“Soaking the Rich” – A discussion

As my readers surely are aware, I spend a great deal of time researching and writing on the issues of the day. I do this, not so much to convince anyone of the soundness of my views, but rather to lay a foundation for these views, for to hold views without a foundation, in fact and logic, is empty rhetoric. However in addition to writing for my blog, I often get into discussion with various people, which are worth sharing.

So today allow me to share with you a discussion that was based on an article that was written by Christopher Caldwell, a senior editor at The Weekly Standard the magazine founded by William Kristol. In order for you to follow this discussion it will be necessary for you to read the article, which you can find here.

This prompted a letter from Dean Machin, Dept of Philosophy, University of Warwick, Coventry, UK reading as follows:

Sir, Christopher Caldwell’s article was dispiriting and uplifting in equal measure. First was the hackneyed argument that increasing taxes on the rich will not “suffice” to address the US’s (or indeed any state’s) debt problems. Of course this is true, but as there is no single measure that will achieve this end the point is irrelevant. Second, he is right about the disproportionate political influence of the rich. So, here’s a proposal: make the rich choose between increased taxes or no political influence. Let them vote (as if they care about that). But ban lobbying, funding political parties, meeting politicians and controlling media outlets. Good consequences may follow and this proposal would go some way to returning politics to the control of the people who are doomed to be affected by it; and away from those individuals who are footloose and mobile.

Now I find the letter more revealing than the article by Caldwell. 

Mr. Manchin writes:

First was the hackneyed argument that increasing taxes on the rich will not “suffice” to address the US’s (or indeed any state’s) debt problems. Of course this is true…

But it is not true and it reveals one of the major flaws in the rebuttals that liberals make in responding to spurious allegations. They accept their facts as true, without asking themselves whether they are, in fact, true. That is a poor way to effectively rebut an argument.

The American Enterprise Institute, the organization that speaks more than any other for the wealthy, tells us in an article entitled, “Guess Who Really Pays the Taxes”: “The top 5 percent pay well over half the income taxes.” and further down under (2) “The wealthiest 1 percent of the population earn 19 per­cent of the income but pay 37 percent of the income tax.” According to Forbes magazine “The 400 Richest Americans Pay An 18% Tax Rate” and according to the Tax Foundation “the top 1 percent of tax returns paid 36.7 percent of all federal individual income taxes” (see the third full paragraph in the article).


If we look at the tax projections of the Office of Management and Budget for 2013 (click to enlarge) we see that they estimate receipts from the income tax of $1 trillion 344 billion. 

37% of that is $497 billion or almost half of a trillion. Over ten years that comes to $5 trillion. If by making capital gains income and interest income taxable at the same rate as earned income (i.e. income earned by working) and such other adjustments as necessary, we increased their contribution to the common weal by 50% or an effective income tax rate of 27% (and there is no reason why it should not be much higher) we would add to the treasury another 2 1/2 trillion, probably enough to wipe out the deficit without any cutting. I said that there is no reason why it should not be much higher because there is ample precedence for a much higher tax rate. Under the Republican Eisenhower Administration (1953-1961) the top tax bracket was 91% on incomes over $200,000, and it remained there until 1964 when the top rate was changed to 77% on incomes over $400,000 and 66% on all income over $100,000, which adjusted for inflation comes to $2,895,000 and 3/4 of a million respectively. See here. These high rates of taxation did not prevent the US from enjoying prosperity, but they did prevent the incredible skewing of wealth upwards.

But the important point here is that the allegations by a senior editor at The Weekly Standard have no basis in fact, and yet were readily accepted by Professor Machin.

But let us go back and look at Mr. Caldwell’s argument further. He says: “The rich pay less because capital gains and carried interest get taxed at a low rate. As Mr. Buffett puts it, “those who make money with money” are treated better than those who “make money from a job.” In saying this, Mr. Buffett subscribes to the religious understanding of money that was universal in the Christian world before the rise of Florentine banking (and of Protestantism) and has been restated in our own time by practitioners of Islamic finance. People are alive but money is not, which makes it wrong – because it is life-denying – to prefer the latter.”

There is only one thing wrong with this – neither Mr. Buffett nor any one else has made this argument, so why is this straw man being rebutted.

