Sunday, February 28, 2010

On taxes and the redistribution of wealth

Some people take an extremist view that taxation is tantamount to stealing.

This view is often justified by statements like the following: "Right now very little of anything the government spends our money on represents anything that I want."

In a participatory government, in particular a Democratic-Republic like ours, the government is a proxy of the people. As such, the government we elect represents all of us and the wants of the minority are deferred to the will of the majority but we are collectively responsible for the effects of actions taken by our government.

Whenever I hear political demagogues talking about "taking our country back," I cringe. Take it back from whom? Ourselves? Such rhetoric is little more than political sour grapes over the result of a lost election.

Another extremist view is that taxation takes money from those who work for their income and gives it to those who don't--the Robin Hood hypothesis. "Those who don't" are often defined as people on "welfare." And "welfare" is itself defined as free money for poor people who refuse to work for a living.

Speaking as an individual who was, at one time, a welfare recipient, I can assure you that for most recipients welfare is NOT a lifestyle choice. Americans are, by nature, a very proud people. The idea of turning to ANYONE for help--their family, their church or their government--is a difficult, painful and often embarrassing decision to make precisely because of the stigma associated with seeking assistance in a culture that prides itself on what is fast becoming the mythos of the "self-made man or woman."

Are there people who take unfair advantage of welfare--or Churches or their families? Yes, but they do not represent the majority of those seeking help. Often it is those that need help the most who are shamed out of seeking it. This results in increased rates of poverty, homelessness and other burdens on society that aren't as easily quantifiable as the budgets for welfare programs.

Our society also has programs for Americans with disabilities. Individuals who are unable to maintain employment because of debilitating conditions, often physical but also psychological and emotional. Are there people who take unfair advantage of those programs? Yes, but--again--they do not represent the majority of those participating in such programs. A stigma also surrounds applying for disability programs, especially for those with chronic mental illness and personality disorders simply because those individuals--while physically able-bodied--are unable to maintain steady employment because of psychological diagnoses that can only be determined by mental health professionals but aren't always obvious by simply looking at them.

Taxation in our country does not automatically take from the rich and give to the poor. If that were the case then your average tax payer would have a guaranteed tax refund that they wouldn't have to itemize or defend. This is simply not the case. There are in fact a great number of flaming bureaucratic hoops that need to be jumped through in order to qualify for government assistance.

The reality of the government's practices in the redistribution of wealth actually takes an approach that is the polar opposite of the Robin Hood hypothesis as we witnessed in October of 2008 when the financial markets were "threatened by imminent collapse" and tax money collected from the majority of Americans--the "poor" or "certainly not rich"--and was given to major American banks under the so-called Troubled Asset Relief Program (TARP) without so much as a memo indicating where it should be spent. The financial market didn't exactly collapse but the lending pump--which the bailout was supposed to prime--didn't exactly start flowing with credit either. But executives of those banks--many of them the architects of the financial crisis itself--received multi-million dollar bonuses to the genuine outrage of the American public and imitative political theater of politicians on the Hill, many of whom are on the take for campaign contributions from lobbyists for the financial industry. Most of that bail-out money has in fact been repaid--a detail many "conservative" critics of TARP fail to acknowledge--but the government robs from the poor and gives to the rich in other ways that no one seems to know about or at least care to acknowledge. I'm speaking of course about CORPORATE welfare. Farm subsidies, payment on government contracts long since cancelled, no-bid contracts to private corporations in war zones.

Another way that the poor are placed at a disadvantage in relation to the rich--if not specifically "robbed" by them--is simply through the many loopholes that exist within our tax laws.

Ben Stein once wrote, "...the rich pay a lot of taxes as a total percentage of taxes collected, but they don’t pay a lot of taxes as a percentage of what they can afford to pay, or as a percentage of what the government needs to close the deficit gap."

In the same article, he quotes Warren Buffett, "There’s class warfare... but it’s my class, the rich class, that’s making war, and we’re winning.” To illustrate this, Buffett compared his income and taxes to that of his staff and "It turned out that Mr. Buffett, with immense income from dividends and capital gains, paid far, far less as a fraction of his income than the secretaries or the clerks or anyone else in his office. Further, in conversation it came up that Mr. Buffett doesn’t use any tax planning at all. He just pays as the Internal Revenue Code requires. 'How can this be fair?' he asked of how little he pays relative to his employees. 'How can this be right?'”

Many "conservatives" don't hide their secular worship of wealthy people like Buffett, holding them aloft as if wealth is a direct measure of wisdom, justice and one's favor in the eyes of God because they are so "blessed" with their wealth and yet there he is, one of the wealthiest men in the world pointing out the lack of fairness that his class takes advantage of over the rest of us.

