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Posts Tagged ‘soak-the-rich’

Under current law, Social Security is supposed to be an “earned benefit,” where taxes are akin to insurance premiums that finance retirement benefits for workers. And because there is a cap on retirement benefits, this means there also is a “wage-base cap” on the amount of income that is hit by the payroll tax.

For 2011, the maximum annual retirement benefit is about $28,400 and the maximum amount of income subject to the payroll tax is about $107,000.

It appears that President Obama wants to radically change this system so that it is based on a class-warfare model. During the 2008 campaign, for instance, then-Senator Obama suggested that the programs giant long-run deficit could be addressed by busting the wage-base cap and imposing the payroll tax on a larger amount of income.

For the past two years, the White House (thankfully) has not followed through on this campaign rhetoric, but that’s now changing. His Fiscal Commission, as I noted last year, suggested a big hike in the payroll tax burden. And the President reiterated his support for a class-warfare approach earlier this week, leading the Wall Street Journal to opine.

Speaking Tuesday in Annandale, Virginia, Mr. Obama came out for lifting the cap on income on which the Social Security payroll tax is applied. Currently, the employer and employee each pay 6.2% up to $106,800, a level that rises with inflation each year. …Mr. Obama didn’t hint at specifics, though he did run in 2008 on a plan to raise the “tax max” by somewhere between two to eight percentage points for the top 3% of earners. …most of the increase could be paid by the middle class or modestly affluent—i.e., those who merely make somewhat more than $106,800. A 6.2% additional hit on every extra dollar they make above that level is a huge reduction from their take-home pay. If the cap is removed entirely, it will also mean a huge increase in the marginal tax rates that affect decisions to work, invest and save. In a recent paper for the American Enterprise Institute, Andrew Biggs calculates that this and other tax increases Mr. Obama favors would bring the top marginal rate to somewhere between 57% and 68% when factoring in state taxes. Tax levels like these haven’t been seen since the 1970s.

Obama is cleverly avoiding specifics, largely because the potential tax hike could be enormous. The excerpt above actually understates the potential damage since it mostly focuses on the “employee” side of the payroll tax. The “employer” share of the tax (which everyone agrees is paid for by workers in the form of reduced take-home wages) is also 6.2 percent, so the increase in marginal tax rates for affected workers could be as high as 12.4 percentage points.

This video from the Center for Freedom and Prosperity, narrated by yours truly, elaborates on why this is the wrong approach.

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President Obama didn’t offer a budget plan yesterday. The White House hasn’t released anything beyond a set of talking points.

But that’s not terribly surprising since his speech was really the opening salvo of his 2012 reelection fight. And it’s clear that a central theme of his campaign will be class warfare.

But if we translate his campaign-style demagoguery into the overall budget framework, we get something like this fiscal continuum. Obama, for all intents and purposes, has taken the moderately left-wing proposal crafted by his Fiscal Commission and moved it significantly in the wrong direction by adding class-warfare tax policy. As such, he is close to the left end of the line, which represents “Statism.”

The Ryan plan, by contrast, is the moderately right-wing mirror image of the Fiscal Commission. But rather than cementing in place bigger government, as proposed by Simpson and Bowles,  Ryan’s budget slowly shrinks the fiscal burden of government. As such, it is on the “Liberty” side of the continuum.

America’s Founding Fathers had the right idea, of course, They envisioned a very limited central government, and for much of our nation’s history, the federal budget consumed about 3 percent of GDP. Unfortunately, the Hoover-Roosevelt policies began the process of moving America in the wrong direction, and federal spending now consumes nearly one-fourth of America’s economic output.

But enough history. Let’s revisit Obama’s speech and the accompanying talking points. In addition to the class warfare (more on that below), we also see an explicit call to reduce the growth of Medicare spending by “strengthening the Independent Payment Advisory Board.”

In other words, Obama wants to use his control of the purse strings to give bureaucrats more ability to decide what kind of care seniors can receive. It’s politically incorrect to call this type of entity a “death panel,” so I’ll simply contrast Obama’s top-down bureaucratic approach with the Ryan plan, which is based on giving vouchers to future seniors so they can pick the health plans that best fit their needs (people over 55 would be stuck with the current system). And since this is very similar to the system used to provide health care for Members of Congress and their staff, you know it must work reasonably well.

Let’s briefly return to the tax side of the fiscal equation. I’ll have more to say about this in a separate post giving a behind-the-scenes look at what Democrats really hope to achieve in the area of tax policy, but I want to offer a basic explanation of why the soak-the-rich approach is doomed to fail. There are five reasons in this video to reject class warfare, including a very important warning that high tax rates on the rich almost always are a tactical move to facilitate higher taxes for the rest of us.