Caldwell concedes that there is a problem with the super rich. He sees a problem from “their influence over the political system.” But he dismissed the influence from campaign contributions by asserting that, “even more comes through the deductibility of “charitable” contributions. Yet it is interesting to note when the President recently suggested that the rich should not be able to deduct these contributions, the scream from Mr. Caldwell’s cohorts was deafening.

But most of all they load the question through the constant refrain that those who want all to contribute to the common weal, are advocating a policy of “Soak the Rich”, which isn’t at all what anyone wants to do.

As I said in my contribution to this discussion at the time the discussion went forward:

I have seen a number of Letters to the Editor that show a misunderstanding of what the graduated income tax is all about. It is definitely not about "soaking the rich." It is about raising enough revenue to allow the government to meet its obligations without putting a burden on people that is greater than what they can afford. I have seen one Letter to the Editor that claimed that those making less than 1 million dollars annually are not rich and therefore tax increases should not be applied to those in that income category. This totally misses the point. Who is rich and who is not is irrelevant. We tax those who can better afford it because that is the source where money can be found without imposing a hardship. As people have more income they can afford to pay more and therefore should. 

We are supposed to be a society that follows the Protestant ethic of valuing work, yet we tax income obtained through work at a substantially higher rate than that obtained from return on Capital. I have never seen any justification for this and this is what Buffet is addressing, for it is that distinction which makes our graduated income tax a hoax and allows the rich, and particularly the very rich, to pay less in taxes as a percentage of their total income, than their secretaries.

                       

Milton Friedman, who I assume is the intellectual inspiration for Republican policies, advocates a flat tax, but includes in income both Capital Gains and Dividends without any distinction or favorable treatment.

                       

We will never have a meaningful graduated income tax until all income is treated equally.

                       

Thus it is not a question of soaking the rich. It is a question of obtaining money from those who can afford it in proportion to their ability to pay; thus the graduated income tax with many brackets. Reducing the brackets is not desirable because it gets us away from affordability. Nor does it create meaningful simplification.

                       

Ditto on exemptions. Many are bad. Corporation for example should not be allowed to choose between LIFO and FIFO for income tax purposes. This distorts their true income and allows them to manipulate it. FIFO should be the standard. This alone would increase corporate taxes allowing them to be lowered somewhat. But I have a real problem taking away the charitable deduction, because without it too many worthy causes would suffer.

                       

The oil depletion allowance and the ethanol subsidy should go, but not the deduction on municipal bonds which cities depend on, nor the deduction on mortgages on first homes, but yes on second or more homes. Nor should we allow the deduction on refinancing mortgages, unless it is shown to be for home improvements. What about 401Ks? They favors higher incomes, but have taken the place of standard pensions, so we need to keep them. But we have so many tax deferred accounts now including the education, medical, etc. deferments, that we should be discussing the merits of various deductions, before we wake up to a mass elimination of good ones and the retaining of those that favor higher incomes. It may be that we should keep all of that type, but limit their total exemption to a fixed amount, e.g. $20,000 per annum.

                       

None of the columnists have even touched on this. We need to start a conversation because this is definitely on the horizon.

Comments are welcome and will be distributed with attribution, unless the writer requests that he/she not be identified.

The Deficit – One Big Hoax (Part VI)

In my last twelve posts I departed from my discussion of the deficit in order to focus on the columnists of the media and the media in general, with special emphasis on the New York Times.

However, it is now time to return to the subject of the deficit, the last part of which was posted on July 30. I suggest that you re-read it and if you can possibly find the time read all its parts. You can find the last post here and that post will give you links to all the others.

At the end of my last post on this subject I said:

Next time: What can and should we do about the deficit and the imminent insolvency of Social Security, Medicare, and Medicaid? Where can we and should we cut?

I will address this here, but before I do so let me return to the subject of this series, namely The Deficit – One Big Hoax. I called it a hoax, not because I don’t think that it is a serious problem, I believe that it is, but because the Republican Party is using it as a hoax to justify its primary aim, which is to destroy all that we have built over the last half century and even before. To not only repeal the Presidents greatest achievement in passing Health Insurance Reform, but to repeal Social Security, Medicare, Medicaid, and even to destroy the agencies that safeguard our health and our well being, including the minimum wage and occupational safety, and I kid thee not, if they can get away with it, our system of free public education.

