Tax the Rich!

A couple of months ago my wife and I took a trip to Boston and New York and while there we had lunch with an old friend of mine whom I’ve known since fourth grade. My friend believes that taxes will and should go up on the wealthy. It seems pretty obvious that he is correct that they will go up but there is more of a conversation to be had about whether they should go up.

Several years ago as the scope of the US’ fiscal problems I made the obvious and un-unique observation that to actually fix things it would require sacrifice on the part of everyone, that it would hurt and I didn’t the the political will existed to do what needs to be done. Maybe some progress is happening on the political will front but that remains to be seen.

Karl Denninger posted the above chart recently that captures the scope of the problem. In their never ending coverage of the fiscal cliff CNBC has offered up that increasing taxes on the wealthy will solve the problem for about a week or two. That is not a reason by itself to not raise taxes but it would do very little.

In all likelihood a real fix will have to involve a lot of little things that by themselves are too small to matter. Per the above table there are only three big things to cut into that could by themselves make a difference. Are entitlements and defense really on the table?

Any program that endures cuts will adversely affect some constituency which is of course the meaning of everyone having to sacrifice something. Any action taken will have consequences to them; raising taxes will act as some sort of weight on demand. I would hope to hear a real acknowledgement of those consequences and that those likely consequences were taken into account in putting together the specific details of the, continuing the example, tax hikes.

My personal base case has been to expect getting means tested out of my social security check when the time comes but there certainly could be other things coming in addition to or instead of and if “fixing it” really is a priority for the country then we all need to understand this reality.

30 Comments

  1. Shared sacrifice. Fat chance.

    If those of us who have managed our habits, education, career(s) and savings are asked to contribute 90% of the solution to the “fiscal cliff”, and the takers of free stuff are asked to take 10% less, the takers will scream UNFAIR.

    We witnessed the Santa Claus effect on the ballot box. Add race-based voting, and the result to even the casual observer should be obvious.

    Obama can solve this by having a “Nixon China” moment and cut a deal that goes against his political instincts for the long term good of the country – to have both sides with significant skin in the game. Does anyone think he will pivot with this approach?

    T

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  2. Taxing the rich may work, since untaxing the rich did not result in job creation or GDP growth.

    Compare 1993 to 2001 with 2001 to 2009.

    Do we tax the rich at the earlier or later period?

    I don’t think the rich can claim history is on their side even starting from the early 1900s.

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  3. T, you are so right. The country is in a pickle of a fiscal mess. While it would not bother me to see the total incomes of Barbara Streisand or grossly overpaid athletes confiscated by the government, the problem is that when a politician gets $1.00 in revenue, he spends $1.50. What is desperately needed is a balanced budget amendment to the constitution which also caps the percentage of GDP the government (at all levels) can confiscate. Obviously, the amendment must have an exception for legitimate emergencies, but invoking the exception must have real safeguards to ensure it is not invoked willy-nilly as is the current practice (a safeguard such as any congressperson who votes to invoke the emergency exception can never run for office again). Only a real constitutional requirement, backed by real safeguards, will provide politicians the necessary backbone to stop buying votes. Otherwise, we are on the trajectory of the British Empire of a century ago. I am not optimistic.

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  4. I’ve always found it interesting that people consider the budget deficit problem so difficult to solve. Over the years, the Big Picture blog has had an interesting series of graphs that chart the issues creating the current budget deficit, in approximate descending order:

    1. 2001 and 2003 tax cuts
    2. Medicare Part D
    3. Wars
    4. Recession

    #1 can be addressed on 12/31, if we so desire. #2 was at least partially addressed by the Affordable Care Act. #3 has been mostly addressed. #4 – well, it depends on your point of view. Option #1 is to fix it. If you’re the type of person who talks about “the takers” then you probably don’t want to fix it, because people who aren’t you would benefit. So you want option #2, which is to wait 10 years or so (starting in 2009) for everything to hash itself out (of course, people don’t usually understand this). Pick your poison.

    In an ideal world, we’d keep the defense cuts, maybe add more, and raise the salary cap on SS payroll deductions (which almost completely solves the SS funding issue).

    Now, are our representatives going to take a common sense approach? No, they probably aren’t.

    Oh well. I’m prepared either way.

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  5. I remember college econ classes in the 60’s taught 1) in a recession government needs to prime the pump, 2) stock market is a hedge against inflation, and 3) you can’t tax the rich because they will pass it on to the middle class. therefore, I expect high inflation, shrinking middle class, and stocks to outperform bonds.

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  6. Our system is set-up so we can’t enact easy solutions. If we had astute politicians, there would be compromise. Politics and lobbying are turning the country in the wrong direction. But no one wants to make any corrections.

