The lack of logic behind "tax the rich"

[Denny Crane]

The Familiar rallying cry of a certain political party is "tax the rich." I'm going to explain in this post why there's no logic to it.

Let's look at the Clinton tax rates / tax hikes and what Obama proposes. For people making $250K, raise the tax rates. Just who makes $250K or more?

A truck stop on the toll road in a place like Memphis. It's an LLC or S corporation, so the owner can draw his living wages from the business without paying double taxation of dividends. It might do $4M in sales to generate $250K in profit - that profit flows through to the owners and is taxed. Increasing the tax rate is depleting that business' cash reserves and limiting its ability to expand and hire more people. Maybe they'd save up for 4 years to build a restaraunt on the side, employing cooks, waiters, dishwashers, and generating sales for the food and restaraunt suppliers. Do we want to balance the govt. books on the back of this guy?

The upscale restaurant up the street from you. It might do $1.5M in sales and $400K in profits. They'd use the $400K to build a 2nd restaraunt or expand its offerings. Do you want to balance the govt. books on the back of this guy?

Bill Gates. The guy is worth $50B. His salary at M$ topped out at $1M. So you tax him $500K. Pays for 2 minutes of the military budget. Heck, tax his whole $50B in net worth and you pay for 1/3 of a year worth of Iraq or 1/20th one year's worth of Social Security or a tiny fraction of Medicare. He borrows against his $50B, which is not taxed - in fact, he gets a tax shelter for paying the interest on his loan. He wants to trade $10B worth of his M$ stock for $10B worth of Apple stock, it's not taxed because it's a like-kind transaction (in accounting/tax terms). If the guy is smart, he has $1M in mortgage payments, so his tax bill is $0. I fail to see the point in raising taxes, thinking you're going to ding him.

The CEO of Disney makes $250M in compensation. A few $million is salary, the rest is in stock options that are not taxed until he realizes a capital gain. Probably never wants to realize a capital gain, he borrows against his stock after exercising it.

Tax all the money of the Forbes richest 500 people in the world, and you don't pay much of a year's govt. expenses. That's all their net worth, all the money they've saved in their lifetimes.

So you see, taxing the rich isn't taxing the rich, it's taxing the waitress who would have either a job or a better paying one.

Prove me wrong

 

[The Return of the Raider]

Where are the "next" tax hikes? Is it really for 250k, exactly as you are predicting? Is it higher or lower than that figure?

 

[Denny Crane]

$250K is Obama's figure.

At $5M, the businesses are larger, obviously, but the principle is the same.

 

[Denny Crane]

An article from Politico that explains pretty much what I posted above, in different terms.

http://dyn.politico.com/printstory.cfm?uuid=0E92FEE0-3048-5C12-0002330C2A831238

An argument against Obama's tax plan
By: Grover G. Norquist
July 11, 2008 08:22 AM EST
The Tax Policy Center and the Barack Obama campaign used some sleight of hand this week in Politico. To quote Eric Tolder of the TPC, “Most small-business people, like most everyone else, are not really high-income.” While this is true, it completely and totally misses the point.

Let’s start with the definition of a “small business.” Most will tell you that small-business income constitutes income derived from sole proprietorships, partnerships and Subchapter S corporations.

The conservative argument (and that of the John McCain campaign) is that Obama’s stated plan to raise taxes on households making $250,000 or more in income is a tax increase on small business. The simple answer to this dilemma can be found in the IRS Statistics of Income Bulletin (Table 1.4, for those who are interested).

So what do the data say?

In 2006 (the latest year available), $706 billion of such income was reported to the Internal Revenue Service. Of this, about half was reported by households in the top marginal income tax rate. Interestingly, two-thirds of this income was reported by households making $250,000 per year or more — the very same households that Obama wants to increase taxes on.


The Obama campaign maintains that the number of small-business owners is what’s important. Economists know what matters is the tax rate that’s applied to the bulk of small-business income. Make no mistake about it: Obama’s plan to raise taxes on households making more than $250,000 will raise taxes on most small-business profits in America.

