Howard Dean complains that recent Federal tax cuts primarily benefit the richest 2 percent of Americans. This sounds unfair and unreasonable unless you ask the question whether it makes sense to tax rich people at all.
Consider John Richman. He works as the CEO of a public company and earns $20 million per year. Suppose that a greedy state government such as New York tries to tax Mr. Richman. As part of his job, John is entitled to unlimited free travel on the fleet of corporate jets and with $20 million/year in income a person can easily afford 6 houses. John has the corporation buy a penthouse triplex in Manhattan that he can use a few days every week but he tries to spend as much as time possible in his beach house in Florida and on his ranch in Wyoming. When tax time rolls around John declares his residence to be in one of these two states, both of which lack any kind of income tax.
When John shops for Impressionist paintings, yachts, and collectible Ferraris, you can be sure that he is smart enough to have it all delivered to one of his homes in a state free of sales tax. As long as there is one state in the union without a sales tax, it is impossible to collect sales tax from John for 99% of the stuff that he buys.
Suppose that the federal government tries to put a heavy tax on John’s $20 mil annual income. John has a lot of flexibility about how he brings his money home. He can elect to put it into a deferred compensation account so that it won’t be taxed for many years to come. He can give himself stock options and then take the money out later when the market has risen a bit, thus converting current income to long-term capital gains, taxed at a maximum rate of 20 percent.
Suppose that John accumulates a lot of wealth during his term as CEO. If the American authorities get really aggressive about taxing it he can afford to hire lawyers and accountants to shield his wealth from taxation. If worst comes to worst he might put it into a tax-exempt Virgin Islands business or possibly move his wealth altogether out of the United States. John is presumably retired by this point, in possession of $200 million in wealth. He doesn’t need to remain in the U.S. in order to work.
By contrast let’s consider Jane Rabblewoman. She works as a Walmart cashier and shops at Walmart. Jane doesn’t have enough money to maintain multiple houses. If she were to move away from her high-tax state she’d not have enough money to afford airplane tickets to travel back to see her friends and family. Jane’s income is a sitting duck for state tax authorities and it doesn’t really matter how low taxes are in some other far-away state.
Because Jane doesn’t have a second home and a private jet she does most of her shopping locally and thus pays sales tax on the majority of her purchases.
As a point of political rhetoric it makes sense to talk about how the rich should pay tax. But as a practical matter it seems virtually impossible to collect tax from the rich, except perhaps for property tax. Could it be that George W. Bush cuts taxes for the rich not because has so many rich friends but rather because he recognizes the impracticality of actually collecting?
[Note that the idea of taxing what’s easy to tax rather than what is fair isn’t original. The Europeans have a sales tax that is triple what we’ve got in the U.S. and more broadly applied (they call it Value Added Tax and it is between 16 and 25%). They put in V.A.T. partly because so many people were cheating on their income tax whereas VAT is easy to collect.]
According to some guy at the Cato institute, the richest 1 percent of Americans pay 30 percent of the income tax. The number may be exaggerated, but clearly the super-rich do pay taxes.
If your theory is true, that the super-rich evade the better part of the taxes, then in principle we should be taxing them even more heavily on those portions of their income that they won’t/can’t hide to make up for what they’re spiriting away.
When Howard Dean and others talk of taxing the rich, they’re not talking about doing it within the current architecture which is full of loopholes. They’re talking about closing some of these loopholes to make sure that someone making an effective 20M/year doesn’t pay a lower percentage income tax than someone making 40K.
Sure, it’s not easy, but it’s probably worth exploring.
Of course, the average rich person is not at all like John Richman. There is a difference between being “affluent” (having high income) and being “rich” (having high net worth). Yes, affluence correlates to wealth, but not always. Lots of affluent people spend so much that they never become wealthy. They contribute heavily in both income and (especially) sales taxes.
Also, the average millionaire is either a small business owner or profession (doctor, lawyer). These people are affluent enough to be taxed at the highest rate, but not wealthy enough to use the tax evasion strategies Philip outlines. Also, the small business owner pays heavy business taxes before s/he takes income and then pays income taxes on that. I don’t think most of these discussions about the rich not paying their fair share include the business taxes most states impose.
A smart business owner can lower his/her tax burden through unrealized income. This is the part of Philip’s point that holds true for even the “moderately” rich ($ 10 million or less). Philip is also right that the government will never get that money, because it is not income. It will be taxed much later at the capital gains rate. Still, the affluent and moderately wealthy in this country pay plenty of taxes–through business taxes, property taxes, sales taxes, income taxes, and capital gains taxes.
