I wrote a post down below (A Tax Primer) that elicited response from a couple of conservatives, and could well have led to one of those tit-for-tat exchanges that covers all the details in great detail while missing the point entirely. But I wasn’t in the mood. I wrote about how people of ordinary means are taxed at a higher level than people of extraordinary means, and how this is going on right under our noses. The gist of the response is that investors are performing a function too important to tax at regular levels, about how wealth creation is too important to mess with, etc. There’s even a reference to Cuba in one of the responses. That’s another form of Godwin’s Law, I think (any discussion of economics will eventually devolve into accusations of communism).
Yet they miss the basic point: The flow of wealth is upward. Investors don’t create wealth – they harvest it, reallocate it, store it for themselves in the form of second homes and fat bank accounts. They perform a useful function, but not so vital that we need to give them special tax treatment. We’ve had periods when taxes on upper income levels were very high, in the fifties, sixties, and seventies, growth rates were high, prosperity was more widely spread, there was less inequality. Life was generally getting better for most people.
The supply-siders have had their way now since 1980, and more so since 2000. Since George W. Bush has become president, five million people have slipped into poverty, eight million have lost their health insurance, median household income has gone down thirteen hundred dollars, three million manufacturing jobs have been lost, three million Americans have lost their pensions, home foreclosures are now the highest on record since the Great Depression, the personal savings rate is below zero (which hasn’t happened since the Great Depression), real earnings of college graduates have dropped five percent, entry level wages have fallen over three percent, wages and salaries are now the lowest percentage of GDP since 1929.
That’s during a period of low taxation of wealth. The underlying principle is that the wealthy are the means by which we accumulate wealth for investment, yet in prior times there was plenty to invest, even with high marginal rates. It sounds very reasonable, but doesn’t play out in the real world.
There’s class warfare going on, but it is not as normally pictured – it’s not the rabble pounding on the doors of the mansions – quite the opposite. The wealthy are slowly bleeding the wealth creators, the workers, investors, small business owners, and hoarding that wealth. Lately, they have taken to encouraging people to use their homes as credit cards, and have so managed to tap the last great source of middle class wealth – home equity. We have seen an enormous transfer of wealth these past thirty years, upward.
I am an ordinary person of modest means. My marginal rate is 46%. It’s no accident. I’m not politically powerful, I don’t have a lobbyist working for me, or a tax foundation to intellectualize the theft. Wealthy people have now rewritten the tax code so that their type of income is taxed at a maximum rate of 15%. That’s not a reflection of economic need, nor does it serve the greater good. It merely reflects who has power, who doesn’t.
Taxation is both a means of raising revenue and a tool by which we increase equality. Progressive taxation is well-established and widely practiced, and we are no less free because of it. We simply have more equality in society, a larger middle class, and more opportunity for people to achieve better lives. And taxation itself, which the right wing presumes to be an economic sin, often enough lead to wiser use of money for public good. There’s little difference between public and private spending other than money used to build a bridge or school offers greater benefit to more people than yachts, mansions and casinos.
We once had marginal tax rates that hit as high as 70% on the equivalent of $3 million in income, inflation adjusted. We also had growth widespread prosperity, and an expanding middle class. Progressive taxation did not hurt us – in terms of all of us, greater good, with was a public benefit.
Conservatives are fundamentally wrong about the way the world works. They are poster children for the power of an ideology crafted by the wealthy in order to justify wealth accumulation as the be-all-end-all, as if it were the only meaningful form of freedom. They have given us what we have now – a broken economy and widespread poverty, wide divisions of wealth ownership and people kept afloat by borrowing because wages failed to keep up with productivity. The fruit of our labor percolated up – nothing has trickled down.
Friday, October 31 Wall Street Journal, page one: Banks Owe Billions to Executives. They’ve had a bailout, but companies like Goldman Sachs are contractually obligated to pay billions to the very executives who drove them into a ditch. In the end, taxpayers will foot the bill.