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I posted yesterday about the horrible unfairness of life (i.e., I’m not rich). Interestingly, there are a number of rich left-wingers that feel guilty about having a lot of money. In a burst of genius, I came up with an idea that will kill two birds with one stone. They should give their money to me.

Unfortunately, I doubt this idea will work. Rich statists with neurotic disorders tend to deal with their feelings of guilt by supporting higher taxes on other people. I’ve actually debated these crazies (see here, here, and here).

Now more of these odd people are crawling out of the woodwork. Here’s an excerpt from a Yahoo story.

Add PIMCO founder Bill Gross to the list of wealthy Americans who think they aren’t being taxed enough, already. “Of course we should” pay higher taxes, Gross says. …In addition to tax hikes on the wealthy, “let’s raise corporate taxes too,” the famed bond fund manager says, a view that runs in direct opposition to the current discussions in Washington. “Corporations complain and complain and complain and have got the Obama administration suggesting there should be some corporate tax reform,” Gross notes. But at just 1% of GDP, corporate taxes are “historically low.”

To be sure, perhaps the PIMCO guy is just trying to boost his net worth through the back door. His bond fund probably has lots of government debt, so perhaps he thinks higher taxes will protect the value of those bonds. A strange theory, but being a statist means never having to understand how the real world works.

Then we have Stephen King, who apparently feels guilty about his wealth, so he wants the government to rape and pillage other people. And I’m not aware of any back-door rationale for him to support higher taxes, so this presumably is a classic case of GRLWND (guilt-ridden left-wing neurotic disorder). Here are some of the details from an editorial in a Florida paper.

The horror novelist, a part-time Florida resident, addressed a “Wake the State” rally Tuesday in Sarasota, took a swipe or two at Gov. Rick Scott and complained that rich people — like himself — are getting off too easy. “As a rich person,” he said, “I pay 28 percent taxes. What I want to ask you is, why am I not paying 50? Why is everybody in my bracket not paying 50?”

Of course, there’s nothing to stop Mr. King or Mr. Gross from pissing away their money by voluntarily sending checks to Washington. Indeed, the Daily Caller is offering free psychiatric advice to guilt-ridden left wingers by directing them to the Treasury Department website with the information about making gifts to Uncle Sam.

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The Oregon Ducks will compete for the national championship early next month, so they’ve had a good season. Unfortunately, Oregon’s government isn’t doing nearly so well. Politicians approved a big tax hike on those bad, evil rich people in 2009, and Oregon’s spite-filled voters approved that measure earlier this year.

So how’s is Oregon’s class-warfare approach working? Not surprisingly, the politics of hate and envy is generating poor results. Revenues are much lower than forecast, as anyone with a rudimentary understanding of the Laffer Curve could have explained. The most noteworthy result is that about one-fourth of rich taxpayers have disappeared. Does the name John Galt ring a bell?

None of this should be a surprise. Maryland politicians tried to rape rich taxpayers a couple of years ago and they also crashed on the Laffer Curve.

As the Wall Street Journal opines, Oregon politicians are getting just what they deserve.

In 2009 the state legislature raised the tax rate to 10.8% on joint-filer income of between $250,000 and $500,000, and to 11% on income above $500,000. Only New York City’s rate is higher. Oregon’s liberal voters ratified the tax increase on individuals and another on businesses in January of this year, no doubt feeling good about their “shared sacrifice.” Congratulations. Instead of $180 million collected last year from the new tax, the state received $130 million. The Eugene Register-Guard newspaper reports that after the tax was raised “income tax and other revenue collections began plunging so steeply that any gains from the two measures seemed trivial.” One reason revenues are so low is that about one-quarter of the rich tax filers seem to have gone missing. The state expected 38,000 Oregonians to pay the higher tax, but only 28,000 did. Funny how that always happens. …The tax wasn’t enacted into law until June 2009 but was retroactively applied to January 1, 2009. So for the first half of the year wealthy Oregon residents weren’t able to take steps to avoid the tax ambush because they didn’t see it coming. This suggests that a bigger revenue loss from tax mitigation strategies will show up on tax return data in 2010 and 2011. …All of this is an instant replay of what happened in Maryland in 2008 when the legislature in Annapolis instituted a millionaire tax. There roughly one-third of the state’s millionaire households vanished from the tax rolls after rates went up. If Salem officials want to find where the millionaires went, they might start the search in Texas, the state that leads the nation in job creation—and has a top income and capital gains tax rate 11 percentage points lower than Oregon’s.

