Why Raising Taxes on the Wealthy Will Not Work

Great Debates
1

http://www.economist.com/node/21543165

According to this article 1) most deficit reduction should come from spending cuts and 2) to get more tax revenue one should get rid of loopholes and deductions not raise taxes?

I generally agree with the gist of the article and ending crony capitalism by flattening and lowering rates while eliminating loopholes (as outlined by Governor Huntsman) is a good start.

Do you think hypothetically raising the taxes on the wealthy will generate any meaningful amount of revenue and do you think that deficit reduction should come from spending cuts mostly (including military spending) or from tax increases and/or elimination of loopholes.

2

I have no interest in seeing people starving in the streets, poisoned food and collapsing buildings; so no, I don’t support significant spending cuts except for the military. The only way we are going to fix the deficit in the long term is by taxing the rich for the simple reason that they have most of the money. You can’t get money from people that doesn’t exist. The deficit isn’t primarily due to America spending too much (in many areas it needs to spend more) as it is due to its refusal to seriously tax the people who have the most money.

3

The FDA has nothing to do with spending (I mean how many billions does it take up) and reforming Social Security and Medicare is not going to result in “people starving in the streets”.

Well how much is enough? 40%? 50%? And as the article points out for example America has a very high corporate tax.

4

I pulled some numbers for various sources, so if I got any of this wrong please correct me. The top 1% paid $318 billion in taxes in 2009, which constituted 37% of individual income taxes collected. Per this editorial, raising the top tax rate will “only” bring in .3% of the GDP, or roughly $44 billion dollars a year. While he gives no source for that number it would constitute a 13% increase in revenue from the top 1%. Since he gave no source, I have no idea if $44 billion is an accurate estimate, but it doesn’t necessarily set off my bullshit alarm.

However, he claims that closing loopholes will bring in 7% of the GDP, or roughly $1 trillion a year. Bullshit alarm activated. What’s his source for that number?

In any case, I find this editorial lacking in cites and light on facts. To the author, I’d say, $44 billion isn’t chump change, especially when shmucks are trying to shut down planned parenthood to save a buck. Let’s go ahead and collect that extra $44 billion, which we can do with the stroke of a pen, and then we can start looking at loopholes. Because his only argument against raising the top marginal tax rate is that it’s not going to solve the problem all on its own, which does nothing to explain why we shouldn’t do it anyway.

5

The FDA costs money, and regulatory agencies of all kinds are prime targets for the “waste cutters”. And people will starve without SS; that’s why it was created, because people were starving. And slashing Medicare will cause people to freeze & starve due to lack of money for necessities, and just die to lack of medical care.

Whatever rate is necessary to remove the majority of their wealth and redistribute it among the public they are parasitizing; it doesn’t have to be all income tax.

6

We should start with tax rates from the Clinton years as a default, not the absurdly low tax rates we have now.

I say get rid of all deductions to help eliminate loopholes. If the government wants in incentivize a certain behavior with money, then can mail out checks.

Collecting more money from the rich, whether it be from higher taxes or elimination of loopholes, has less effect on the economy. We should have a highly progressive tax system because it creates a more stable economy…more money in a larger number of pockets.

7

First I think my conservative credentials are essentially beyond question, as is my opposition to things such as massive income redistribution and “soaking the rich.”

The article is actually a good one, and much more nuanced than the OP.

The article is actually saying “raising effective taxes on the rich is necessary.” I agree with that, by the way. I’m opposed to stupidly high top marginal rates, for most of my life the top marginal rate has averaged around 70% (was over 90% when I was born.) At 35% it’s at the lowest sustained level it has been in my lifetime. It was actually lower at the end of Reagan’s term (28%) but that was only for two years, in the early 90s it was 31% for 3 years and then up to 39% until Bush was elected. So the last 8 years where it has been at 35% is the longest period in the history of my life at least where the top marginal income rate has been under 40%.

But increasingly the top marginal rate has essentially come to be meaningless. It’s a way to essentially tax successful lawyers, doctors, and other professionals who earn large incomes from salary and wages, but for taxing the truly wealthy it’s almost irrelevant. The truly wealthy just don’t make most of their money from what the IRS considers “earned income” and because of that their income is taxed under a different taxation scheme.

