To Tax the Rich, Stop Arguing About Who’s “Rich”

via New Deal 2.0 by Mark Schmitt on 10/7/11


mark-schmitt-newTaxes aren’t punishment for the rich. They are a shared obligation.

It’s happening again. As Congress finally begins to take President Obama’s proposal seriously to let taxes return to their 2001 level, but only for households with over $250,000 in income, along with the newer “Buffett Rule” proposal to limit tax breaks for millionaires, even liberal Democrats are starting to get squeamish about whether $250,000 or even a million is really “rich.”

Here’s Senator Chuck Schumer on Wednesday: ”In the eyes of many, it is hard to ask more of households making $250,000 or $300,000 a year. In large parts of the country, that kind of income does not get you a big home or lots of vacations or anything else that is associated with wealth.”

Schumer and House Minority Leader Nancy Pelosi, who made the same argument in 2009, aren’t totally wrong. In New York or San Francisco there are certainly plenty of two-income families edging over the $250,000 line who aren’t lighting their cigars with $100 bills. If they have student loans, or can’t imagine their kids going to public school, or are paying a mortgage on a three-bedroom house or apartment in what they consider an acceptable neighborhood, they often find themselves living right at the edge.

On the other hand, the very things those families think of as the basic necessities of life, like private school and nannies, are in fact things that are “associated with wealth,” as Schumer puts it. These are people who earn almost five times the median income in the U.S. They may not feel rich compared to their college classmates who went to Wall Street instead of law school, but by any real measure they are very wealthy.

Nor is any proposal asking them to pay much more. The original Obama proposal, reversing some of the Bush tax cuts, would only affect the marginal tax rate on income above $250,000, restoring the pre-2001 tax rate of 39 percent. That’s an increase of three percentage points. So a household with $275,000 in adjusted gross income (after all the deductions and exemptions) would pay three percent more on $25,000. (The amount of income above $250,000.) That’s $750.

As a result, the proposal wouldn’t raise much money — just $80 billion. But pushing the “rich” line even a little bit higher would quickly erase even that revenue, since there are so many more people in the $250,000-$300,000 range than in higher brackets.

Without conceding Schumer’s point, let’s move on: Arguing about who is “rich,” and therefore should pay more, is a pointless, deadly game. The line will always shift upwards, because at any meaningful level, there’s always someone who doesn’t “feel” rich. And these are always the people that members of Congress are likely to know. (Many members of Congress are among them.)

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The problem with this whole approach is that it treats taxes as a punishment levied on “the rich,” with the promise that the rest of us will bear no burden. But taxes aren’t punishment. They are simply the cost we share for the society we benefit from — one that provides military protection, Medicare and Social Security when we need it, education, energy research, and the rest. The tax system is progressive not to punish the rich, but because some have a greater ability to pay than others. Ten percent means something very different to someone earning $30,000 than it does to someone making $300,000. And, frankly, even those of us who are not “rich” by the $250,000 standard but are actually secure and reasonably well-off could stand to pay more in taxes. When we look at 4.2 million people unemployed for a year or more, at families devastated by foreclosures, bankruptcies, and health crises, my own two-income family is remarkably fortunate by comparison and can do more, even though we’re solidly in the “other 99%” and didn’t cause the financial or economic crisis. Taxes are a shared obligation, not a punishment.

One way to get away from the stultifying debate about who is really “rich” is to take the “Buffett Rule” and leave millionaires out of it. Warren Buffett’s point is that he pays a much lower tax rate than his secretary. Why? Because his income is almost all in the form of capital gains, which are taxed at a 15 percent rate, while his secretary’s income from work is taxed at a higher level, maybe 28 percent or more, depending on her total family income. But while the contrast between Buffett and his secretary is very powerful, what if they made the same amount of money? Assume she makes $100,000 in income from her work, and next door to her lives a trust-fund kid who takes in the same amount, $100,000, from income on investments that he inherited. She goes to work, while he plays Halo all day. He, too, pays 15 percent on his income. Is that fair, even though he’s not a millionaire?

The special rate for capital gains and dividend income is the first problem to fix in tax reform, and not just for millionaires or those over $250,000. It creates enormous distortions in economic activity — all the complicated-sounding loopholes you hear about, like the “carried-interest loophole” or the “founders’ stock loophole,” are really just scams to redefine ordinary income as capital gains to get the preferred tax rate. Eliminate the special rate and the loopholes disappear. Nor do lower rates for capital gains, in the long-term, promote growth or encourage investment that wouldn’t otherwise occur. Economist Alan Blinder pointed out in 2007 that after the Tax Reform Act of 1986 eliminated the special rate for capital gains, the economy continued to boom. The better “Buffett Rule” should be simply, “All income should be taxed in the same way, regardless of whether it comes from work or investment.”

We should stop arguing about who really counts as “rich” and remember that principle, along with the principle that taxes aren’t punishment. If we do that, the result will be a system in which the wealthy pay more in taxes and far less economic energy is wasted on tax avoidance, leading to the kind of economic growth that will benefit all of us.

Mark Schmitt is a Senior Fellow and Director of the Fellows Program at the Roosevelt Institute.

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