Their lack of concern with the deficit can easily be seen in that not one of their proposed “reforms” decreases the deficit. The Ryan plan, which has passed the House with almost unanimous Republican support (four Republicans voted against it and no Democrats voted for it) would, according to Representative Paul Ryan himself, add $6 trillion to the national debt over ten years as reported by the Economist, hardly a left wing source, and as far as I can find nowhere else in the media.

The same goes for all the proposals for “tax reform” touted by the Republican Presidential candidates. Whether we are talking about the famous (or infamous) 9/9/9 plan or the newly touted flat tax plan of Rick Perry, each one would increase the deficit that they are so ostensibly worried about that they threatened to put the country into default. Yet the media, not even the so-called liberal media, has bothered to point this out. E. J. Dionne Jr. writing in the Washington Post said:

What struck me about Rick Perry’s unveiling of his flat tax proposal is how little attention most of the coverage paid to the massive increase in the deficit it would cause – or the enormous cuts it would require… But the will-o’-the-wisp quality of the Washington conversation is underscored by the fact that when anyone proposed new and temporary spending to boost job growth a couple of months ago the avatars of the conventional wisdom kept asking, “But what about the deficit?” But when Perry proposes his big tax cuts, such questions are nowhere to be heard – except in the 10th paragraph of some news stories. (And that includes Dionne’s own Washington Post’s news reports.)

It is in that sense that it is a hoax, but one that our media fails to call attention to.

But as I have said, while the deficit in the short run, is of secondary importance, while job creation and our infrastructure are of immediate concern, and the two are related, we cannot afford to have only a short-term outlook. The long-term economic future of this country depends on our having the infrastructure to compete. As just one example that has not been discussed, but that is of vital importance is the enlargement of our ports, particularly the port of New Orleans. The Panama Canal is being enlarged to accommodate the larger vessels of the future, but the Port of New Orleans, and our other ports, do not have the capacity to accommodate such vessels. The sooner we address such problems, the better for the future of our economy, and the deficit, which ultimately will be controlled by a robust economy.

But at the same time there is enormous wasteful spending by our government. To the extent that we address such spending, we will reduce our deficit and free up money to do the things that need to be done.

We keep being told that the elephant in the room is entitlement spending and this is true, but in my view this should be addressed, not as a budget issue, but as a sustainability issue.

According to the Social Security Administration (I urge the reader to read this report in full.):

Projected long-run program costs for both Medicare and Social Security are not sustainable under currently scheduled financing, and will require legislative modifications if disruptive consequences for beneficiaries and taxpayers are to be avoided. The long-run financial challenges facing Social Security and Medicare should be addressed soon. If action is taken sooner rather than later, more options and more time will be available to phase in changes so that those affected have adequate time to prepare. Earlier action will also afford elected officials with a greater opportunity to minimize adverse impacts on vulnerable populations, including lower-income workers and those who are already substantially dependent on program benefits.

Both Social Security and Medicare, the two largest federal programs, face substantial cost growth in the upcoming decades due to factors that include population aging as well as the growth in expenditures per beneficiary. Through the mid-2030s, due to the large baby-boom generation entering retirement and lower-birth-rate generations entering employment, population aging is the largest single factor contributing to cost growth in the two programs. Thereafter, the continued rapid growth in health care cost per beneficiary becomes the larger factor.

I intend to discuss this vital issue at length at a future time but allow me to here at least begin a discussion of wasteful spending and I will not attempt to address this in the order of importance, but rather as issues come to my mind. Following this model I address first the so-called Drug War.

I can think of no area where we have done more damage to our economy and to our society than in this area.

The incredible thing is that it should have been obvious from our experience with prohibition. While I am sure that differences between them can be found, the results in the two cases are so parallel that it is an inescapable comparison.

In addition, there is an incredible agreement across the political spectrum on its wrong-headedness. The people who have spoken out against it include: Milton Friedman, the supply side economist, Walter Cronkite, the beloved journalist, George Shultz, Secretary of State in the Reagan Administration, Walter F. Buckley, Jr. founder of the Right Wing National Review, and Jimmy Carter the 39th President of the United States. For the exact quotes from these people, see below. To enlarge for legibility click on it.

Once again, in order to limit the post to a reasonable length, I will defer further discussion to the next post.

Comments on this and other posts are invited and should be sent to es628@columbia.edu.