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November 29, 2012

On Taxes, Hope Continues to Trump Facts and Experience

Cause, meet effect:

In the 2009-10 tax year, more than 16,000 people declared an annual income of more than £1 million to HM Revenue and Customs.

This number fell to just 6,000 after Gordon Brown introduced the new 50p top rate of income tax shortly before the last general election. The figures have been seized upon by the Conservatives to claim that increasing the highest rate of tax actually led to a loss in revenues for the Government.

It is believed that rich Britons moved abroad or took steps to avoid paying the new levy by reducing their taxable incomes.

If there's one thing that unites politicians on both sides of the liberal/conservative divide, it's that no one wants to pay more taxes than they absolutely have to.

Senate Democrats plan to consider a measure Tuesday that would extend lower interest rates for some federally subsidized college loans and pay for the extension by ending tax breaks for firms with three or fewer shareholders — commonly referred to as “S-corporations.”

Democrats call these types of tax breaks the “Newt Gingrich/John Edwards loophole,” because both former politicians took advantage of a federal tax law that allows those with high incomes to avoid paying Medicare payroll taxes on earnings by establishing S-corporations and treating only a portion of their total earnings as taxable wages.

News reports cited by Democrats note that in 2010, Gingrich Holdings and Gingrich Productions paid the former House speaker about $444,000 in wages and declared $2.4 million as profits to his S-corporation, allowing Gingrich to avoid $69,000 in Medicare payroll taxes. Edwards did the same starting in 1995, when he paid himself $360,000 each year for four years and treated the rest of his $26.9 million in earnings as company profits, saving him an estimated $600,000 in payroll taxes.

When public policy starts taking money out of the wallets of wealthy progressives, talking points about reducing income inequality, making the rich pay their "fair share", and economic patriotism are no match for good, old fashioned self interest:

As a multimillionaire married to Teresa Heinz Kerry of the Heinz ketchup fortune, Kerry’s best known tax gaffe was mooring his $7 million yacht outside his home state of Massachusetts. Saving taxes on a pricey yacht might seem unpatriotic anywhere, but cheating your own state was worse. Kerry moored the vessel in Rhode Island so he could save the $500,000 in taxes a Massachusetts berth would trigger. See John Kerry Saves $500,000 By Docking 76-Foot Luxury Yacht Out Of State.

That rubbed people in Massachusetts where he was a sitting U.S. Senator the wrong way. Eventually, Kerry announced he would pay over $500,000 in Massachusetts tax on his $7 million yacht ($437,500 in state use tax, $70,000 in annual state excise tax).

As Thomas Sowell points out, neither party can claim complete consistency with regard to tax rates:

... under both Republican President Calvin Coolidge and Democratic President John F. Kennedy, high-income people paid more tax revenues into the federal treasury after tax rates went down than they did before.

There is nothing mysterious about this. At high tax rates, vast sums of money disappear into tax shelters at home or is shipped overseas. At lower tax rates, that money comes out of hiding and goes into the American economy, creating jobs, rising output and rising incomes. Under these conditions, higher tax revenues can be collected by the government, even though tax rates are lower. Indeed, high income people not only end up paying more taxes, but a higher share of all taxes, under these conditions.

This is not just a theory. It is what hard evidence shows happened under both Democratic and Republican administrations, from the days of Calvin Coolidge to John F. Kennedy to Ronald Reagan and George W. Bush. That hard evidence is presented in clear and unmistakable terms in "Who's The Fairest of Us All?"

Another surprising fact brought out in this book is that the Democrats and Republicans both took positions during the Kennedy administration that were the direct opposite of the positions they take today. As Stephen Moore points out, "the Republicans almost universally opposed and the Democrats almost universally favored" the cuts in tax rates that President Kennedy proposed.

Such Republican Senate stalwarts as Barry Goldwater and Bob Dole voted against reducing the top tax rate from 91% to 70%. Democratic Congressman Wilbur Mills led the charge for lower tax rates.

