Are the Rich Over Taxed?

The Obama Administration annoys me. It legislates horrendously complicated healthcare legislation. It applies Keynesian pseudoscience to attempt to restart the economy, driving up our deficit ever higher.

Conservative talk show hosts annoy me even more. They pontificate over how bad Obama is about the deficit even though most of the deficit was inherited from the Bush Administration. Moreover, back when Clinton achieved a budget surplus (cash basis, not actuarial basis!) they whined about being overtaxed. Finally, they and the Republicans in Congress are fighting for tax cuts for the rich.

I am not so sympathetic to the plight of the rich. Yes, they pay a lot of taxes. But they have tax loopholes you can drive a truck through. They get protection of their wealth from the government, including restraints on competition. They get a subsidized return on passive investments because of the monstrous federal budget deficit. And don’t get me started about retroactive extensions of copyrights, and bailouts for the financial industry.

The rich are getting a fine return on the 15% tax they pay.

That’s right. 15%. That’s the long term capital gains tax. This is lower than the marginal tax rate for median income wage earners. Wage earners pay more than that in Social Security and Medicare taxes (14.2% effectively). A 10% income tax rate puts Joe Size Pack in a higher tax bracket than Bill Gates.

OK, the rich also indirectly pay corporate income tax on the stocks they hold. So does Grandma, on whetever she hold in her retirement account. This doesn’t strike me as progressive.

Here is my proposal:

  1. Fold FICA and Medicare taxes into the income tax to make a flat tax rate of 25% up to a half million dollars a year or so.
  2. Have a somewhat higher (but not outrageous) tax rate for higher than a half million per year. Maybe 35%.
  3. Treat capital gains, dividend income, wages, etc. equally.
  4. Replace all deductions and exemptions (other than charity) with a fixed amount of free money.
  5. Instead of an estate tax, treat gifts and inheritances as ordinary income…maybe.

The last provision is a bit harsh on farmers and small business owners. Clobbering people with taxes when a loved one dies is rather mean-spirited.

So here is a possible alternative: set the tax basis on all non-cash gifts and inheritances at zero. You pay when you cash out, if ever.

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  1. There are two main problems with this logic – first this group does the best when the economy is growing exactly because they are the most innovative and are willing to take risks and second in the new economic season their incomes will fall anyway leaving much less to be taxed and redistributed leaving a sizeable hole in the already unthinkable deficit. From the most basic notion that the stimulus plan would actually stimulate something to the blunt force ideas tax those high earners expecting them to earn as much tomorrow as they did yesterday to the more subtle misconceptions GDP will be slightly negative this year and then grow dramatically next year bringing down the deficit we are layering ourselves in programs designed for an economy that no longer exists.

  2. Most rich people are rich because they can collect a premium from the people they employ, not because they are more innovative or more willing to take risks. Indeed, the rich are mainly risk averse – especially as their corporations get larger. Their main talent is preventing innovation by others due to their advantages of scale. This is why a decently set up cooperativist movement will eventually beat capitalism if it provides incentives for actual innovation rather than conformity.

    My plan is a slow and accelerating move to personal accounts to replace Old Age and Survivors Insurance, with personal accounts holding shares in the employing company (2/3rds and in an insurance fund of all such companies 1/3rd – which gives 1/4th of shareholding strength the ability to convince the insurance fund to join with them to take over the company should their be any malfeasance – thus keeping mangement in line). I would take the cap off of this tax and eventually make it employer only funded, with each employee getting an equal share of the employer contribution so that age cohort members all have the same voting strength regardless of salary. Note that this equal strength will eventually lead to open auctions for management positions, which will flatten salaries and take care of the equality problem.

    I would have a 13.3% VAT to fund discretionary spending which takes place within CONUS – both military and civil.

    A 4% to 28% income tax would fund debt repayment, net interest and overseas military adventures and naval sea deployments – the higher rate accounts for the fact that a VAT only collects so much from the rich, who spend less at higher incomes.

    A 33.6% business income tax would fund the social service departments, including health, education and corrections (which should be medicalized since most of these costs have to do with the war on drugs). This includes 6% which will be refunded back to families through their employers for a $6000 per child tax credit and to preserve the employer health insurance exclusion. Under this tax, all value would be taxed (not just profit).

    This chimes in with the Treasury estimate of what a Fair Tax would cost, by the way. 47% is the rate the Fair Tax would really cost.

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