We need the top AGI individuals in America to be paying much more than 15%, probably more like 35%. I don’t think we need to tax them at 50% or 70%, I think we’ve tried that before and it isn’t the cure-all that liberals believe it to be. The fact that at random intervals in our past we had a very strong economy but a very high tax rate are essentially irrelevant, the strong economy of the 1950s was more based on a very unique historical situation in which we had a massive manufacturing base and the rest of the world had been blown to bits and we were thus in the enviable position of being the world’s manufacturer.

If you hold a bond the interest payments are taxed as income, if you hold a share in a company dividend payments are treated as capital gains. That’s probably one of the more significant issues we have right now, there’s really no reason in terms of fairness or policy that a dividend should be treated differently from an interest payment on a loan. Capital gains tax rates were designed to offer a lower tax rate for increases in wealth through appreciation in value of capital that you held, not to allow individuals to funnel large amounts of money to themselves through issuing dividends in companies they control and then have that raw cash treated as a capital gain. But in reality even if you change the rules on capital gains, it’ll be a bitter fight and then the ultra wealthy will start making most of their income through some other method.

The wealthy have always been effective at tax sheltering, not because it is impossible to develop a tax code in which sheltering is very difficult but because anytime we change the tax code it’s a huge political fight. Individuals react almost instantly, the government reacts slowly. Change the tax rate for dividends and I guarantee you the Romneys of the world will make sure that the next FY most of their income comes from some other tax advantaged source.

It’s easy to say “end all deductions, all loopholes” and then you’ve made it financially difficult or impossible for middle class Americans to save for retirement, own homes, or pay for health insurance.

What I would propose is for all income under the $380k you tax at the regular tax rate for the appropriate brackets. Dividends for money earned under the top bracket should be totally untaxed, as should all forms of capital gains. Interest payments should all be untaxed, not just for tax exempt municipal bonds and etc. This actually shouldn’t cost the U.S. too much, most people who earn less $380k a year aren’t earning a significant portion of income from bonds, dividends, or capital appreciation.

For every dollar you earn in the top tax bracket, I’d tax dividends and other types of non-wage earnings (interest payments etc) at 15%. For all earnings over $1m I’d tax them at the top marginal rate. And I mean all earnings. For that reason this system would incentivize holding stock and bonds to a point, but over $1m it doesn’t matter where you money comes because it will all be taxed 100% at the same rate. I expect millionaires would probably still earn a lot of money from dividends and stock simply because of the nature of things, but you might see more of them just taking salaries, too.

I would also say that corporations can only pay people up to $1m a year and have it count as an expense (and thus lowering net income.) Anything given over that amount (whether it be intangible benefits like access to transportation, resorts, premium health plans etc, or things like stock awards, salary, bonuses etc) can still be given but it essentially has to be paid for with “post-tax dollars”, essentially meaning a company has to pay for it out of after tax income.

8

There’s nothing hypothetical about it. Raising income tax rates on high earners will absolutely increase revenue.

Frankly, raising income tax rates on everyone isn’t a bad idea.

And, while I’m at it, getting rid of the artificial construct that capital gains aren’t income wouldn’t hurt either.

9

Americans do not support income redistribution. Further, most Americans are simply unworthy of having large amounts of money. Stupid, unaccomplished, and unskilled persons do not deserve to hold even a small portion of the wealth of men like Bill Gates and Warren Buffet.

They deserve fair pay for their labor and ideally they’d all make enough to live reasonably comfortably. But they aren’t entitled to own a home or a car.

10

The $1 trillion is probably correct. Here’s the thing, the top 1% of earners pay a huge share of taxes already. However, the top 1% pay a total tax rate of something like 28% (that is more than just federal) and pay effectively around 15% federal income tax rates because almost all of their money goes through the capital gains tax and not the regular income tax.

So if you closed the capital gains “loophole” you would essentially be more than doubling the tax revenue from the top 1%, because their Federal effective rate would go from 15% up to near 35%, a far bigger increase in raising the top marginal rate back to the Clinton era 39.6% (which wouldn’t result in all that much revenue because it only applies to earned income.)

11

Drastic reform of health care is what will bring our deficits under control. About 70-80% of our long term debts are due to our health care system being so expensive.