What type of tax rate are we talking about? Currently, S corporations face a top tax rate of 35 percent, while sole proprietors and general partners face a tax rate of 37.9 percent (since they’re responsible for paying both income tax and the Medicare component of the payroll tax).

Under Obama’s plan to let the scheduled 2011 tax rate hikes occur, and his plan to raise the self-employment tax on those making more than $250,000, the S corporation rate would rise from 35 percent to 39.6 percent. The sole proprietor and partner rate would rise from 37.9 percent all the way up to a staggering 50.3 percent. Many Democrats in Congress have proposed making all small businesses (including S corporations) pay this 50-plus percent rate. A small business tax rate that high would be the highest marginal rate faced by them in nearly a quarter-century.

What would a world look like where two-thirds of all small-business income would be taxed at a 50 percent rate? The economic law that “taxing something more and getting less of it” would apply. Fewer Americans would be interested in opening or expanding small businesses. Tax evasion and legal tax avoidance would spike, as tax shelters would once again become a booming industry. Since small businesses create a majority of jobs in America, Main Street closing up shop will have a direct impact on the family budget, as well. Plants and equipment will go unused. Despite the misguided opinions of static scorers in Washington, federal tax revenues will likely decline as the economy staggers into a full-on recession.

What’s the alternative? One place to look is the optional alternate tax system originally proposed by Congressman Paul Ryan (R-Wis.) and now endorsed by McCain. It would give households (including those with small business income) a choice between the current tax code and one with a top rate of 25 percent on all income over $100,000. This would have the beneficial effect of lowering the tax rate on most small-business income by 10 percentage points. Small businesses haven’t faced a tax rate that low in quite some time and would be likely to respond with the creation of new businesses and more investment in existing businesses.

The McCain small business tax plan doesn’t end there. For those businesses that are organized as conventional corporations, the top tax rate would fall from 35 percent to 25 percent, the European average. For all businesses, technology and equipment — which now must be slowly “depreciated” over many years — would be immediately expensed in year one.

Stepping back, voters and policymakers should ask themselves whether they want two-thirds of small business income taxed at a 50 percent tax rate or if they want nearly all small-business income taxed at a 25 percent tax rate. They should ask themselves whether it’s healthier for small businesses to write off a computer over six calendar years or to simply write it off in year one. To America’s small business sector, the answer is obvious.

Grover Norquist is president of Americans for Tax Reform and author of "Leave Us Alone — Getting the Government’s Hands Off Our Money, Our Guns, Our Lives."

 

[Dumpy]

First off, studies have conclusively shown that the wealthy derive more benefits from government services than the poor and middle class. For example, the costs of regulation and the court system, which companies such as Microsoft and Disney have used to their advantage. Second, since you are not arguing that the government should reduce its expenditures, someone has to pay to keep the government running. Arguing that taxing the rich more will have minimal benefit would seem to imply that no one should be taxed anything at all. Third, your examples include some ridiculous assumptions about what the highest tax rates might be. Fourth, the example of the restaurant that makes $250,000 in profit is silly, since it is only each dollar above $250,000 that would be taxed at a higher rate, not the owner's entire profit. Fourth, none of this would be necessary at all if 2/3 of the nation's most insanely richest people didn't take up residence on some offshore island seven months of the year in order to avoid estate tax when they died. Fifth, one reason why these few CEOs get paid so much is because their expected tax hit is built into their salaries.

 

[Dumpy]

What would a world look like where two-thirds of all small-business income would be taxed at a 50 percent rate? The economic law that “taxing something more and getting less of it” would apply. Fewer Americans would be interested in opening or expanding small businesses. Tax evasion and legal tax avoidance would spike, as tax shelters would once again become a booming industry. Since small businesses create a majority of jobs in America, Main Street closing up shop will have a direct impact on the family budget, as well. Plants and equipment will go unused. Despite the misguided opinions of static scorers in Washington, federal tax revenues will likely decline as the economy staggers into a full-on recession.

