Taxing the Rich in America

[General Mung Beans]

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

Taxing the rich in America
The politics of plutocracy
America’s rich should pay more, but there is no need to raise their income-tax rates

Jan 21st 2012 | from the print edition


IN AN ordinary American presidential election, a candidate who had earned a fortune in business and then paid an absurdly low tax rate would barely raise eyebrows. Americans have long considered wealth something to admire and pursue, not vilify and redistribute. Alexis de Tocqueville said he knew “of no country…where a profounder contempt is expressed for the theory of the permanent equality of property.”

But this is no ordinary election. That so much scrutiny has fallen both on how Mitt Romney earned his fortune (in the ruthless world of private equity) and his tax rate (15%, less than what some middle-class families pay) is a sign something has changed. For that, credit a decade in which the median family in America saw its real income fall by 7%, even as the top 1% grabbed a share of national income unseen since the 1920s (see article), and a level of unemployment that, though falling, remains troublingly high. Not many Americans like the tactics or fashion choices of Occupy Wall Street, but quite a few share the movement’s opinion that the economy is tilted in favour of the wealthy.

And so the rich are now a campaign issue. Barack Obama calls for “millionaires and billionaires” to “pay their fair share”: introduce a minimum tax rate on millionaires and return the top income-tax rate to 39.6% from 35%, and the other 98% of Americans would not have to pay more, he claims. Republicans shoot back that raising any taxes would destroy jobs and business confidence. They think you can fill the budget hole by spending cuts alone; many want to cut taxes further.

Neither side is talking sense. America’s rich should indeed pay more tax; but marginal rates should not go up.

History shows that deficit reduction works best when most of the burden falls on spending cuts. That means that middle-class entitlements will have to be reduced, no matter what Mr Obama tells his supporters. But, just as in every other budget squeeze, a portion must come from higher taxes, no matter what the Republicans say.

Democrats say only the top 1% need pay more; that’s misleading. Others will have to pay too. But more of the increase should be shouldered by the rich who have done so well from recent trends. Technological change and globalisation have sharpened demand for the most skilled workers, in particular superstars, be they athletes or hedge-fund managers, thus sharply increasing inequality. Tax policy has exacerbated this trend instead of mitigating it. George Bush junior slashed top income-tax rates as well as rates on dividends and capital gains, which explains why Warren Buffett and Mr Romney have such low tax rates.

Follow the money

However, restoring the top income tax rates, as Mr Obama proposes, is not the best way of extracting extra revenue from the rich. It would raise revenues of about 0.3% of GDP and do nothing to make America’s grotesquely complicated tax system more efficient. It would be far better to close or limit loopholes and deductions, currently worth up to 7% of GDP, which distort behaviour (by, for example, encouraging people to take out big mortgages) and mostly benefit the affluent. Some deductions, including mortgage relief, would have to be phased out in stages; but many could go immediately. In a similar way, equalising the rates on capital, dividends and ordinary income would make it possible to lower America’s corporate tax rate, currently one of the rich world’s highest.

The result would be lower rates, more revenue and a more efficient and progressive tax system. If that’s where the debate about wealth ends, it will have been worth it.

This was in many ways Huntsman's tax plan...too bad he dropped out.

[Stark]

Is 'closing loopholes' really a plan? Are there specific practical suggestions attached to it? Tax reform is something easy to promise, and easy to busily do nothing useful at for years.

[Knife]

AN ordinary American presidential election, a candidate who had earned a fortune in business and then paid an absurdly low tax rate would barely raise eyebrows. Americans have long considered wealth something to admire and pursue, not vilify and redistribute.

Actually, I'd argue that this very premise is beginning to go away.

[Zaune]

Is 'closing loopholes' really a plan? Are there specific practical suggestions attached to it? Tax reform is something easy to promise, and easy to busily do nothing useful at for years.

Well there's bugger-all point in Congress imposing higher taxes on the wealthiest members of society when they can't seem to stop them wriggling out of what they're supposed to be paying now, is there?

[Mr Bean]

Is 'closing loopholes' really a plan? Are there specific practical suggestions attached to it? Tax reform is something easy to promise, and easy to busily do nothing useful at for years.

In America there are individuals and Corporations who have a tax rate of zero thanks to the number of loopholes that have been carved into law. Mitt Romney's 15% tax rate is his default because his income is mostly carried interest (IE income from investments which are not counted as income). With very little effort he could be paying as little as 12% and with a good accountant he could be paying as little as 4% thanks his self run charity. Having your own charity is one of the best tax shelters in America.