Unlike the Republicans today, John F. Kennedy had an answer when critics tried to portray his tax cut proposal as just a "tax cut for the rich." President Kennedy argued that it was a tax cut for the economy, that changed incentives meant a faster growing economy and that "A rising tide lifts all boats."

If Republicans today cannot seem to come up with their own answer when critics cry out "tax cuts for the rich," maybe they can just go back and read John F. Kennedy's answer.

A truly optimistic person might even hope that media pundits would go back and check out the facts before arguing as if the only way to reduce the deficit is to raise tax rates on "the rich."

...Because so few people bother to check the facts, Barack Obama can get away with statements about how "tax cuts for the rich" have "cost" the government money that now needs to be recouped.

The Big Lie the President keeps telling is that we're in this fix because the rich aren't paying their fair share of taxes. But that's not an assertion that's easy to square with the facts. Regardless of how much money the federal government takes in, it's literally impossible to run deficits unless we spend more than we collect in revenue. It doesn't help the President's blame-the-rich argument that changes to the tax code since 1979 have completely exempted the lowest 40% of earners from paying federal income taxes (they pay zero or NEGATIVE net income taxes) and shifted the entire burden of federal income tax revenue to the highest 60% of wage earners (who account for ALL federal income tax revenue collected).

The facts don't support the notion that the wealthy aren't paying their "fair share"! They're paying not only their fair share, but the share of 40% of their fellow Americans!

The princess took the liberty of adding some reference lines and symbols to a chart showing the average income tax rate paid by each of the 5 income quintiles and the highest earning 5% (top line) over the last 3 decades or so.

A few observations:

1. With the exception of the top income quintile, 80% of taxpayers have paid less than the historic average tax rates for their respective income quintiles for over 20 years.

2. All 5 income quintiles experience a sharp drop-off in average income taxes paid around 2000. This sharp decline bottomed out and then either leveled off or began to reverse itself around 2003-2004 except for the bottom income quintile, whose average tax rates continued to decline.

3. With the exception of the top income quintile, the trend in average tax rates for the bottom 80% of taxpayers is consistently downward. The effect of tinkering with the tax rates paid by the top earners, as this chart from the St. Louis Fed shows, is unclear at best:

It makes sense to suspect (as Sowell and so many others claim, and the experience of countries like Britain demonstrates) that raising taxes on the wealthy only causes them to either flee or avoid the higher taxes as John Kerry clearly had no problem doing, even when it went against everything he claims to believe in.

But I have a hard time believing the wealthy are equally sensitive to tax hikes regardless of the economic conditions or the magnitude of the tax hike. Raising marginal rates slightly during an economic boom probably has a different effect than the same increase during time of economic uncertainty or recession.

There's a lot for both parties to think about here - especially given Sowell's observation about the Democrats and Republicans of today having reversed the positions they took in the 1960s with regard to increases in the tax rate.

Posted by Cassandra at November 29, 2012 04:05 AM

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So let me see if I understand this concept:
Charge higher prices for the same product, and eventually you will drive down demand for that product. Raise taxes on millionaires and eventually you will have fewer millionaires to tax. Eat the cake and eventually there will be no cake to eat.

I dunno. It sounds kind of fishy to me.

Posted by: spd rdr at November 29, 2012 12:26 PM

Well, I can tell you one thing. If tax rates go up, there's gonna be a whole lot more money going into my 401(k), where the .fedgov can't touch it, in 2013.

The liberals are right about one thing. I don't "need" that money. I can live quite well without it. And so I will.

For now.

I'll just bring it home later, when hopefully rates are lower, and/or, I'll bring it home when my expenses are so much lower than I'd actually have more disposable income even staying under the cap.

One way or the other, the .fedgov won't see it.

