Taxing Progressively

Not Soak the Rich, Just a Little Sprinkle

President Obama’s new federal budget plan won’t end plutocracy in America. But this second Obama budget, if adopted, might actually inconvenience it.

By Sam Pizzigati

The Heritage Foundation, the right wing’s most lavishly funded think tank, doesn’t much like the federal budget plan the Obama White House released last week. Heritage hired guns are blasting the Obama blueprint for fiscal 2011 as perhaps the “most irresponsible budget ever.”

What has the wealthy and their biggest fans so upset? Certainly not the deficit, the cause for concern they profess so earnestly. Growing budget deficits, as economist Polly Cleveland pointed out last week, can actually work to rich people’s advantage, in part because the rich hold so much of the government’s debt. The interest payments the rich collect on that debt “tips” America’s top-heavy distribution of wealth even more their way.

The rich can live — quite well — with budget deficits. But taxes drive them crazy, and President Obama’s second budget is proposing, over the next decade, $970 billion in new taxes on America’s most affluent. But do these tax hikes, as critics charge, “soak the rich”? Not hardly. Obama’s budget, if adopted, will inconvenience the rich, not soak them. 

For the rich, that may be almost as bad. Rich people simply detest inconveniences. Unlike people of modest means, they can afford to avoid them — and the U.S. tax code, for years now, has made that affording ever easier. Just how easy becomes painfully clear upon perusing the fine print of the tax changes the Obama White House is proposing.

One example: Under current law, corporate CEOs can classify their workers as “independent contractors,” a neat maneuver that denies workers the benefits normal employees receive and saves corporations vast sums that end up inflating executive paychecks. The Obama budget proposes new rules that would make these corporate misclassifications more difficult to cook up.

Tax ratesCurrent law also lets corporate execs who get nailed cheating consumers deduct off their taxes the punitive damages courts order them to pay. How convenient. The new White House budget would make executives and their companies much more likely to eat these damages, on their own.

Another convenience the rich enjoy and exploit: Current law gives the IRS only three years to discover whether wealthy tax filers are neglecting to report income from foreign assets on their tax returns. After three years, the IRS can’t levy any penalties on the wealthy tax avoiders they catch. The Obama budget proposes to double this statute of limitations to six years.

The income the wealthy do already report, meanwhile, will face higher tax rates under the Obama budget plan. In the 2011 federal fiscal year, couples making over $250,000 a year — and individuals over $200,000 — will pay taxes at a 39.6 percent rate on ordinary income over $373,650. These taxpayers, under the Obama plan, would also pay higher taxes on dividends and “capital gain” income from the sale of stocks and other assets. The current 15 percent tax rate on these income streams would jump to 20 percent.

Some super-rich taxpayers — the top guns at hedge funds, venture capital firms, and other investment partnerships — would pay even more under the Obama budget plan. These power suits have been claiming the bulk of their income as “capital gains.” The Obama budget, if Congress goes along, would nix that claim.

In 2008, 25 hedge fund managers took home at least $75 million. In 2011, under the new Obama budget, the top 25 would pay taxes on most of their millions at a 39.6 percent rate, over double the current 15 percent capital gains rate.

But these hedgies and their awesomely affluent friends really have little reason to angst about these new rates. By any reasonable historical yardstick, they’ll be doing just fine if the new Obama budget gets through Congress as is.

A half-century ago, in 1961, income over $400,000 — around $3 million today — faced a 91 percent tax. In 2011, if the Obama budget plan goes into effect, the top rate on income over $3 million would sit at 39.6 percent, less than half the top tax rate on America’s richest back in the mid-20th century.

Politicos and pundits ignored this historical perspective last week. Debate in and around Congress instead revolved almost totally around hand wringing over the size of the federal budget deficit.

Lawmakers and commentators worried about the deficit, in a more rational world, wouldn’t be ignoring America’s tax-the-rich history, since higher taxes on the wealthy — and the corporations that manufacture them — offer one obvious route to deficit reduction. But mainstream policy wonks in Washington have essentially written off higher taxes on the rich as a viable deficit-reduction strategy.

The latest evidence of that write-off: The mainstream wonks at Washington’s Brookings Institution Tax Policy Center last week promoted a new paper said to prove that “raising taxes only on the rich won’t close our budget deficits.”

This paper, condescendingly entitled Desperately Seeking Revenue, argues that tax increases on the rich would have to be “huge” to bring the federal budget deficit down to manageable levels by 2019, so huge that these rates would imperil national “economic efficiency.”

How high, under this mainstream Brookings Tax Policy Center analysis, would taxes on the rich have to go to significantly narrow the deficit in 2019?

If taxes rose only on couples making over $250,000 and individuals over $200,000, the analysis notes, the top tax rate would have to rise to 77 percent to bring the deficit down to 3 percent of GDP in 2019, the target Obama budget director Peter Orszag has set. To meet the 2 percent target the Tax Policy Center prefers, that top rate would have to rise “to nearly 91 percent.”

That the United States had a 91 percent top tax rate in effect for most of the quarter century after World War II — and survived quite nicely — goes unmentioned in this mainstream analysis. A curious omission. In the 1950s and early 1960s, with a 91 percent top rate in effect, the annual federal deficit never once hit as high as 3 percent of GDP and only once hit as high as 2 percent. These same years saw the greatest increases ever in U.S. middle class prosperity.

Tax rates on the rich, a closer look at the Tax Policy Center analysis makes clear, wouldn’t even have to go all the way to 91 percent to work some serious deficit-reduction magic. The Tax Policy Center experts, in their analysis, have made a series of assumptions that, taken together, overstate the actual tax rate on the rich needed to get the deficit, a decade from now, down significantly.

These assumptions dramatically reveal just how incredibly stunted — on taxing the rich and powerful — the mainstream political imagination has become.

The Tax Policy Center analysts assume, first, that top tax rates between now and 2015 cannot possibly be raised beyond the 39.6 percent the Obama White House has proposed. Second, they assume no increase in corporate taxes.

signupBut if corporate tax rates were hiked — to the point where the federal government received as much of its income from corporate taxes as the government regularly received before the 1980s — and if tax rates on top-bracket income rose over 39.6 percent before 2015, taxes on the rich wouldn’t have to hit 91 percent a decade from now to significantly reduce the deficit.

The new Obama budget actually does include a variety of tax increases on corporations, particularly on those that use their foreign operations to avoid U.S. taxes. But the White House has, notes tax analyst Linda Beale, “scaled back its proposals aimed at companies that shift profits offshore” since last year. What happened? General Electric, Microsoft, Caterpillar, and other corporate giants have been complaining. The White House listened.

The White House now needs to listen to the rest of us. And we need to raise our voices loud enough to be heard.

Sam Pizzigati edits Too Much, the online weekly on excess and inequality.

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2 comments for “Not Soak the Rich, Just a Little Sprinkle”

  1. The gilded class does not want to share any more crumbs than they have to as they work to undo more of what Roosevelt and Johnson accomplished.

    Posted by Lisa M | February 22, 2010, 12:56 pm

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