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  7. I think what’s right depends on your perspective. But one argument I rarely hear is that it would be good to tax the rich rather than another group because the loss of wealth relative to the rest of society will motivate them to be more innovative and productive.
    If this is truly a meritocracy, that is the group you would most like to motivate.

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  8. Anon 1:27, that’s an interesting spin on taxation. But using that logic (that taxing someone actually motivates them to be more productive) and the law of diminishing returns, then logically additional taxes on the poor will “motivate them to be more innovative and productive” than additional taxes on the rich, as the rich are already the most taxed portion of society. Good idea, let’s tax the poor more. On a serious note. I fear that we have reached a critical mass where more people think they actually get more from the government in subsidies (welfare, unemployment, food stamps, medicaid, free school, etc.) than they pay in the consumption taxes they do pay; therefore, this critical mass will always vote for politicians who promise to protect and increase their of government subsidies. As for cutting income taxes; no, they want to raise the taxes they don’t pay so there will be more public treasury to pillage.

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  9. “as the rich are already the most taxed portion of society.”

    This is demonstrably not true, and this belief is probably one of the bigger things impeding tax reform.

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  10. SD, you do know that the top 1%, 5%, 10%, 50% pay way more than their proportional share of the income tax collected; while the bottom 50% pays essentially nothing? Qualified dividends tax rate sounds low, but then consider that the dividends have already been taxed before being distributed. As for capital gains tax rates; I am sure that raising them to ordinary income tax rates will incentivize the rich to risk more of their money on investments that improve the lives of all. It is a tragedy that so many are at the government teat and honestly believe they have a right to someone else’s earnings. Just how much of someone’s income should the government be allowed to confiscate? If your answer is to go back to the Clinton era tax rates, then everyone’s taxes go up, not just the rich. And, by the way, I am not a rich person watching out for my own backside.

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  11. “the bottom 50% pays essentially nothing?” … Why should you pay taxes if you have essentially no income? If you control 20% of national income as a group, why shouldn’t you pay 25% or 30% of the taxes??? Isn’t the skewing of income to the upper 1% destroying the intent of our form of government and perverting our national purpose?

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  12. For rather selfish reasons I’d prefer to see the definition of wealthy kicked up to incomes above $500,000 but find it difficult to cavil since, like former Chief Justice Oliver Wendel Holmes, I do believe taxes are a necessary cost of civilization.

    I still do find it interesting how persistent the myth of the non-tax-paying “takers” has become though. Myth it surely is however as I pointed out on this blog back in April at http://tinyurl.com/bves2at (comment is at end of thread)

    As I said then (with links to evidence and analyis) “…the greatest tax burden as a percentage of income remains solidly on the poor who pay far more than anyone else in those terms even if that does not include income taxes ..”

    This is mainly because just about every other tax, from payroll to sales tax, is regressive rather than progressive so it should be no surprise that the working poor are the most heavily taxed (as a percentage of income) demographic in the country.

    And as to income taxes themselves, they may be progressive in nature but the wealthy have acquired access to many dodges and strategems that they pay far less as a percentage of income than anyone else and the extremely wealthy can do even better than that, often paying no tax at all.

    NB: There are arguments worth having about all this: Americans are rightly suspicious of redistribution schemes, even ones where benefits appear to be clear, but a continuing problem in these arguments is that too many people are convinced that the primary area in need of fixing is welfare for all those “non-tax paying slackers” at the bottom of the income scale — and it is doubtless true there is work that needs to be done there even when it is understood there are far fewer “non-tax paying slackers” than legend would have it — but the real problem area that is badly negleced and in serious need of fixing is at the top income scale, the top .01% in particular, where an incredibly large chunk of the redistribution is actually going.

    Persuading citizens that their biggest problem was the greedy and ungrateful poor has been one of the more successful propaganda campaigns in the history of the USA I do believe. My hat’s off to the plutocrats; got their money’s worth on that one at least.

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  13. 6:35

    Surely, you jest.

    When one pays no Federal income tax, that means one pays zero for national defense and zero for the “general welfare” of the nation as a whole.

    Through decades of direct observation and participation in the public housing and public education sector, I know you must either be joking or are grossly out of touch with boots on the ground reality. Rampant fraud, waste and an entitlement mentality are not created by the “1%”. It is created by self serving politicians and elite progressive activists who have, through colossal ignorance, destroyed any notion of work ethic and the nuclear family in most urban areas in a vain attempt to muster creds with fellow hallucinates or to buy votes for your political party. How many trillions of dollars has our nation spent on the so-called poor since the 1960s? And the poverty rate is the same, if not worse. There will never be “enough” to extract from taxpayers to fund wealth redistribution schemes.