Your theory is contradicted by the fact that the administration has actively taken steps to make it easier for the wealthy to avoid paying taxes at all, through shell companies in the Cayman Islands and so forth. Also, the relatively meagre resources given to the IRS to go after tax fraud are disproportionately spent going after low income people where the potential collections do not merit the effort financially. The practicality of collecting taxes from the rich is not an issue, they really believe it is unfair that the rich have to pay taxes at all.
I think affluent people should pay less taxes percentage wise because they end up paying more in absolute amount anyway, e.g. a $100k computer programmer would pay more dollars to IRS at 15% than a $40k HR manager at 30%.
Maybe we should redirect the principles here. Even if the top 1 percent spend some thirty percent of total taxes, they also own some forty percent of U.S. net worth. At such a ratio, and such an ownership, the thirty percent they pay does not seem outrageous.
Similarly, the idea that everyone would pay an equal amount in absolute dollars would have to take into account the devastation that would be visited upon certain things that are taken for granted. For instance, taxes pay for things like roads, sidewalks, libraries, schools, government, and, last but not least, our police and military. Our military budget is the highest of any country in the world, and as a percentage of our total budget stands currently at 47 percent. As it stands, that present budget cannot cover our current military escapades.
I think affluent people should pay less taxes percentage wise because they end up paying more in absolute amount anyway
There’s a reason for that. The government is basically a property protection racket when it comes down to it. The more property you have, the more resources it takes to prevent the mob from forcibly redistributing your wealth.
If you’re rich, you’re paying for a premium government. Defund it at your peril.
Could it be that George W. Bush cuts taxes for the rich not because has so many rich friends but rather because he recognizes the impracticality of actually collecting?
You’ve got to be joking.
While a good number are gung-ho for a flat tax scheme to solve all the ills of the tax system, I don’t agree. Determining “income amount” may be a cinch for salaried and hourly folks, for those incorporated (which the numbers are steadily increasing), it’s a fuzzy number that can be reduced to near poverty level for even the most affluent.
Instead I would be in favor of a national sales tax – with exceptions for food (except take out/restaurant), clothing, shelter (1st home only or 1st rent), and maybe car/bus/train payments/fees. Additionally, instead of welfare or food stamps or any other bureaucratic means of a safety net (besides the social security and medicare programs…), I’d like to resurrect the Milton Friedman idea of transfer payments/negative income tax – like 20K.
I feel that the federal tax system should be simplified, and most of the deductions eliminated.
First, all income should count equally no matter the source (wages, capital gains, interest, gifts…).
Each person taxed individually, that is no ‘married’ or ‘head of household’ distinctions.
A reasonable standard deduction applied uniformly …say, 2 times the poverty level ($17960 in 2003), plus the poverty level increment per dependent ($3140).
http://aspe.hhs.gov/poverty/03poverty.htm
Then tax the rest using a uniformly increasing rate. One such simple method would be:
income – std. = X
tax = log( X / 1000 ) x X / 10
a single parent with one child making $20100 would pay no tax.
That same person making:
$40,000 would pay 2,584.71 or about 6.4%
$100,000 15,201.34 15%
$500,000 128,668.42 26%
$5,000,000 1,841,178.89 37%
and for Bill Gates types
$500,000,000 284,936,172.37 57%
I see after all my formatting it all got squeezed. that formula should be:
income – std = X.
tax = log( X / 1000 ) x X / 10
you can figure out the rest.
This post is severely misinformed. As the first commenter pointed out, the rich actually pay a great deal more in taxes than the rest of the people. There is a substantial number of Americans (on the order of tens of millions) that effectively pay no tax at all (even though they are required to file).
Also, perhaps you have heard of something called AMT–the alternative minimum tax, which ensures that those with high incomes who take great pains to avoid paying taxes cannot successfully do so without moving to the Caribbean and renouncing US citizenship.
See http://www.fairmark.com/amt/amt101.htm and http://www.fairmark.com/amt/topten.htm.
“Tax the rich” is a political slogan that never fails to get cheers; but when you consider where the capital to invest in new companies and new technologies that improve our lives and make our workers more productive (raising everyone’s standard of living), it becomes a far less appealing proposition. In the 1950s and 1960s, the top marginal rates were in the neighborhood of 90%–for every incremental dollar you earned, you kept $0.10. Don’t underestimate the damage that can be done to the economy by de-incentivizing the most highly-rewarded members of that economy.
The other thing to point out is one of the serious concerns with flat tax or VAT systems is that implies very limited (or no) deductions, which will severely impact those people (over 100 million at least) who presently enjoy tax-free mortgage interest payments. This tax-free benefit is limited to a total of $1 million, so don’t think that the example CEO in the post doesn’t pay serious taxes (both property taxes and on mortgage interest) for his monster homes.
Also, income taxes reflect just that–current year income. They are not meant to be taxes on wealth.
