Taxes and Class Warfare

Signs are passed out at all the conventions. As I watched President Clinton speech I notice the sign du’ jour was: “Middle Class First.” The democrats have gone to great pains to say they are not using class warfare but they clearly are. It is not the function of government to put anyone first- it is the obligation of the federal government to apply equal protection under the law. When Democrats say they want a fair playing field what they really mean is they want to tilt the field to get more equal results. Clinton went on to say that Obama would not raise taxes on the middle class and poor and repeated the assertion that taxes will be raised on high income individuals. At least Clinton did not say millionaires and billionaires as President Obama is fond of repeating. So who is really paying more?
Obama’s plan is pretty straightforward and available to anyone who seeks it out:

Families making $250,000 or more will have their income tax raised by about 10%. Their capital gains rate 33% more.

The alternative minimum tax and the estate tax would also be restored at levels of 1 million and 3.5 million respectively.

The top corporate tax, already the highest in the western world- would go from 28% to 35%.

Obama has also targeted many exemptions and tax breaks as well.

So approximately what percentage of the individuals having their income tax raised make over 1 million dollars a year? The answer is less than 1 out of 10, meaning 90% of those paying more are families and individuals making as little as $250,000 a year. $250,000 a year allows for a comfortable life to be sure but it is hardly rich as most people define it and can be just getting by in a city like New York or San Francisco for a family. The other problem is that when we assess tax policy we do it one year at a time. Say that you are a small business person and have struggled for years and years and finally have a good year. That good year suddenly puts you in a much more confiscatory tax bracket and acts as a disincentive to your productivity and expansion. This also would apply to virtually anyone selling a home after more than 20 years in Northern or coastal California. That sudden big profit would elevate even the most average income to a high tax level.

Higher tax rates are also a disincentive to productive work. Ronald Reagan said he learned about the disincentive of taxes when he found that he would take the rest of the year off from working when he reached the highest rate. The problem with tax policy is that too often policy makers think in a vacuum. They do not bother to try to assess the changes in behavior tax policy brings about and when they do they frequently underestimate the effect.

With the globalization of the economy America must compete for capital. Our corporations and foreign corporations have global options and they must exercise them or risk going out of business to a competitor who does. We want our corporations to be competitive and hire our labor, we also want to attract global foreign companies to do business in America.

When President Kennedy and President Reagan cut taxes both saw increases in the amount of tax dollars collected. Economist Art Laffer developed a curve that tried to represent the correlation between tax rates and taxes paid in gross dollars. His curve demonstrated that at a certain level increases brought diminishing returns.

We are also very close to becoming a society were taxpayers are a minority; that is the percentage of Americans who pay any federal income taxes is close to 50%. Do we really want a society were the majority pay absolutely nothing to the federal government? We fought a revolution over taxation without representation and in modern America fewer of us and paying and being asked to pay more by those who pay nothing.

Of even greater importance is the productiveness of that money. Do we want our businessmen and industrialists using more of their capital or do we want our government. Wealthy people do not put their money under the mattress, they put it to work for them. Can anybody argue that money is better spent in Washington where the congress has disapproval numbers in the 70-80% range. Capital is better spent in the markets where it can fund businesses large and small who will expand and hire with that capital. Do we want to discourage investment with higher capital gains? Obama has decried the wealthy investing in so called tax havens overseas, through smart policy he can convince many more of them to put capital to work in the United States.

 

 

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