That’s how our economy works, in microcosm. In this election Barack Obama has made a small gesture to undo some of the injustice – a middle class tax cut. It’s a smart thing – it puts money in the hands of people who need it and actually spend it, and we’ll all do well by it. But listen to the right wing – “Socialism!”, as if sucking off the wealth of the middle classes for accumulation above is somehow more worthy. He wants to take a (very) small step back towards progressivity. I hope he wins, I hope he succeeds. We’ll all be better off.
Piece of Mindful 
You have made so many erroneous assumptions about society and so many mistakes of economics that it is impossible to address them all on a Saturday morning. However, I like your idea of returning America to the 1950s.
Best Regards,
Your Favorite Harvester,
Max
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Oh please – grace us with the details. You got the chops?
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Well, the mighty wind will, necessarily, continue to blow. That is due to the fact that you’ve missed, or misinterpreted, both history and reality.
First, let’s address your assumption that FICA taxes would otherwise be paid to the employee if not paid by the employer. For discussion we’ll assume that’s true. But if that’s true then it would also be true that compensation for other benefits, such has health insurance premiums, paid by the employer would otherwise be paid to the employee. You leave that out of your analysis and thus heavily skew the numbers to paint a picture that is significantly worse than reality.
Additionally, you assume that all income coming to those who live on inherited wealth is at the long term capital gains rate. That’s a rather complete leap of faith inasmuch as interest income is taxed at ordinary tax rates as are short term capital gains. For a guy who shuns the theoretical over perceived reality I’m surprised that you take this tack.
The actual numbers, according to the Congressional Budget Office, paint a significantly different picture.
The effective tax rates, including Social Insurance Payments for 3rd, 4th, 5th quintiles and the top 1% are 14.2, 17.5, 25.2 and 31.2 respectively as of 2005. This data does not assume, however, that the employer part of FICA is paid by the individual. It does include the effective FICA payments for the self employed though and shows an average tax burden for social insurance for the 3rd and 4th quintiles of 9.5% and 9.7% respectively. Thus, the actual numbers indicate a quite progressive tax structure for those who claim to be in the reality based community.
Secondly, your assertion that the middle class enjoyed more success on the 50’s, 60’s and 70’s than Reagan and beyond is bunk as is your notion that the middle class had to go on a borrowing binge to simply pay for necessities in recent years. A very recent study by the Minneapolis Fed refutes the conventional wisdom on to which so so quick to glom. Although the study does not refute the widening spread between the wealthy and the middle class is demonstrates quite convincingly that the last three decades have shown the greatest increases in personal income in the history of the country. The increasing debt burden is more likely explained by increased consumerism. In almost every area per capital measures of consumer goods has shot up. The average size home is nearly 50% larger than homes in the 60’s even though the average household has 30% less members. The numbers of cars, TVs, household appliances, air conditioners, etc has at least doubled in the last three decades.
Finally, we have to address your Marxist assertion that wealth is created from the bottom up. This is pure nonsense. Wealth is created by those who can capture efficiency in the manufacture of products and services, invention and/or innovation, and the ability to find demand in markets. The staggering wealth that was created from 1982 (the year Intel delivered the 8088 microprocessor) to the market created wealth for the next two decades with the major benefits flowing almost exclusively to entrepreneurs and those who had the foresight to underwrite the associated risks. Labor and materials are but input goods to facilitate the efficient distribution of products that find demand in the market place. Both capitol and labor are dependent on invention, innovation and market demand. You have it all wrong and your thinking reflects Marx’s pre-industrial mentality.
While I agree that taxation is a “weapon” as you put it it’s much more a tool for social engineering of which the unintended consequences protect the rich and hurt the poor. You’re right about the inequities the tax law creates but you’re right for the wrong reasons. The tax laws arbitrarily screw the poor with incentives for home ownership, corporate sponsored health insurance, and barriers to entry for innovation. Regulation does the same thing in many cases (although you should know by now that I do support some level regulation to ensure a level playing field – a term of art that I hope you don’t assume means what you define it to mean. And I don’t have a problem with a progressive tax system either. Those with more wealth use more government services. But your constant attempt to boil the tax discussion down to marginal tax rates is so over simplified that it makes me wonder if you’ve really thought the issue through.
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Oh, sure, I have the chops. You know that. I have beaten you up so many times on this subject, you have lost count.