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In my fiscal policy speeches, I sometimes try to get a laugh out of audiences by including a Powerpoint slide with this image. Leading up to this slide, I talk about the Armey/Forbes flat tax and explain that it would eliminate the corrupt internal revenue code and replace it with a simple 10-line postcard. But I then warn that simplicity is not the same as low taxes and show the Obama slide.

But maybe jokes about Obama tax reform were a bit premature. According to the New York Times, the White House is giving serious consideration to a sweeping plan to streamline the tax system.

While administration officials cautioned on Thursday that no decisions have been made and that any debate in Congress could take years, Mr. Obama has directed his economic team and Treasury Department analysts to review options for closing loopholes and simplifying income taxes for corporations and individuals, though the study of the corporate tax system is farther along, officials said. The objective is to rid the code of its complex buildup of deductions, credits and exemptions, thereby broadening the base of taxes collected and allowing for lower rates — much like a bipartisan majority on Mr. Obama’s debt-reduction commission recommended last week in its final blueprint for reducing the debt through 2020. Doing so would offer not only an opportunity to begin confronting the growth in the national debt but also a way to address warnings by American business that corporate tax rates and the costs of complying with the tax code are cutting into their global competitiveness.

There’s actually much to like in the Administration’s potential plan. Lower tax rates will help the economy by improving incentives for productive behavior. And getting rid of distortions will further enhance growth since people no longer would have an incentive to make inefficient decisions just for tax purposes. And simplification could have a profound impact on cleaning up the horrible mess at the IRS. Moreover, a plan that trades lower tax rates for fewer tax distortions would be a welcome change from the poisonous soak-the-rich tax policy the White House has been pursuing.

This sounds like good news, but there’s a catch. The White House is looking at this exercise as a way to not only clean up the tax code, but also as a way of getting more money for politicians. This blog post explains why this is the wrong approach from an economic perspective, but politics will be an even bigger obstacle.

The American people want tax reform, but they don’t want more of their money going to Washington. And most Republican politicians have wisely pledged not to support legislation that increases the overall tax burden.

So the ball is in Obama’s court. If he genuinely wants to make America more prosperous and competitive, he should move forward with plans to lower tax rates and eliminate tax distortions, but he needs to tell his staff that tax reform should not a Trojan Horse for a tax increase.

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I get nauseated and disgusted when guilt-ridden wealthy people try to come across as friends of the common man by endorsing soak-the rich taxes. I’ve even debated a couple of self-loathing trust fund babies (see here and here) about class-warfare policy.

If neurotic rich people believe that the government should have more money, there’s nothing stopping them from writing big checks to Uncle Sam. This is a free country and they have the right to be stupid.

But they shouldn’t be allowed to lie, either intentionally or accidentally. And this is why I get so upset when Warren Buffett says that rich people have lower tax rates than their secretaries. I’ve already explained on the blog that this is completely inaccurate because it ignores double taxation, and I reiterated that argument in this CNBC interview.

I’m not surprised that my debate opponent disagreed (even though I assume he knows I’m right), but I am surprised that one of the CNBC hosts didn’t understand the concept.

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Warren Buffett once said that it wasn’t right for his secretary to have a higher tax rate than he faced, leading me to point out that he didn’t understand tax policy. The 15 percent tax rates on dividends and capital gains to which he presumably was referring represents double taxation, and when added to the tax that already was paid on the income he invested (and the tax that one imagines will be imposed on that same income when he dies), it is quite obvious that his effective marginal tax rates is much higher than anything his secretary pays. Though he is right that his secretary’s tax rate is much too high.

Well, it turns out that Warren Buffett also doesn’t understand much about other areas of fiscal policy. Like a lot of ultra-rich liberals who have lost touch with the lives of regular people, he thinks taxpayer anger is misguided. Not only does he scold people for being upset, but he regurgitates the most simplistic Keynesian talking points to justify Obama’s spending spree. Here’s an excerpt from his hometown paper.

Taxpayer anger against President Barack Obama and Congress is counterproductive because policy makers took measures including deficit spending to stimulate the economy, billionaire investor Warren Buffett told CNBC. …“I hope we get over it pretty soon, because it’s not productive,’’ Buffett said. “We will come back regardless of how people feel about Washington, but it is not helpful to have people as unhappy as they are about what’s going on in Washington.” …“The truth is we’re running a federal deficit that’s 9 percent of gross domestic product,” Buffett said. “That’s stimulative as all get out. It’s more stimulative than any policy we’ve followed since World War II.”
About the only positive thing one can say about Buffett’s fiscal policy track record is that he is nowhere close to being the most inaccurate person in the United States, a title that Mark Zandi surely will own for the indefinite future.

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