a progressive capital gains tax. Very interesting idea. I’ll have to chew on that one…. Nice thinking outside the box!
I’d say no and here’s why. The rich don’t pay taxes…the poor and middle class do.
Let’s say that taxes are raised and Microsoft has to pay more taxes. Well, to cushion that blow, they raise prices. Who ends up paying for those higher prices? We do.
The rich know how to work the system…frankly, that’s why their rich. The system is designed to protect them because they are what keep the world turning.
Does it suck? Maybe. Why not learn this system and see how you can take advantage of it like the rich do.