Honestly, though, I am right in the middle of replacing the drain plumbing underneath my kitchen sink. I am harvesting my own wealth while screwing the workingman out of a job.
Mighty minds of the right, not to mention mighty hands!
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I do not assume that FICA taxes will be paid to the worker if now sent to the government. I simply claim ownership of those taxes for the worker. He ahs to produce more than he costs, and FICA, as well as unemployment insurance, health insurance where provided, vacations and sick pay (but not Workers Comp) are part of the equation. In fact, I assume that if employment taxes were eliminated, employers would keep the money.
I’m fully aware that those living on inherited wealth have other kinds of income beyond income and dividends, but if they so choose and are wealthy enough, they can live on these items (and munis) and pay very little tax. That choice is not available to workers, who must pay two taxes and cannot hide.
Your table would change considerably if FICA taxes were included in full. It’s nothing more than a hidden tax, and should be included. And not that the very premise of the self-employment tax is to put us on the equal footing as employed people, and the rate, not coincidentally, is 14.2%, and not 15.3%. To be on equal footing with employed people, we pay the same tax as them – 14.2%.
Inflation adjusted real earnings are less now than they were in 1970. If you want to measure wealth in terms of consumer goods, then you’ll find that people in Nicaragua, who usually have many TV sets, are quite well off. Earnings is the key, and not possessions.
Our savings rate is negative. I don’t know what that tells you, but it tells me that people are going into debt to finance their lifestyles. Most people in this country tend to overspend on consumer goods, vehicles and housing, and are doing so with less real earnings than they had forty years ago. Hence, debt. What is the average debt load per household compared to 1970? What was the cost of health care then? Are we better off? Not likely.
I’d be very curious, since you like dealing in quintiles, knowing what percentage of national income is collected by the top quintile? The top 1%? What percentage of wealth do they own?
You seem to believe that innovation and creativity are not forms of labor. They are more highly rewarded, rightfully, but are the product of human effort. Yes, if you give better tools to labor, labor produces more wealth. People work on different levels, and creative people who give us new tools and innovations are the most highly rewarded, as they should be. My point is that investment is not a wealth producing activity, but rather a wealth allocation one, and a wealth harvesting one. I agree with Lincoln that labor precedes capital. You on the right tell us that we must not tax investment income at high rates, as they are the ones creating wealth. Not so.
Put it this way – every company that employs people gathers more income from each employee than they pay them – if that were not true, they would go belly up. (It’s a broad statement, not always true – in our current environment, executives are vastly overpaid, and much of that has been arbitrage – trading foreign labor for American labor, increasing the margin on their products and pocketing the difference, splitting it with shareholders.)
I therefore think that passive income collection is not a necessary feature of our economic well being, and that it should be taxed at higher rates, as it was during the time when one worker could support his family, and when top tax rates were 70-90%. I cited the dreary numbers to you of our economic performance these past eight years – in your world, we should have prospered off the charts, as the tax burden on passive income was dramatically lowered. There’s something wrong with your formula – it doesn’t yield what the real world does. We’re much worse off now than eight years ago, taxes be damned.
Marginal tax rates are key – how much harder do I want to work to earn that next dollar of income. People are usually surprised at how little of their Christmas bonus they get to keep. Yes, MTR’s are not an indicator of total tax burden, as the income tax structure is laden with deductions and credits. But it is critically important on the Laffer Curve – no?
Early on in my career, I used to take time with my tax clients to explain to them how much tax they really paid – it usually worked out to 25-40% of their income. Most didn’t want to hear it – they only wanted to know their refund. If you put wages and investment income side by side, wages pay far higher taxes. That’s the world we have created these last eight years.
I use last-dollar tax to put on display the inner workings of the tax system, to refute the notion that middle class people get off light. But I do see the big picture – a guy making $50,000 pays 14.2% of his income in payroll tax, and usually 25% on top of that on his last dollar earned, and that ends up taking 25-30% of his income in tax. A guy making $1,000,000 pays a 1.6% payroll tax and 35% income tax, and 35% on his last dollar, probably 35% of his income in tax. They are fairly close. That’s how it looks down here in the trenches.
