Conservatives are having epiphanies on tax rates (although not at WSJ).

Here’s the kind of article that I would only expect to find on the pages of Wall Street Journal. A tired and refuted by numerous studies argument for lower taxes on the rich. You see, the author argues, the rich pay a larger share of all income taxes (even more than they paid in 1950s) and thus their taxes should be cut.

In 1958, approximately two million filers (4.4% of all taxpayers) earned the $12,000 or more for married couples needed to face marginal rates as high as 30%. These Americans paid about 35% of all income taxes. And now? In 2010, 3.9 million taxpayers (2.75% of all taxpayers) were subjected to rates that were 33% or higher. These Americans—many of whom would hardly call themselves wealthy—reported an adjusted gross income of $209,000 or higher, and they paid 49.7% of all income taxes.

This is what puzzles me most in such arguments – consistent and probably deliberate refusal to look at other factors of such disproportion, such as increasingly barbell-shaped nature of income distribution. Also, notice how artfully the author uses those making $209,000 to make a point about the rich paying too much taxes, and then turns around and points out that they are not rich at all. Lumping together those making $209,000 and the 0.01% is convenient for 2 reasons: You get to show how large a share of taxes paid by that group while still making an impression on the layman reader that it is the 1% that pay 50% share of all taxes. What share of that 50% is paid by the middle class (and I do consider those making $209,000 middle class) is not explored at all.

The following is a simplistic and extreme example just to illustrate my point. Suppose we have a town with 100 citizens. 98 citizens are making $10,000 and 2 citizens making $500,000: At the flat rate of 35% the 98 guys’ share of total income taxes would be $10,000*98*0.35=$343,000 and the 2 rich guys’ share of total income taxes would be $500,000*2*0.35=$350,000 – more than 50%!! Outrageous, if you dismiss the fact that the 2 guys are making 50 times more than those 98 moochers.

Now imagine that the income is more evenly distributed: 30 guys make $10,000; 60 guys make $20,000 and 5 guys make $100,000 (notice that the size of the total pie didn’t change). Now the share of the top bracket would contribute 5*$100,000*0.35=$175,000. And the share that all others would contribute – I’ll spare you the calculation – $525,000. Could it be that the rich paid less total share of taxes during the times when the income distribution was more even? As was the case in the 1950s?

These back of the envelope calculations would be even more compelling if I used the true rates. In reality, the bottom 30 guys pay no taxes at all (because they are too poor to pay any taxes); the top 5 guys pay 15% (as in capital gains), and the burden of taxation is being carried by those 60 guys in the middle. Since those 60 guys work for a living – they still would pay 35% rate and would generate $420,000 in taxes; but the top 5 guys would pay only $75,000 in taxes. Not only the burden is being carries entirely by middle class, we are not even generating the same amount of tax revenues as we would if everyone paid the same rate.

At this point 2 clashing camps emerge: those who insist that the bottom 30 guys pay their share and those who insist that the top pay the same share as everyone else. I’m in the latter camp. In fact I would be willing to entertain the idea of a flat tax for everybody, as long as 2 conditions are met: capital gains are taxed at the same rate as ordinary income and the bottom guys are paid decent wages, so that paying 35% tax would not break their backs. But because I find that raising minimum wages to a satisfying level is an impossible feat (politically and practically), I, being realistic, simply advocate for raising the taxes on capital gains. And that’s where cries of class warfare begin to emerge. And that’s where I move to my next argument: Why is it that making money on money is supposed to be more sacred and revered than working for wages? Why are “entrepreneurs” (I use quotes, because I do not find anything entrepreneurial about investors who don’t produce anything and more often than not risk someone else’s money) more valuable members of society, as evidenced by tax rates, than teachers and nurses? If top bracket insist that they are “job creators”, shouldn’t Walmart workers, office workers, accountants, IT and other clock punchers insist on being called “business facilitators” and demand equal respect?

If this still seems like a sure path to socialism (or a “road to serfdom”) you have missed some recent epiphanies on the right. Here’s the quote from a recent American Conservative magazine article:

 A capital gains tax rate (making money off money) that is lower than the earned income rate (making money off work) is just not fair. Bestowing that rate on hedge-fund managers through a specially designed loophole is just not fair. Allowing the rich to take mortgage deductions for second and third homes, or for homes worth over $1 million, is just not fair. Allowing business owners like me to take myriad deductions that our employees cannot take is just not fair. But, most of all, allowing the wealthy to pay very low tax rates while interest on the war debt accumulates, deficits continue, and middle-class incomes deteriorate is just not fair.”

At conservative National Review magazine Ramesh Ponnuru seems to be getting a grip on reality: Especially refreshing is this passage:

“The Republican story about how societies prosper — not just the Romney story — dwelt on the heroic entrepreneur stifled by taxes and regulations: an important story with which most people do not identify. The ordinary person does not see himself as a great innovator. He, or she, is trying to make a living and support or maybe start a family. A conservative reform of our health-care system and tax code, among other institutions, might help with these goals. About this person, however, Republicans have had little to say.”

Even William Kristol at the Weekly Standard is seeing the light:

“After all, surely Republican members of Congress understand there’s something crazy about appearing to fight to the death for a tax code in which Mitt Romney and others pay a 14 percent tax on millions of capital income​—​while silently allowing the payroll tax on labor to go up from 13.3 percent to 15.3 percent for all the working stiffs?”

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