I'm just going to quote this, because I believe that a similar argument can be used to support the idea of limited government-supported universal health care. One can argue that the lack of health care stops some percentage of people from becoming small business owners and entrepreneurs, because of the risk involved, especially if they have a family. If you believe that the small businesses and entrepreneurs are the building blocks of our economy, it would seem to make sense that a limited universal health care program would encourage more people to take that route, thus, in the long run, providing a boost to the economy. Speaking for myself, I would never want to open my own shop if it meant giving up health insurance for my children. never, ever, ever. I don't want to get into the minutae about the cost of the health care program, what it would include, what services would be included, etc., but it would seem to me that a minimal safety-net type of insurance program, which could be enhanced by private insurance, would ultimately provide great economic benefits. BTW, I have NEVER heard this argument made anywhere. It is my own.

 

[Denny Crane]

First off, studies have conclusively shown that the wealthy derive more benefits from government services than the poor and middle class. For example, the costs of regulation and the court system, which companies such as Microsoft and Disney have used to their advantage. Second, since you are not arguing that the government should reduce its expenditures, someone has to pay to keep the government running. Arguing that taxing the rich more will have minimal benefit would seem to imply that no one should be taxed anything at all. Third, your examples include some ridiculous assumptions about what the highest tax rates might be. Fourth, the example of the restaurant that makes $250,000 in profit is silly, since it is only each dollar above $250,000 that would be taxed at a higher rate, not the owner's entire profit. Fourth, none of this would be necessary at all if 2/3 of the nation's most insanely richest people didn't take up residence on some offshore island seven months of the year in order to avoid estate tax when they died. Fifth, one reason why these few CEOs get paid so much is because their expected tax hit is built into their salaries.

What do you think M$ expenses were in defending itself against the limitless resources of the govt. prosecution in their anti-trust case in the 1990s?

I do argue the govt. should reduce its expenditures. By 2/3, actually.

The highest tax rates would be 39% for federal, 10% for state, plus property taxes, sales taxes, gasoline taxes, telephone taxes, and so on.

If the taxes weren't absurd, nobody's take up residence on an offshore island. The taxes are so bad already that businesses are moving their HQs offshore.

These few CEOs, like the one at Disney I mentioned, write $40M checks to movie actors for one movie. Their take of the entire revenues of the company is a tiny fraction of what all the employees make. For the fortune 500 companies, the median salary for CEOs is $8.4M. 500 x $8.4M is $4.2B. We're talking about $2B in tax revenue at Obama's tax rate, or $1.8B at the Bush tax cut rate. What exactly does $200M buy the government? A bridge to nowhere of course!

http://money.cnn.com/2006/04/06/news/newsmakers/pluggedin_f500_fortune/index.htm

 

[Denny Crane]

Note: the average CEO at the fortune 500 companies earned $10.8M. My figuring above is off by 25% or so, the tax revenue would be an extra $250M, not $200M.

 

[Dumpy]

What do you think M$ expenses were in defending itself against the limitless resources of the govt. prosecution in their anti-trust case in the 1990s?

I do argue the govt. should reduce its expenditures. By 2/3, actually.

The highest tax rates would be 39% for federal, 10% for state, plus property taxes, sales taxes, gasoline taxes, telephone taxes, and so on.

If the taxes weren't absurd, nobody's take up residence on an offshore island. The taxes are so bad already that businesses are moving their HQs offshore.

These few CEOs, like the one at Disney I mentioned, write $40M checks to movie actors for one movie. Their take of the entire revenues of the company is a tiny fraction of what all the employees make. For the fortune 500 companies, the median salary for CEOs is $8.4M. 500 x $8.4M is $4.2B. We're talking about $2B in tax revenue at Obama's tax rate, or $1.8B at the Bush tax cut rate. What exactly does $200M buy the government? A bridge to nowhere of course!

http://money.cnn.com/2006/04/06/news/newsmakers/pluggedin_f500_fortune/index.htm

For starters, Microsoft has benefitted immensely from copyright and patent protection.