Posted by: Yu-Ain Gonnano at November 29, 2012 01:09 PM

Posted by: Yu-Ain Gonnano at November 29, 2012 01:28 PM

I linked this just the other day on my Facebook page:

Which actually is more to the point. The President can literally confiscate every penny every household makes over $250k and it STILL wouldn't pay even HALF of one year's budget. And how many of those people would sit still for that, do you suppose?

Posted by: MikeD at November 29, 2012 01:52 PM

Well, I can tell you one thing. If tax rates go up, there's gonna be a whole lot more money going into my 401(k), where the .fedgov can't touch it, in 2013.


I may end up deciding it's not worth it to us to work, at least f/t. Certainly not at my current pay grade.

I found it amusing during the whole OMG!! WAR ON WOMEN!!! kerfuffle that no one seemed to flash on the obvious fact that raising marginal tax rates on the highest earning households disproportionately impacts the take home pay of married working women. It's a tremendous negative incentive.


Posted by: Cass - Confirmation Bigot-in-Training at November 29, 2012 03:17 PM

I want spd to run for Congress. CSPAN would be so much more entertaining.

Posted by: Cass at November 29, 2012 03:25 PM

The whole tax argument proceeds from two false premises. The first is that the government needs that much money. The second is that tax reform must be revenue neutral. It need not.

The only thing driving the second is political exigency. This is no mean force, but it has naught to do with the principle of how much money the government in fact needs.

Driving all of this is the failure of politicians of all stripes (and of Americans generally, from our wonderful educational system (and this is not the unions' fault) which doesn't deem it necessary to teach budgeting and then economics in K-12) to understand whose money it is that's being "claimed" by government in taxes.

Eric Hines

Posted by: E Hines at November 29, 2012 03:37 PM

whose money it is that's being "claimed" by government in taxes

It's those awful, rich people, right?

Posted by: MikeD at November 29, 2012 04:06 PM

It's those awful, rich people, right?

Yew betcha. A class which I still have dreams of joining.

Eric Hines

Posted by: E Hines at November 29, 2012 04:14 PM

I would be happy with a fair system... How about let's eliminate income taxes all together and go with a straight sales tax. Say 10% on all goods and services - no exemptions or exceptions. Of course it would never happen that way. It would be adopted in addition to income taxes, for the children, you know.

Posted by: Pogue at November 29, 2012 04:44 PM

Sales tax is terribly regressive. I'm for this system: eliminate all business taxes (and deductions, subsidies, credits, etc)--businesses aren't the ones who pay those taxes, anyway, even though they sign the checks. Us citizens, as end customers, pay those taxes through prices that are elevated to cover what, to the business, is just another cost center. Also, a flat 10% income tax that everyone pays on the total of their personal top-line income--again, no deductions, subsidies, credits, etc. Except for a single deduction: 50% of the then-current Federal Poverty Guideline.

This system puts everyone into the game, and it eliminates the market distortions that tax schemes inevitably produce, whether deliberate or accidental. And by eliminating those distortions, it minimizes the government's distortions of our economy.

Unfortunately, that last alone will make it difficult, politically, to achieve--politicians would have to give up too much existing power.

Eric Hines

Posted by: E Hines at November 29, 2012 05:25 PM

Don't be so sure your 401K is safe. The government is already looking at changing the game and forcing you to trade it in for a Social Security "benefit".

So they can take that an squander more money. The madness will continue, and Argentina is our destiny.

Posted by: Don Brouhaha at November 29, 2012 08:22 PM

Don't be so sure your 401K is safe.

Yeah, and Harry Reid has been trying to tax them for decades. I count this another urban myth.

Eric Hines

Posted by: E Hines at November 29, 2012 09:16 PM

The thing I keep hearing about is a "wealth tax." So you've paid income taxes for the last 30 years, and capital gains taxes, and sales taxes on any money you did retain and spent; but in spite of all that, you've accumulated some wealth. Since this isn't new income, it's not really taxable under current law.