Just closing loopholes so he payed 35% not 15% and Corporations like GM payed 35% and not less than 1% which be a massive boost to US revenunes. The chances of this happening are slightly less likely than a Herman Cain/Ron Paul ticket.

[Stark]

No shit, professor. The point you missed completely was that putting a bullet point out there like 'close loopholes' is meaningless, because you it doesn't tell you what impact it will have. You may not be aware of this, but reforming a tax code can introduce new loopholes, miss old loopholes by 'accident', create a new layer of bullshit that serves the rich and harms the poor and yet not actually achieve jack shit in terms of revenue. The US tax system is a perfect example of how 'reform' can not just be useless but actually harmful.

You can say you're going to 'close loopholes' and close a loophole or two while not actually helping the situation at all, so to assess this as a 'tax plan' you need to know actual information about it, and not just the stated goal.

[Starglider]

I certainly agree with raising capital gains tax and reducing or eliminating corporation tax. Aside from being fundamentally a double taxation and hence a massive waste of government and accountant time, corporation tax is massively distorting (hits small and local companies much more than large and international ones) and considerably easier to dodge. Executing such dodges supports a huge swath of accountants and lawyers who are a waste of money and manpower. GM / GE etc can and will ship profit centers and HQ functions overseas to dodge corporation taxes; as it is US corporations are holding massive amounts of cash offshore to avoid US taxes. Moving the point of taxation to dividend payments and stock stales will remove that sort of distortion and more effectively raise cash, because its significantly harder for individual shareholders to dodge taxes or leave the US. Finally corporation taxes are regressive, as pension funds are major shareholders and they affect everyone's pensions equally. Removing corporation taxes will help recapitalise pension funds and increase pensioner income, which will then be taxed progressively.

[Broken]

http://www.economist.com/node/21543165
This was in many ways Huntsman's tax plan...too bad he dropped out.

Did Huntsman have an actual tax/economic plan of his own? I know he endorsed the Ryan Budget Plan (which everyone and their mother hated once it was explained to them) in the debates. But I do not recall him releasing his own plan, or was this something he did before he came around to embracing the Ryan Budget Plan, which (IIRC) was fairly late in his run.

[KrauserKrauser]

I am fully in favor of removing the exception for carry income and long term captial gains and treating all income the same.

Why should a hedge fund investor with income they receive through gaming world currencies or some other such garbage be taxed at a lower rate than someone that actually takes out garbage for a living?

I can see the long term capital gains argument to some degree but the carried income is just lobbyist drivel.

[General Mung Beans]

http://www.economist.com/node/21543165
This was in many ways Huntsman's tax plan...too bad he dropped out.

Did Huntsman have an actual tax/economic plan of his own? I know he endorsed the Ryan Budget Plan (which everyone and their mother hated once it was explained to them) in the debates. But I do not recall him releasing his own plan, or was this something he did before he came around to embracing the Ryan Budget Plan, which (IIRC) was fairly late in his run.

Yes, his tax plan was basically simplifying the tax code to three brackets and eliminating deductions and credits. OTOH, he advocated eliminating capital gains taxes...

http://jon2012.com/index.php/issues/job ... tax-reform

[Alphawolf55]

I certainly agree with raising capital gains tax and reducing or eliminating corporation tax. Aside from being fundamentally a double taxation and hence a massive waste of government and accountant time, corporation tax is massively distorting (hits small and local companies much more than large and international ones) and considerably easier to dodge. Executing such dodges supports a huge swath of accountants and lawyers who are a waste of money and manpower. GM / GE etc can and will ship profit centers and HQ functions overseas to dodge corporation taxes; as it is US corporations are holding massive amounts of cash offshore to avoid US taxes. Moving the point of taxation to dividend payments and stock stales will remove that sort of distortion and more effectively raise cash, because its significantly harder for individual shareholders to dodge taxes or leave the US. Finally corporation taxes are regressive, as pension funds are major shareholders and they affect everyone's pensions equally. Removing corporation taxes will help recapitalise pension funds and increase pensioner income, which will then be taxed progressively.

Oh please, Capital Gains tax are hardly a double tax. To constitute double tax, it would have to the same person being taxed twice on the money (a sales tax in a system that didn't allow for deductions would be a better example of that happen). I mean if capital gains is "Double taxation" then if I make an income, pay taxes and use the left over money to hire a maid, the maid shouldn't pay taxes because my money was already taxed.