And I'm not talking about BUSINESSES going offshore, I am talking about INDIVIDUALS with net worth over half a billion dollars moving offshore, thumbing their noses at the government and financial structure that made it possible for them to get so rich.

 

[Denny Crane]

Why exactly should anyone be taxed upon death the bulk of their family's wealth?

How do the Kennedys manage to keep all their money? John Kerry's wife?

And why shouldn't the people who risk capital and sweat equity not have protection for their intellectual properties? It's written into the constitution.

 

[Dumpy]

Note: the average CEO at the fortune 500 companies earned $10.8M. My figuring above is off by 25% or so, the tax revenue would be an extra $250M, not $200M.

Really, Denny, this is one of your worst arguments. You might as well argue that EVERYONE'S tax rate should be 0%, because the government receives so little benefit from any one taxpayer. If I was a judge, I'd be shaking my head right now and asking what else you've got.

 

[Denny Crane]

No, Dumpy, that's not my argument.

My argument is that the rich isn't where the money is when it comes to taxing for govt. revenue purposes.

The govt. makes its money by taxing the bulk of the middle class a good chunk of their paycheck (at least 15% just for FICA).

The math is pretty simple. You tax every worker in the workforce $2 more and you get that same $250M you'd get from the rich 4% more.

 

[Dumpy]

I think that the best argument, to be honest, is that in some parts of the country, $250,000 is decidedly middle class, and a family could be just scraping by, especially if they are trying to save for retirement, plus save for the kids' college education, plus possibly paying for child care or private school expenses. In other parts of the country, of course, you'd be considered rich.

However, to broaden the topic a bit, I suspect that for most people this issue has little importance in the decision who to vote for. I suspect that few people care much compared to some bigger social issue (or a referendum on how the current administration has performed).

 

[Denny Crane]

The other side of my argument is that the whole "tax the rich rallying cry" is nothing more than an appeal to people's class envy, not workable, and people somehow do think they're dinging Bill Gates to pay for a lot of govt. services.

 

[The Return of the Raider]

The BEST solution in my opinion is to just eliminate income tax altogether. This arguement then goes away!!!

 

[Denny Crane]

There was no income tax written in the constitution. In fact it was prohibited.

Not until the 16th amendment.

How did the govt. ever survive without taxes?

The feds were allowed to tax the states. The states figured out how to raise the money they needed to pay (through taxes, tariffs, etc.)

 

[The Return of the Raider]

I'm with you. Let's also bring up the "asset forfeiture" thing while we are at it.

 

[Denny Crane]

It is certain to me that California's junker law is unconstitutional. Surprised it hasn't been struck down.

There is one (and only one) thing I really admire about religion. It's the organizational structure of how it all works. Churches are local to the community. They raise money and directly spend it on the community for charitable purposes. The people handling the money and spending it are face to face with the people they're serving. They do pass a nice chunk of it back to the Vatican, which is bloody rich.

Our government is upside down from that, which is why it doesn't serve us well.

 

[Real]

There's an incredible amount of loopholes within the tax system, no question it needs to be reformed.

The United States has the second largest corporate tax rate in the entire world. Behind only Japan. We have countries like China that are growing at a fast pace.

These liberals talk about big business shipping jobs overseas for cheap labor, why don't they do something to help business grow at home?

 

[MikeDC]

I think that the best argument, to be honest, is that in some parts of the country, $250,000 is decidedly middle class, and a family could be just scraping by, especially if they are trying to save for retirement, plus save for the kids' college education, plus possibly paying for child care or private school expenses. In other parts of the country, of course, you'd be considered rich.

However, to broaden the topic a bit, I suspect that for most people this issue has little importance in the decision who to vote for. I suspect that few people care much compared to some bigger social issue (or a referendum on how the current administration has performed).

