They Do Keep Trying: The Hagiography of the 1%

The #Occupy-Fill-In-The-Blank movement keeps noticing that income disparity in the United States is a drag on the economy, and the right wing press continues to flog two arguments as a response.  The first argument is that “the numbers aren’t up to date, and the rich lost money during the Recession.”  The second is that rich taxpayers pay most of the federal income taxes.  [TaxFnd]

I Have An Ouchy Too?

Both contentions are specious, self serving, and not terribly informative.  Yes, some financiers and developers lost money in the Mortgage Meltdown.  However, begging indulgence for those billionaires who lost millions isn’t likely to resonate with the remaining 99.5% who lost, or are in danger of losing, the most valuable asset the family possesses — the family home.

An attorney offers this perspective: “There are a hundred different ways of looking at the economy, and a million different statistics. But if you wanted to focus on just one number that explains why the economy can’t really recover, this is the one: $7.38 trillion.”   $7.38 trillion is the amount the Federal Reserve’s Flow of Funds report estimates that middle income home owners lost.  The figure is actually a low-ball estimation because those homes were also leveraged, so the middle class lost about 30% of its wealth in the Meltdown, and perhaps as much as 50% if leverage is included in the calculations.

And yes, there are some “mansions” available in Las Vegas in the short sale and foreclosure market, but the drop in home values places middle class families in greater binds than The Rich and Famous. “Las Vegas home values plunged 58 percent from the 2006 high-water mark through February, the biggest drop of the 20 metropolitan areas tracked by the S&P/Case-Shiller index, and are the lowest since June 1999, the group said today in New York. Prices fell 7.4 percent in March from a year earlier to a median $125,950, the Las Vegas Realtors reported April 8. ” [Bloomberg] (emphasis added) Almost 70% of Las Vegas homeowners were “underwater” in 2010.

I Pay Lots of Taxes!

The argument that the rich pay some prestigious percentage of the federal income tax is a complete non sequitur.   Yes, the rich and very rich would, indeed, pay more under a progressive income tax — because that’s what it is — an INCOME tax.  The higher the income the higher the tax.  This excuse completely misses the point.

The problem isn’t that higher taxes on the ultra rich 0.5% of American income earners is “unfair,” but that the remaining 99.5% of the income earners are finding their earnings stagnating and their wealth declining.   In an economy 67% based on consumer spending this is a recipe for disaster.

All’s Fair In Love and Taxes

Not quite.  The Republican protectors of the 0.5% have introduced the “let’s simplify the tax code” argument into the national debate.  ‘Sounds nice, and “everyone” would like a simpler tax system?  Wouldn’t they?

Senator Dean Heller (R-NV) climbed on this bandwagon:

“The current tax code is too costly, too complex, and too burdensome.  Broad-based tax reform will allow families to thrive and employers to create jobs.  We must broaden the tax base by closing loopholes and reducing marginal tax rates on both individuals and businesses.  Tax simplification would also save individuals and businesses both money and time allowing Americans to infuse much-needed capital.”

Too costly?  What “costs” is the Senator talking about?  If it’s the cost of tax preparation it’s a specious argument because tax preparation expenses are deductible on the next year’s filing.  (1) You first have to be making enough money to itemize deductions, and (2) You get to deduct the tax preparation expenses the next year.  Your accountant gets paid and can hire people to do tax preparations, and you get your deduction in the next filing.  Everyone wins.

Is it the cost of enforcement?  There is evidence supporting the contention that for every $1 spent on tax law enforcement $10 comes in to the Federal treasury.  [Deseret News]  And, who is doing the evasion?

“A good chunk of the evasion, the GAO concluded, was committed by individuals with “substantial personal assets” including multi-million-dollar homes and “luxury cars.” One passport recipient bought a house for $2 million and another property for $1.5 million despite owing $1 million in federal taxes. ” [HuffPo] [Source: “Federal Tax Collection: Potential for Using Passport Issuance to Increase Collection of Unpaid Taxes”  GAO March 10, 2011.]

Is Senator Heller truly trying to argue that we can “save money” by making it more difficult to enforce tax statutes on individuals with “substantial personal assets….?”

Too complex?  Not for most people.  If you are single (or married and filing jointly), under 65, you aren’t legally blind, your interest income is less than $1,500, you have no dependents, and you make less than $100,000 you can all but file your returns on a postcard — it’s called the 1040 EZ.  [Bankrate]  Most Americans are bright enough to differentiate between the three possible forms — 1040, 1040A, and 1040EZ.

According to the IRS, 64.4% of us claim only the standard deduction, 33.8% claim itemized deductions, 75.7% of us file our returns electronically, and 57.7% of us have hired someone to prepare our returns.

If you are filing the “postcard” version there’s nothing very complex about it. If you are filing the 1040 with all manner of deductions, bells, and whistles you most likely among the 57.7% and  have an accountant or tax preparation specialist doing the paperwork — and remember — the tax preparation expenses are deductible.

Too burdensome?  Only if you are whining about the cost of living in a civilized society in which soldiers get paid, bridges are maintained, highways are constructed, and food gets inspected. Further, if we accept the conservative argument that 47% don’t pay taxes (that’s only federal income taxes) then at least 47% obviously aren’t “burdened” by those same  federal income taxes.

The 1% Solution

Heller: “We must broaden the tax base by closing loopholes and reducing marginal tax rates on both individuals and businesses.  Tax simplification would also save individuals and businesses both money and time allowing Americans to infuse much-needed capital.”

Sometimes grammar really is important, in this instance Senator Heller is combining “closing tax loopholes” with “reducing the marginal rate.”  No “one” without “the other.”   This is an interesting argument because Americans are now paying the lowest taxes since Eisenhower was in the White House.