[KrauserKrauser]

Capital gains are income. If I run a business, say antiques, and am able to arbitrage a profit out of a purchased item that is somehow different from selling candies at a set price?

There is nothing magical about the gains made through trading or investing. Income is income. Set a threshold or circumstances for declaration of income, regardless of source, and tax everything the same.

If you truly believe in a free market why would you need to direct money to long term investing, wouldn't the market naturally tend toward that anyway if you believe in free market? Long term capital gains taxation at a lower rate is simply social engineering to direct the market in a certain way.

[SCRawl]

I certainly agree with raising capital gains tax and reducing or eliminating corporation tax. Aside from being fundamentally a double taxation and hence a massive waste of government and accountant time, corporation tax is massively distorting (hits small and local companies much more than large and international ones) and considerably easier to dodge. Executing such dodges supports a huge swath of accountants and lawyers who are a waste of money and manpower. GM / GE etc can and will ship profit centers and HQ functions overseas to dodge corporation taxes; as it is US corporations are holding massive amounts of cash offshore to avoid US taxes. Moving the point of taxation to dividend payments and stock stales will remove that sort of distortion and more effectively raise cash, because its significantly harder for individual shareholders to dodge taxes or leave the US. Finally corporation taxes are regressive, as pension funds are major shareholders and they affect everyone's pensions equally. Removing corporation taxes will help recapitalise pension funds and increase pensioner income, which will then be taxed progressively.

Oh please, Capital Gains tax are hardly a double tax. To constitute double tax, it would have to the same person being taxed twice on the money (a sales tax in a system that didn't allow for deductions would be a better example of that happen). I mean if capital gains is "Double taxation" then if I make an income, pay taxes and use the left over money to hire a maid, the maid shouldn't pay taxes because my money was already taxed.

You've missed what he said.

I certainly agree with raising capital gains tax and reducing or eliminating corporation tax.

He went on to point out that corporate tax is double taxation, not capital gains tax. You are free to disagree with this, but please try to be clearer about what you disagree with.

[Alphawolf55]

I actually figured he tripped up his words since whenever someone mentions double taxation it almost always refers to capital gains tax almost never corporate tax. It would make no sense whatsoever to call the corporate tax, double taxation because it's the first tax in the sequence, the first tax can't be the double taxation (unless we're saying that the income tax is the first tax, the corporate tax is the second, and capital gains would be what, the triple tax?)

[Surlethe]

Corporations aren't people. Corporate profits ultimately goes to shareholders as dividend income, so taxing corporate profit (which is effectively what the govt does since corporations can write off costs) is the same as taxing dividend income. Hence, double tax.

[fnord]

What about a dividend imputation system like what has been running in Australia and New Zealand for the past twenty odd years? It essentially refunds the corporate tax paid to the shareholder (as it aims to eliminate double taxation), like so in the Australian system:

Surlethe, a resident taxpayer, is entitled to an all-up dividend of 1000 AUD from XYZ Ltd.

Since the AU corporate tax rate is 30%, XYZ Ltd has already paid 300 AUD of that thousand to the Tax Office.
Surlethe would include the full amount on his tax return, receive a cheque for 700 AUD and a tax credit (being the tax already paid on the dividend) of 300 AUD, which he can offset against other personal tax, and can give rise to a refund as of 1 July 2000.

If Surlethe's marginal tax rate is frinstance, 48.5% (top end)

Code: Select all

1000 - Dividend income
 485 - Tax on said income 
(300)- Less imputation credit
 185 - Net tax payable by Surlethe on that dividend income

There's a whole bunch of other wriggles (like non-residents being generally ineligible for such treatment, and copping withholding tax on unfranked dividends) which I'm frankly not too sure about.

[Surlethe]

Sure, I guess, but why even bother with the extra lines on the tax form, the extra headache in personal accounting, and the extra time waiting for the refund to balance the accounts? I mean, if the whole point of the refund is to counterbalance the effect on shareholders of the corporate tax, then you've basically eliminated the corporate income tax anyway. May as well default to the simpler system.

[Alphawolf55]

Corporations aren't people. Corporate profits ultimately goes to shareholders as dividend income, so taxing corporate profit (which is effectively what the govt does since corporations can write off costs) is the same as taxing dividend income. Hence, double tax.

That would make the capital gains tax the double tax not the Corporate Tax, since the Corporate tax is the first tax. Additionally this assumes the Corporation has dividends which all of them don't or that the company is a private company (which I believe makes them subject to the corporate tax still)