Back in 2000 we collected 20.6% of GDP in tax revenue for the federal government. As of 2010 that was 14.9%. So we can have a much higher tax rate than we do now and still keep society running smoothly. I’m sure most of why we are collecting fewer taxes is the recession, but I’m not sure how much is due to a combination of regressive taxes and income inequality (ie more income goes to corporate profits and the top 5% while their taxes go down. Corporate profits and income for the top 5% of income earners make up almost 50% of GDP as of 2011, I have no idea how much overlap there is in those 2 categories though). During the majority of the Clinton years the tax rate was 18-20% of GDP. In todays society that would work out to about 3 trillion a year in revenue, making the deficit only $800 billion. An $800 billion deficit is still high, but it is more manageable than what we have now.

http://www.taxpolicycenter.org/taxfacts/displayafact.cfm?Docid=205

Anyway, there are 2 things we really really need to do to get our debts under control.

  1. End the recession (good luck) so that tax revenue goes up and gov. spending goes down.
  2. Drastically reform health care in the US to make it more efficient. If our health care were as efficient as what they have in the UK or Japan, our long term debts would be a fraction of what we have now.

That article says the US corporate tax rate is one of the worlds highest, but the effective tax rate is much higher than the rate on paper. But he also talks about eliminating loopholes, so that would raise revenue too.

12

I’ve also never understand why people talk about “loopholes.” Loopholes imply you’ve gamed the system some how. The most material “loophole” is ultra-wealthy people tend to earn most of their money through dividends and ordinary capital gains (selling stocks at a profit typically.) These are now taxed at 15%.

This isn’t a loophole, that’s the designed behavior and the expected result. That’s tax policy, not a tax loophole. The way hedge fund managers use carried interest to effectively get their regular income taxed at 15% is a far more complex issue and is what I would call a “genuine loophole.” It’s also, if you understand the issue, not quite so easy to close without targeted legislation designed to impact one specific industry (or by abolishing the 15% rate on long term capital gains for everyone–or by subscribing to my system in which all money brought in over $1m a year is taxed at the top marginal rate regardless of source.)

I don’t think it’s helpful though to refer to the capital gains tax rate as a loophole. It was campaigned on, passed by congress, and signed by the President. It’s been on the books for years and it mostly operates as intended. So it isn’t so much “closing loopholes” as it is “changing tax policy.” I think it’s helpful to refer to it as such.

While some hedge fund managers earn billions that are taxed at 15% due to the carried interest loophole, they still are a small portion of billionaires and millionaires. The capital gains in general is the biggest reason the rich don’t pay more in taxes and it is currently functioning as expected.

13

Yes they do.

http://www.politico.com/news/stories/0911/64017.html

http://www.bloomberg.com/news/2011-10-10/cain-pulls-even-with-romney-on-economy-for-republican-supporters-in-poll.html

14

Try again, next time, bring relevant polling. Both of those say Americans think the wealthy should pay their fair share of taxes. They aren’t saying “the wealthy should pay taxes so their money can be given to me.”

There is a big difference between advocating the wealthy pay more to maintain the roads, the military, schools and etc than it is to advocate the wealthy pay more so the government can give out income balancing payments to the less wealthy.

15

Americans largely believe most people who receive welfare do not deserve it.

16

Unless you consider everything other than a flat tax to be income distribution I don’t think you’re effectively arguing that Americans support income redistribution.

17

I didn’t say they did.

And redistributing the wealth of those people wouldn’t result in people getting a “large amount” of money; its main benefit would be in putting that money back in the wider economy. Not that making large amounts of money has much to do with “deserves”; you don’t get money for being smart, skilled or accomplished. You get money from exploiting people who are smart, skilled and accomplished.

18

Yes. All three.

19

This is not quite right - dividends are not treated as capital gains. However, the current federal tax rate on qualified dividends is the same as that on long term capital gains - 15% The justification for this lower tax rate is that companies already pay tax on the money distributed as dividends.

20

is there still “long term capital gains”? I thought that went away and all capital gains is treated the same.

In terms of corporate rates, I believe that in Europe companies pay a salary tax that is used to fund social welfare programs like UHC. Simply looking at corporate income tax rates and ignoring other taxes does not give the whole picture.

In general, our current tax rates are low from a historical basis and the government spending as percent of GDP is low in comparison to the rest of the world. This is despite the US spending vastly more on defense than the rest of the world does.