I’m frankly not sure how one might make the 1040EZ filing any simpler.  It’s also unclear as to how any money is saved by further simplification since the tax preparation fees are deductible.  In terms of the “time” required, if much effort and expertise is required by an individual or business to prepare tax filings — then why is Senator Heller arguing in favor of putting tax preparation firms out of business?  He certainly doesn’t appear to be advocating we “infuse capital” into accounting firms and related local businesses.

The bottom line for the 1%, their advocates, their hagiographers, and their advocates is that they want to keep more of what they’ve accumulated.  A better reason for revising our tax system is not that it needs to further protect the already well protected but that it be revised to prevent further income disparity and inequality.

The 99% Solution

This accumulation and the coterminous increasing disparity among income groups in the United States is a function of our tax code which has thus far served the top 1% very well.

“The reasons for the growing disparity, which the CBO, without irony, measured by an increasing “Gini coefficient,” were buried deep in the report. It’s how income was taxed that allowed the ultra-wealthy to keep more of what they earned compared to middle- or lower-class Americans.” [Reuters]

Five elements of the tax system are contributing to the increasing inequality of wealth in this country.

1. Investment income earners are taxed less.   Those who draw paychecks pay taxes immediately, those who secure their income from capital gains can defer payment.  If we want to reduce taxes for most Americans, the thing to do would be to reduce their marginal taxes and increase the taxation on capital gains.   But, “OH, cry the top 1% who perceive themselves to be ‘job creators,’ that will KILL JOBS because there will be less investment…”  Not necessarily — if the taxes on legitimate investments are kept reasonable and the taxes on speculative investments are increased, then according to the Invisible Hand capital will flow to industries rather than the Wall Street Casino.

2. Executives and financiers do best.  “…when you can structure your compensation so that it’s tax-deferred, paid in stock options or paid as capital gains, dividends or carried interest, you can pay much less to Uncle Sam and keep more of your income. Long-term capital gains, dividends and carried interest are taxed at a maximum 15 percent rate.”   Most people can’t do that.

3. Upper income Americans avoid payroll taxes.  “Since the highest earners were paying less in overall taxes because they were paid in non-wage income, their payroll tax rate was also lower. The CBO found that the lowest fifth of families paid an average 8 percent in payroll taxes while the highest-income group paid under 2 percent.”   There’s a quick way to fix at least part of this — increase the Social Security cap above the current $106,800.  Everything above this figure isn’t subject to payroll taxes.

4. Upper income Americans turn themselves into S Corporations.  “The observed growth in the conversion of C corporation income into S corporation income has contributed to the rapid growth in income for the highest-income households,” the CBO reported.”   For all intents and purposes, some of this S corporation activity is perfectly legal tax evasion. Or, as some police procedures are described, “Lawful but Awful.”

5. Those who have the most loopholes benefit the most.   It is amusing that some of those people most often heard complaining about the complexity of the tax code are the very ones who gain the most benefit from the loopholes, havens, breaks, and subsidies.

There are some suggestions which might further address reforming our tax code to distribute wealth and encourage investment more equitably.

The Suggestion Box

The United Kingdom has a 0.25% tax on stock transactions.

“The CEPR study looks at a 0.25% tax on stock trades in the United Kingdom and estimates that an equivalent tax in the United States could raise $40 billion a year for the Treasury.

“This is not hypothetical,” said Dean Baker, co-director at CEPR and author of the report, in a statement. “The UK has used an FST to collect large amounts of revenue,” he said, adding that the International Monetary fund “is currently advocating the tax in recognition of the enormous amount of waste and rents in the financial sector.” (pdf format) [CNN]

This is obviously not a popular suggestion among hedge fund managers and their investment banking cohorts.  However, the imposition of this kind of taxation could shift the burden from occasional investors toward those who are wont to engage in high speed electronic transactions for the sake of finding a smidgen of profit — and the enhancement of their bonuses.

Raise the cap on Social Security and payroll taxes.  The cap hasn’t been raised since 2008, and the $106,800 maximum is far too low to be either equitable or effective. [CD]

Close some questionable loopholes and preferential treatment on capital gains.  “… when one examines the actual way in the tax code works, it turns out that the vast majority of income subject to the the capital gains tax does not result from economic investment – which means the asserted justification for this preferential treatment kind of falls apart.” [DKos]  For example, can anyone explain how the U.S. economy is “grown” by giving collectors of fine antiques, rare stamps, and fine art” special exemptions under the current capital gains system?  As the author of the post asks, what national economic benefit is created by someone who “earns” $20,000 selling an antique luxury car that’s been stored in a garage for a year?

Professor Alan S. Blinder (Princeton University) who has served as the vice chairman of the Federal Reserve explains further:

“A far more important objection is that the tax preference for capital gains undermines capitalism — a system in which capitalists, not the state, are supposed to make the investment decisions. When I discuss this issue with my Economics 101 students, I show them an example of a proposed investment that loses money before tax (and which, therefore, should be rejected) but which actually turns a profit after tax because of the preferentially low capital gains rate. (Accountants and tax lawyers live this example every day.) The government thus induces people to make bad investments, which is a good way to run an economy into the ground.”  (emphasis added)

A system of taxation that increases income disparity, serves the interests of the privileged few, encourages speculation at the peril of investment, and shifts the overall burden to a middle class decimated by a stagnant economy, needs to be reformed — but not via the simplistic sloganeering proposals of the Wall Street Warriors among the conservative cohort.

1 Comment

Filed under Economy, Foreclosures, Heller, Nevada economy, Taxation

One response to “They Do Keep Trying: The Hagiography of the 1%

  1. craigtew

    Thanks for the helpful information. I have been looking for info about investment income and how it’s taxed. Thanks.