I think that's the difference between ignorance and irrationality. Very few people, I think, would find it reasonable to spend thousands, or even a few hundred dollars for the right to cast a vote on the current administration. Or have some voice on a social issue which, since, as far as I can tell, none of those are really in play.

I'll keep my few hundred dollars that the Dems would tax from me (or cost me by overtaxing others) and voice my displeasures through other means, thank you.

 

[Dumpy]

I think that's the difference between ignorance and irrationality. Very few people, I think, would find it reasonable to spend thousands, or even a few hundred dollars for the right to cast a vote on the current administration. Or have some voice on a social issue which, since, as far as I can tell, none of those are really in play.

I'll keep my few hundred dollars that the Dems would tax from me (or cost me by overtaxing others) and voice my displeasures through other means, thank you.

But they are in play. I suppose it partly depends how you define the phrase "social issues." The two parties have fundamental differences when it comes to environmental issues, abortion rights, same-sex marriage/civil unions, the way science is taught in our schools, and generally the extent to which certain religious beliefs will intrude on our lives. et cetera.

 

[shookem]

Tax the rich?
I'm with Steve Tyler ... I'd rather eat 'em! (I bet the taste like butter)

 

[AEM]

There was no income tax written in the constitution. In fact it was prohibited.

Not until the 16th amendment.

How did the govt. ever survive without taxes?

The feds were allowed to tax the states. The states figured out how to raise the money they needed to pay (through taxes, tariffs, etc.)

How do you like the National Bank though?

 

[Denny Crane]

But they are in play. I suppose it partly depends how you define the phrase "social issues." The two parties have fundamental differences when it comes to environmental issues, abortion rights, same-sex marriage/civil unions, the way science is taught in our schools, and generally the extent to which certain religious beliefs will intrude on our lives. et cetera.

Seriously?

In play, like national health care, which was promised by Truman in 1948? Where is it?

In play, like outlawing abortion? Republican presidents and republican congress, appointees to SCOTUS to tip the balance. Where is it?

How about that Defense of Marriage Act, passed 85-14 in the Senate and signed by Bill Clinton!

The schools are doing great tho, right?

 

[Dumpy]

Seriously?

In play, like national health care, which was promised by Truman in 1948? Where is it?

In play, like outlawing abortion? Republican presidents and republican congress, appointees to SCOTUS to tip the balance. Where is it?

How about that Defense of Marriage Act, passed 85-14 in the Senate and signed by Bill Clinton!

The schools are doing great tho, right?

yes, seriously.

 

[The Return of the Raider]

Seriously?

In play, like national health care, which was promised by Truman in 1948? Where is it?

Social Security - FDR. Why is that not considered national health care? Just because you have to be retired to take advantage of it?

 

[Denny Crane]

Truman promised universal health care in 1948. It's been part of the Democratic Party platform ever since. Democrats controlled both houses of congress from 1960-1980 (and before that). During those years, JFK, LBJ, and Carter were Democratic Party presidents. In 1993 and 1994, Democrats controlled both houses of congress and Clinton was president.

What's the excuse?

 

[Dumpy]

Truman promised universal health care in 1948. It's been part of the Democratic Party platform ever since. Democrats controlled both houses of congress from 1960-1980 (and before that). During those years, JFK, LBJ, and Carter were Democratic Party presidents. In 1993 and 1994, Democrats controlled both houses of congress and Clinton was president.

What's the excuse?

I'm sorry, is this a response to my post #24?

 

[Denny Crane]

It sure is.

They're politicians. They make promises they don't keep. If they passed enough bridges to nowhere to satisfy everyone, they could pass whatever they want!

So there is no difference between the parties.

About the only thing the president can really do is veto and do foreign policy things.

 

[Dumpy]

It sure is.

They're politicians. They make promises they don't keep. If they passed enough bridges to nowhere to satisfy everyone, they could pass whatever they want!

So there is no difference between the parties.

About the only thing the president can really do is veto and do foreign policy things.

what does post #24 have to do with universal health care?