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“Inflation adjusted real earnings are less now than they were in 1970.”
Back that up. I can tell you didn’t read the Minneapolis Fed study.
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Down the page a bit, here.
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It looks like some comments got scrubbed, but I’ll give it another shot.
I share your sensibilities, in that I want a “better” society, and a more fair tax system, but I don’t share your conclusions.
I’m not sure measuring economic growth should be our only metric for comparing societies. Above a baseline standard of living, people don’t report any higher levels of happiness. Maybe there are other things to pursue, like more positive social interactions, but any social activist (like Barack Obama) ends up asking for more money, and thus advocating more economic growth. When we ask for quality of life, we seem to end up asking for more money. And the rich have the money. The 5th quintile pay 80% of the taxes, so policy ends up nurturing that group, no matter who is in power. That quintile has the human capital, the organizational ability, the productivity, to pay the big taxes. You can carp about some unequality of tax rates, and when you throw in sales tax and the gambling/lottery skim big brother takes, the rates are even more skewed, but the wealthy swamp the revenue side by the sheer size of their ecomomic pie.
>>>>The wealthy are slowly bleeding the wealth creators, the workers, investors, small business owners, and hoarding that wealth.
Exactly wrong. The wealthy ARE the wealth creators, the workers, the investors, and the business owners. The bottom up economic growth that Barack thinks he can finesse will never, ever work: there is just not enough human capital in the first two quintiles to generate the $$ we seem to need in today’s economy.
>>>>Conservatives are fundamentally wrong about the way the world works. They are poster children for the power of an ideology crafted by the wealthy in order to justify wealth accumulation as the be-all-end-all, as if it were the only meaningful form of freedom.
You are in this pack, too. You decry the way the world works, then you want the gov’t to step in with their brand of wealth accumulation. Same game, different group running their fingers through the lucre.
>>>>The fruit of our labor percolated up – nothing has trickled down.
Completely wrong. Almost everyone, almost every state, gets more in taxes/services than they pay. We have huge transfer of wealth programs in this country. You seem to think that if my neighbor gets to keep more of his money (by paying less in taxes) than me, that is a transfer of wealth from me to him. Not so.
>>>>There’s little difference between public and private spending other than money used to build a bridge or school offers greater benefit to more people than yachts, mansions and casinos.
The bridge or school can be as big or bigger a boondoggle than a mansion or casino.
>>>>And taxation itself…often enough leads to wiser use of money for the public good.
I agree with this. All this talk of tax cuts has the perverse effect of increasing spending.
>>>>Since George W. Bush has become president, five million people have slipped into poverty…
Try 5 million low wage illegal immigrants
>>>>…eight million have lost their health insurance (illegals plus rising health care costs.) …three million manufacturing jobs have been lost (they’ve been outbid by other countries or technology. Not necessarily a bad thing. We can do other things.) …three million Americans have lost their pensions (this is bad, but it happens if you worked for a company that overpromised.) …home foreclosures are now the highest on record since the Great Depression (people signed the papers. They overbought.) …the personal savings rate is below zero (and you want to tax interest income even more) …real earnings of college graduates have dropped five percent (Their earnings have gone up, but the costs they face have gone up even faster, mainly health care and housing.) …entry level wages have fallen over three percent, wages and salaries are now the lowest percentage of GDP since 1929 (hello illegal immigration, which helps the upper quintiles by cheapening products and services, but hurts the lower wage earners.)
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I did want to avoid tit for tat here, as it is time consuming and fruitless. Here’s my bottom line: All wealth comes from conversion of resources to commodities, and commodities into products – value added. It is labor – creative, administrative, grunt, that adds that value. Investors, while a necessary part of our society who perform an essential service, far overvalue themselves, and have taken to believing that they are creating wealth when thye merely harvest, store, and reallocate.
I believe in progressive taxation, with a maximum tax on labor, and higher taxes on passive income, along with progressive taxes on corporations, estate taxation, government sponsored health care and education. Barack Obama believes in some of that – some – and I will vote for him.
Honest people disagree. I believe that Max Bucks, Fred and Dave Budge are honest people.
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