    Sadly, poverty is now an occupation for multi-generations of inner city residents. I learn new tricks on how to milk the system practically each time I converse with my tenant-clients. Need a security deposit? Go to the Salvation Army. They’ll pay that and your first month’s rent. Want free utilities? Think “TIP program. Want subsidized gas for your car, see The Salvavtion Army or Catholic Charities . Want free clothes? Goodwill. Want to scam Section 8 housing? Quit your job, sign up, and then work for cash elsewhere – or have an employed boyfriend move in and live free while getting free housing. Need extra cash? Slip and fall, then have a public defender extract a few thousand from the owner’s insurance company in lieu of going to court. I could fill the rest of Roger’s blog with more examples…

    Public education’s fraud and unionized thuggery on the taxpayer speaks for itself.

    To state that this is a fraud perpetuated by your insinuation that corporate entities and conservatives is not only a Big Lie, but a bankrupt falsehood at the practical level.

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  14. Ah, a Q.E.D.

    Weighting the machinations of poverty stricken “inner city residents” (wonder who that refers to) and their perennial stuggles to make ends meet as somehow being of more sociopolitical and moral consequence than the machinations of billionaires and their perennial struggles to extort ever greater rents via influence over the legal and political system might make an interesting psychological profile study but here it is only another case in point.

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  15. “you do know that the top 1%, 5%, 10%, 50% pay way more than their proportional share of the income tax collected; while the bottom 50% pays essentially nothing”

    What is “their share?”

    Who is paying “more”?
    1. Someone like me, who I think is in the 80th percentile, with a tax rate of 25% or so but a “real” rate of something like 7%?

    2. Someone making twice as much as me, with a tax rate of what, 31%, but still paying an actual rate of 7%?

    “As for capital gains tax rates; I am sure that raising them to ordinary income tax rates will incentivize the rich to risk more of their money on investments that improve the lives of all”

    I have no idea. What I do know is that raising tax rates isn’t going to destroy the economy. Period.

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  16. “How many trillions of dollars has our nation spent on the so-called poor since the 1960s? And the poverty rate is the same, if not worse”

    Uh, yes, that’s the problem. We’ve spent 20 or 30 years reversing the progress we made. The “wealth gap” has gotten worse, as has been written about ad nauseum (90% of income gains going to top 2%, lack of low end wage growth, etc. etc.).

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  17. RW…

    “For rather selfish reasons I’d prefer to see the definition of wealthy kicked up to incomes above $500,000”

    Interestingly enough, I caught an article in the LA times proposing a wealth tax to replace the income tax (along with possibly getting rid of the corporate income tax).

    The general idea, issues with hiding assets aside, was that, say, 500k or less = 0%, 500k to 1m = 1%, > $1m = 1.5%.

    I forget the exact numbers. The idea was to eliminate the problem associated with income taxes in that even if you make them progressive, they favor the wealthy.

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  18. SD,

    ISTR that article on a wealth tax, I think it was by Daniel Altman at http://tinyurl.com/cwrtctg

    I remember thinking (despite the fact it would cost me more personally) that it was a better response to the growing problem of trust/estate-based (rather than hereditary) aristocracy now establishing itself in the USA but I also recall thinking it will never succeed politically beause that very aristocracy (contra my QED responder) has already grown too powerful.

    I really don’t think Americans realize just how much plutocratic aristocracy in America has grown or how much the “the poor are out to steal your stuff” propaganda has distracted everyone from the reality of that growth but I do know I have had quite enough of the BS and fear-mongering involved in that distraction.

    I’ve been head-faked more than once in my life and learned to live with it but getting played for a punk by some chump who thinks I’m too stupid to see the game is going to get the big dawg response and I ain’t woof’n.

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  19. The verdict is in from our intellectual superiors……

    Drum Roll, please.

    HIGHER TAXES.

    MORE SPENDING.

    Brilliant.

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  20. Actually, we already have a wealth tax, one that has made the small family farm and many small businesses things of the past. It’s called the inheritance, or death, tax.

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  21. Oh, oh. Once anti-intellectual ad homimen, HIGHER TAXES AND SPENDING, and the eternally sacred small farmer is invoked — avert! avert! — it’s probably time for the less devout among us to take a breather.

    Ciao.

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  22. The inheritance tax is treated somewhat like the idea of higher taxes killing business; it’s often hard to find one real-life instance of an inheritance tax killing something. I have seen funny things, though, like a father selling land to a son-in-law for a few dollars an acre.

    Small farms aren’t dead because of the inheritance tax. The number of small farms is dwindling because agriculture is a volume business. You don’t make a lot of money/acre, so you accumulate a lot of acres.