A $1,000,000 limit on tax free mortgage interest deduction does not seem like much of a limit. Go ahead and put an upper limit at 50% a number you get at $100,020,100 income with the above formula; a truly indecent amount of income for a year. Also, I agree with Humphrey that there is little benefit in a VAT without major complications. However a flat tax that has a standard deduction is different. The fixed amount standard deduction can be adjusted to reflect a reasonable “housing cost” or interest amount that would benefit the low income home owner more than the wealthy as a % of income. By the way, using the above formula and George Bushes public tax return for 2001 his tax rate would go from 27.2% to 28.6% based on gross income as reported.
It could be, but it’s not.
Saying that the Rich pay most of the taxes is like saying the government pays for the things it buys. The government doesn’t pay for the things it buys – the people do. And the rich don’t pay taxes – they collect taxes. It’s Econ 101 – money doesn’t grow on trees.
The IRS collects from the rich, the rich collect from the middle class, the middle class adjusts its wages and prices accordingly, and the poor lose their jobs and hope. Taxes take money out of the economy. When money is taken out of the economy it’s the poor who lose. The standard of living of the upper classes doesn’t change. The numeric (dollar) values of the goods and services they provide or purchase changes – but their standard of living does not. The standard of living of the poor, however, gets worse with every tax increase – of any kind. Or perhaps more accurately, the number of poor increases with every tax increase of any kind. This may come as a shock to you reader, but assuming that you are in the middle/upper middle class, you don’t pay taxes. Neither do I. Further, giving us a tax break won’t improve our standard of living because wages and prices will simply adjust. Still further, giving the rich a tax break won’t inprove their standard of living either – but it will put people back to work. It doesn’t matter if the rich guy just buys another yacht – working people build yachts.
Its kind of ironic (don’t you think) that the people who keep saying we must help the poor keep claiming they will do so by increasing the taxes on the rich. Perhaps ironic – and perhaps just plain evil. Its irony if they don’t understand and are simply stupid. Its evil if they do understand and just want as much tax money as possible to flow through their greedy, sticky, little hands.
Please pass this on to President Bush. He’s saying the right thing when he says the tax cuts will help the economy. But he’s got it wrong when he says the rich are getting most of the cuts because they pay most of the taxes. What he should say is that he’s giving it back to the rich because that’s the easiest way to put as much money back into the economy as quickly as possible. Raising taxes hurts the poor – period. Cutting taxes helps the poor – period. Socialialism doesn’t work – it is contrary to reason and human nature – period.
You’re correct in that no matter how taxes are structured, wealth redistribution is controlled by leverage/negotiation/bargaining effectiveness. And you’re correct in that a complex tax process 1) obfuscates redistribution. 2) is churn/waste. ______
“It doesn’t matter if the rich guy just buys another yacht – working people build yachts.”_____
Incorrect. It does matter, because a yacht creates little benefit. High cost/benefit ratio.[†] In general, the rich spend for the most extraneous items of “consumption”. It would be better if the rich invested all of their takings/redistributions. However many of the middle class USAans also blow their “deposable 🙂 income”. ______
When concerned about the economy and getting the most benefit out of ‘the economy’: how *many* (%) people are working, what *kind* of work they produce, and productivity are what matter.
† Much akin to http://www.google.co.uk/search?q=Economics+Windows+Work+Lost+False+Bastiat
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The problem of a sales-tax-only system is that insider income would never be taxed. All kinds of false-expenses (trips to the Bahamas, pilfered paperclips, etc) would be swallowed up in company accounting – but much more than they are now. The tax reporting structure is just a small bit of the bureaucratic cost of taxation. The bookkeeping, income disguises, and loophole-chasing are the true big churn of taxation. Anyone who has filled Sch C, E ,etc knows this.
Income laundering is the real reason why “business income” should be taxed. Because managers control the cash flow. Anyone who has worked in privately owned business knows that sh1t goes beyond the sh1t that happens in publicly traded corps, despite the rules and regs that are supposed to find income. Remove all rules, and private businesses owners and managers would appear to be indigent on paper. Then soon shareholders would collude with public company managers to do similarly with publicly owned companies.
apologies, i mistakenly omitted a slash in an italics tag. 🙂
also this blogware retro-changes nyms! freaky blogware alters nym in PREVIOUS posts based on the last nym used for same email address!
quoting last para in original site http://philip.greenspun.com/blog/2003/09/02#a1455
“[Note that the idea of taxing what’s easy to tax rather than what is fair isn’t original.”
Property tax is what’s “fair” to tax, because property (and life) is what costs the government. So if you’re concerned about fairness, govt needs to tax wealth. (btw, property is otherwise costly to own. structures, vehicles, etc need maintenace, repair, etc)
The blog is very useful.