Friday, July 17, 2009

You can't tax the rich to pay for everything

Taxes fund the basic infrastructure necessary for us to live in society. All of us should pay our fair share. The Bush tax cuts in the US did benefit the poor and middle class, but most of their benefits went to the rich.

In addition, the Bush tax cuts treated capital income far more favorably than earned income. Earned income is wages. Capital income, which is commonly called unearned income, consists of income from wealth, like capital gains and dividends. Wealth disparities are generally greater than income disparities, since the former reflect that you can accumulate wealth over several generations. A number of wealthy people (but not all of them) earn most of their income from capital income. Bush cut the tax rates for capital gains and dividend income to 15%; this probably exacerbated wealth disparities in the US. He also reduced tax rates in general.

A backlash is starting to grow in the US. Taxing the rich is growing more popular. Indeed, many of the health reform bills include surtaxes on the rich. For example, the House proposed that couples making above $350,000 annually would pay a tiered surtax starting at 1%. All U.S. residents pay a payroll tax of about 12.6% of their earned income for Medicare and Social Security, whether or not they owe federal income tax. Since Medicare provides a flat benefit (i.e. everyone is eligible for the same benefit, regardless of how much you contributed during your lifetime), income above a certain amount is excluded from the payroll tax, and capital income isn't subject to the payroll tax; however, there is talk of expanding the amount of income subject to payroll taxes, and also including capital income. A CNN Money article by Jeanne Sahadi discusses the backlash and some tax proposals; it quotes researchers at the Tax Policy Center, a nonpartisan collaboration between the Brookings Institution and the Urban Institute, which are both prominent think tanks.

The article also repeats a point made by Len Burman, director of the TPC: while the President promised not to increase taxes for anyone making under $250,000, there aren't enough people making over that amount to pay for everything that needs to be done. We can't fund the things we need to do solely by raising taxes on people making over $250,000.

That said, the Center on Budget and Policy Priorities has a bunch of folks who are far better versed in tax policy than I. Chuck Marr of the Center figures that the House proposal is reasonable. It would affect only 1.2% of US households. Since 1976, the top 1% of US households have seen their real income (i.e. after inflation), after taxes, grow by 276%. All households in the top 20% have seen real after tax income grow 86%. In contrast, real after tax income for the middle 20%, second lowest 20% and lowest 20% of households has grown by 21%, 18% and 11% respectively. In addition, Marr debunks conservatives' arguments that the surtax will harm small businesses (most small businesses don't earn over the specified level, and can choose to incorporate in a manner so as not to make their owners vulnerable to the tax (i.e. incorporate as a C corporation). Last, tax levels in general are actually lower than they are under President Reagan.

I still maintain that you can't simply tax the rich to pay for everything we need to do, but I concur that the House tax proposal by itself is reasonable.

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