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  23. Yes we are killing the wealthy by having high taxes. Over the last 30 years the top income income earners have increased their net worth by ONLY 300+% while hard working middle class has much less to show…that is the final result rest is all NOISE

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  24. Italy now is looking to cut altogether the medical social system. Cost too much. It is interesting that the US is going the oppisite direction. Well, the medical expenses in Italy is one of the biggest and so Maro Monti sayed that next year and by 2014, no more goverment assisted medical system. That is going to be difficult. But lots of stuff that people were getting was unnecessary. They created jobs by building more hospital and spending more. Now, it will be very difficult to suddenly take that perk out. It comes down to spend only what is necessary, or else, consequences. Why not go across the board, tax everyone 30%. If you want to give to charity well that is great, but no tax deduction at all for anything. I think that the poor have payed more since they get less deductions and the are not as smart to tingle with the tax returns. There should not be any deductions at all. I think we all would be paying less taxes including the rich. In terms of giving a hand to someone who has fallen, why not. It is only human. Look we gave millions to Bin ladden when he was fighting the russians. Why not give a hand to some people that need education that are bringing up a family. That is the future of our country. Americans have wasted lots of money on the wrong things, on people that have turn against America. Cut down on what US gives to other countries. There is way to maintaine a power by giving hand out to every dictator that is friendly. T – I like your habits, they are the same as mine. However, one day a woman came up and sayed what ” what is mine is mine and what is yours is mine”. I ran for my life in Italy. Well, I never got a penny out of the 700 thausand US hard money. I did not do that but the laws in the us. If I did not have an escape, I would have lost my life. There is another way to say. I am lucky, or god blessed me or I am glad … never lost where a judge ruled that I must loose every thing. I now appreciate the ones that spend it all. I am still not that way. Iwas raised and still am to save. But now I know that some people are down there through no fault of their owen. Think about it. And when you are gone uncle sam will take it away or your grand children will spend it away. So, is it better to say If I have it let me help someone, maybe that person could have been me. I wish at that time I had none. So that what is your is mine could have sayed well honey, go take a flight. At that time there was NOW organization. I do not know now. That is a fair way to apply all laws to every. Cross tax rate for all. No deduction. And have something like we have in Italy, when you get married, you can select to have joint finances or seperate finances. That is your partner cannot touch your propaties, bank accounts ect. You select that at the day of the wedding. Smart is it, instead of letting a judge – a person that you do not know make decion for your life. Take care T, and live long. But think.
    Jeff from NYC

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  25. Thanks for the Italy tip – I’m going to read up on that . It looks like the issues are a poorly implemented national health service plan back in the 80s and the austerity that’s being forced on them, but I’m hoping to find more detail; I just see cost cuts, not chucking it altogether.

    Note that, as of 2008, per capita health spending in the U.S. was $7500 vs $2900 in Italy. Man that’s pathetic.

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  26. Jeff (11:30)

    Just for the record, I contribute 10% of net income to several charities that work with the disadvantaged, and volunteer monthly at our county food bank distributing food packs to families. I launched what has become a county-wide program to bring lunch and have one-on-one time with students of ability that have poor home circumstances (I go 2x/week and have done this over the past four years). My company gives rent rebates to tenants who complete an associate degree (15% back monthly for two years) and encourages independence over welfare. I know of no other landlord who does this.

    I also tutor Latino illegals on taking the citizenship test. The pass rate is presently 16 for 17. I pay for all the test and instruction out of pocket.

    T

    PS -I am usually reluctant to mention my charity work, but I wanted to set the record straight.

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  27. Why simply “tax the rich?” why not tax everyone? As in everyone? It sure would feel better if all citizens were required, at a minimum, to send $50 to the government general fund to have some “skin in the game”. And how about when the tax forms are filled out each year there is a print out of a per capita portion of the the debt? At the least the debt that is published. No the NPV of Social Security, Medicare, Medicaid, etc which would scare everyone to death!

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  28. would it cost more than $50 to collect $50 from everyone who doesn’t pay?

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  29. Yes it would. And $50 was just a completely arbitrary number. Merely a wild, ridiculous, and unrealistic suggestion with the idea that one issue I see is we need to all see we are in this together…I saw this slogan the other day…seems like may be fitting for this time…United we Stand. I agree with you Roger, there will be pain, discomfort, and then subsequent anger perhaps. But changes are necessary for the Union, and we should spread the load around.

    Thanks for the great discussion on the blog.

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  30. “why not tax everyone?”

    Everyone is taxed. Even if you set aside payroll taxes since they don’t go into the general fund, you’ve got things like gas taxes.

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