So we change the law: and now we can tax your accumulated wealth! That we taxed it as income every year in which it was earned is not relevant; what's relevant is you have money and we want it.

Posted by: Grim at November 30, 2012 12:18 AM

Not to mention that estimates are that there are about $54t in privately held assets. Given that the budget is almost $4t, to balance the budget, that would take an average 7.4% tax rate. Add to that a historical inflation rate of about 3%. This means that your rate of return on that wealth would need to exceed 10% just to keep what wealth you already have.

Those that have wealth will necessarily lose it. Those that don't will never be able to accumulate any.

Talk about killing the golden goose.

Posted by: Yu-Ain Gonnano at November 30, 2012 09:07 AM

The thing I keep hearing about is a "wealth tax."

But we already do that. We have the death tax, taxes on dividend receipts (which already have been taxed to the issuer), cap gains taxes (which income provided the funds for the investment that produced the gains have already been taxed), a progressive tax system (which taxes some more than others just because they've been successful or lucky and achieved more income).

Eric Hines

Posted by: E Hines at November 30, 2012 10:25 AM

But we already do that.

Well, then, there should be no problem about doing it harder.

Actually, I don't understand where the authority for the 'death tax' comes from. The Sixteenth Amendment clearly permits taxes on any sort of income, including income from capital gains; but I don't understand where the authority comes from to tax accumulated wealth that has already been taxed as income.

Posted by: Grim at November 30, 2012 12:33 PM

Well, then, there should be no problem about doing it harder.

The fact that it's wrong is no justification for doing it even more so. But I suspect I'm misunderstanding your statement.

...I don't understand where the authority comes from to tax accumulated wealth....

You'll get no argument from me that supports the legitimacy of the death tax, but I speculate that the "authority" comes from an amalgam of the 16th Amendment and the Section 8 Taxing and Necessary clauses, as interpreted by a too flexible court that thinks it has leave to amend the Constitution from the bench through some sort of "Living Constitution" nonsense.

Eric Hines

Posted by: E Hines at November 30, 2012 01:49 PM

Soooo, if the rich would just pony up, the budget would be balanced, welfare spending would be capped and poverty would disappear overnight.

I believe in Skittle-pooping unicorns, the Tooth Fairy and the Easter Bunny.

Posted by: MadPuffOnMeds at December 1, 2012 03:44 PM

My argument, Mr. Hines, was not well formulated. I was thinking of the argument against the health care mandate, which was that (a) it was unconstitutional because the Constitution nowhere authorizes it, and (b) it was an unprecedented expansion of Federal power. The courts said in response to (a) that it was actually a disguised version of an enumerated power, and in response to (b) that unprecedented things happen sometimes.

Here, I'm still unclear on exactly how the authority is enumerated; but if you're arguing that they already in some sense do it, then (b) isn't available as an argument. If it's something the government already does, then it must (somehow) have the authority; and so 'doing it harder' is an easier slope.

Posted by: Grim at December 1, 2012 04:47 PM

Your clarification of b) making "doing it harder" now makes sense. The Court's behavior, which has been consistent with b) for too long, is I think, an example of the "Living Constitution" amending from the bench beef.

Still, bad rulings (and good) can be reversed by a later court--or by implementing the Dred Scott failure solution.

As to "the government already does it," that's been the Progressive argument for some time: others have done this thing before us, that alone legitimizes us doing it. That it was wrong to do then (or now) is irrelevant.

Eric Hines

Posted by: E Hines at December 1, 2012 05:01 PM

I believe in Skittle-pooping unicorns, the Tooth Fairy and the Easter Bunny.

Don't forget Tinker Bell, aka Julia. Her life is in the balance of the strength of your belief.

Eric Hines

Posted by: E Hines at December 1, 2012 05:02 PM

I am on the horns of a dilemma, Mr. Hines. Does Obamacare prohibit the clapping of hands?

Posted by: MadPuffOnMeds at December 2, 2012 06:44 PM