Many argue that a flat tax would be "more fair" but as long as big businesses can afford to hire legions of lobbyists to influence legislation that favors Wall Street and the wealthy, even the most "fair" flat tax would be riddled with loopholes to allow the most wealthy to keep doing what they're doing now to avoid paying their "fair" share under a so-called flat tax.

I don't think a flat tax is necessarily the answer--at least not one that's flat across the board. What needs to happen first is to close a lot of loopholes that allow the wealthiest people to get away with paying less than their middle-class counterparts. For example, if a corporate executive waives a $1 million salary--taxed at 35%--in favor of $1 million worth of company stock that he sells 13 months later, instead of taxing him only 15% in capital gains, it should be taxed at 35% since he accepted that stock in exchange for his services to the company. That stock is his income thus it should be taxed as income.

Many "conservatives" like to argue that taxation is a disincentive to work and they often cite a quotation attributed to Ronald Reagan to defend their argument:

“The more government takes in taxes, the less incentive people have to work. What coalminer or assembly-line worker jumps at the offer of overtime when he knows Uncle Sam is going to take 60 percent or more of his extra pay?” -Ronald Reagan, circa 1982

Let's think about that for a minute. If the 40% left over is more than what he's already making before taxes, he just might jump at it.

A coal miner in 1982 made around $13/hour. Assuming a 40-hour week, a couple weeks vacation and a handful of sick days, that coal miner might be bringing home $25,000 in 1982 which put him in a tax bracket of 32%. The top tax bracket that year was 50% and applied only to people making more than $55,300, more than TWICE the average income of a coal miner.

In 2008, a coal miner might take home $43,000 a year. Again, around the middle of the tax bracket paying 25%. The top bracket is only 35% and it doesn't kick in for an individual until he or she clears $372,950, over EIGHT TIMES as much as our coal miner makes.

My point is, coal miners and assembly-line workers--i.e. average Americans--don't have to worry about paying 60% in federal income taxes. It never ceases to amaze me how the extremely wealthy can convince the middle-class and the poor to feel sorry for them because they live in a higher tax bracket and yet the "super-rich" pay less as a percentage of their total income because they find all sorts of interesting loopholes to keep from paying it.

Let's put the Robin Hood myth to rest once and for all: The redistribution of wealth doesn't come from taxation, it occurs prior to it. If we were to bring back the highest brackets of the 80s (45%), 70s (70%) or 50s (90%), more wealth would be made available to more people because those higher brackets would encourage the wealthiest people NOT to acquire so much wealth to begin with (seriously, there comes a point where simply having more money doesn't really affect one's quality of life or one's ability to take care of one's family). Let's say the top bracket alone was raised from 35% to 45% on individuals making $372,951 or more. The bracket right below that is 33% for $171,551-$372,950. A difference of just $1 in a person's salary can mean a 12% difference in their rate of taxation. That's a difference of nearly $45,000 in taxes one wouldn't have to pay by simply earning $1 less in income. So where does it go? Back into the company one works at, enabling said company to grow, create more jobs and offer higher wages for lower earners who would still be taxed but in lower brackets, ensuring that they retain their buying power--lower earners spend more of their income than the wealthy.

The "Greatest Generation" paid over 90% in their top bracket for decades and did so with very little complaining. The 'tax as disincentive' argument is baseless. Reagan's analogy fails for reasons illustrated above. If Rush Limbaugh had to pay 75% of his income in taxes, he'd still be worth $100 Million. Sean Hannity, $25 Million. Glenn Beck $12.5 Million. Bill O'Reilly: $2.5 Million. Would a higher tax bracket really take away the incentive these men have to work?

I'm all for tax relief, but only for those people who actually spend money and deserve a break and that's the poor and the middle-class--though lately it's getting harder and harder to distinguish the two. My solution is to take the lower brackets and flatten them to 15% across the board for anyone making $0-$9.9 Million--more accurately, $9,999,999.

You might ask, Why so much? Why that particular number?

Let's face facts, a million bucks isn't what it used to be and small business owners, the people who employ most of the work-force, are middle-class Americans--many of them paper millionaires who can do a lot more good for the economy with a tax break than Warren Buffet, Bill Gates or Michael Bloomberg who all do just fine no matter what shape the tax code takes.

Why all of those nines? Because middle-class millionaires are defined as anyone worth more than $1 million but less than $10 Million and $10 Million is where I draw the line between the "Rich" and the "Super-Rich."

As for people making $10 million and up? Tax the hell out of them. What you get won't be a disincentive to work but a disincentive to earn more than they need. Incentivizing people to earn a lower salary ($9.9 million a year hardly puts anyone in the poorhouse) keeps money out of any one person's bank account and invests it into business, job creation, the economy.

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