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Monday, August 15, 2011

An Unsustainable Free Ride for the Wealthy

Let's start out by talking about a flat tax. At one point, a flat tax was all the rage among conservatives. For many, it's still a fave. When someone on the right talks about "simplifying the tax code," what they really mean is flattening the tax rate. If everyone paid the same percentage and there were very few deductions, everything would be "fairer," they argue. People making a lot of money are "punished for success" by being pushed into a higher tax bracket. Never mind that this "punishment" doesn't seem to be much of a deterrent, since the total number of US millionaires is expected to double by 2020, as the income inequality between the wealthy and everyone else grows at an astonishing clip. The wealthy are gluttons for this particular punishment, apparently.

Now, keep a flat tax -- the conservative favorite -- in mind while you read this quote from an op-ed by Berkshire Hathaway CEO Warren Buffett, one of the richest people in the world.

BuffettLast year my federal tax bill -- the income tax I paid, as well as payroll taxes paid by me and on my behalf -- was $6,938,744. That sounds like a lot of money. But what I paid was only 17.4 percent of my taxable income -- and that's actually a lower percentage than was paid by any of the other 20 people in our office. Their tax burdens ranged from 33 percent to 41 percent and averaged 36 percent.

If you make money with money, as some of my super-rich friends do, your percentage may be a bit lower than mine. But if you earn money from a job, your percentage will surely exceed mine -- most likely by a lot.


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That's right, a flat tax would actually be better than what we're paying now. We now live in an upside-down world where an office worker is taxed at a higher percentage than the CEO of the same company. Do the wealthy still pay more in total than everyone else? Of course they do. But if we take the flat tax as a serious argument, we have to conclude that even conservatives believe the rich should pay more than everyone. They may not say so outright, but it's the only logical conclusion to the sets of facts. Even Republicans believe that the wealthy should send more total to Washington than the average citizen.

I don't bring this up as an endorsement of a flat tax -- which I believe is fiscal insanity -- but to point out just how insane our current tax rates are. If a flat tax is idiotic, then our current system is worse, by virtue of being not-flat in the wrong direction.

"I know well many of the mega-rich and, by and large, they are very decent people," Buffett goes on. "They love America and appreciate the opportunity this country has given them. Many have joined the Giving Pledge, promising to give most of their wealth to philanthropy. Most wouldn't mind being told to pay more in taxes as well, particularly when so many of their fellow citizens are truly suffering." He calls on Washington to "stop coddling the super-rich."

And he's right for several reasons, not the least of which is that if we increase taxation rather than cut spending, the wealthy will actually be better off. Republicans have tried to repeal the law of supply and demand, but reality is a stubborn thing and will not be dismissed by wishful thinking -- no matter how earnest all that wishing may be. If the government spends more, this has the effect of increasing demand -- including demand for labor -- and the increased employment and consumer spending will send money all the way to the top (money gushes up, it doesn't "trickle down"). In the meantime, tax revenues for the lower brackets will also increase as people become better off. Wealth isn't created by tax cuts, wealth is created by working and spending and borrowing. In fact, borrowing probably makes up the biggest chunk of wealth creation, since it's the source of all interest. If you want a quick explanation of this, check out the "run on the bank" scene in It's a Wonderful Life -- "The money's not here. Why, your money's in Joe's house..." If we increase demand to the point where people spend, that's great. If we increase it to the point where people feel safe enough to borrow, that's even better. And maintaining a stupidly bass-ackward rate of taxation just isn't doing the job.

Would raising taxes on the wealthy be political suicide? Not at all. Polling shows it's only slightly less popular than free beer. And, despite the claims of Republicans that these tax hikes would hit the upper middle class, the fact is that just 3% would see their taxes go up if the increase were set at households earning $200,000 or more, as President Obama has proposed in the past. And the increased revenue from the tax hikes, combined with the increased tax revenues from higher wages and employment spurred by government spending, would go a long way toward reducing our deficit. Republicans want to run government like a business? Fine. Just remember the old business dictum; "It takes money to make money."

When your tax burden is so weighted toward people at the bottom of the economic ladder that a flat tax would actually be an improvement, then something is really out of whack. This needs to be fixed, because the current system heads no place but down and everything we're seeing happen to the economy today will only get worse. It's clearly unsustainable.

-Wisco


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