Monday, September 26, 2011

Class Warfare

The Associated Press (via the Wall Street Journal's James Taranto) writes of the President's "Buffett rule" idea:

"Warren Buffett's secretary shouldn't pay a higher tax rate than Warren Buffett. There is no justification for it," Obama said as he announced his deficit-reduction plan this week. "It is wrong that in the United States of America, a teacher or a nurse or a construction worker who earns $50,000 should pay higher tax rates than somebody pulling in $50 million."

On average, the wealthiest people in America pay a lot more taxes than the middle class or the poor, according to private and government data. They pay at a higher rate, and as a group, they contribute a much larger share of the overall taxes collected by the federal government.

The 10 percent of households with the highest incomes pay more than half of all federal taxes. They pay more than 70 percent of federal income taxes, according to the Congressional Budget Office....

There may be individual millionaires who pay taxes at rates lower than middle-income workers. In 2009, 1,470 households filed tax returns with incomes above $1 million yet paid no federal income tax, according to the Internal Revenue Service. But that's less than 1 percent of the nearly 237,000 returns with incomes above $1 million.

This year, households making more than $1 million will pay an average of 29.1 percent of their income in federal taxes, including income taxes, payroll taxes and other taxes, according to the Tax Policy Center, a Washington think tank.

Households making between $50,000 and $75,000 will pay an average of 15 percent of their income in federal taxes.

Lower-income households will pay less. For example, households making between $40,000 and $50,000 will pay an average of 12.5 percent of their income in federal taxes. Households making between $20,000 and $30,000 will pay 5.7 percent.

The latest IRS figures are a few years older — and limited to federal income taxes — but show much the same thing. In 2009, taxpayers who made $1 million or more paid on average 24.4 percent of their income in federal income taxes, according to the IRS.

Those making $100,000 to $125,000 paid on average 9.9 percent in federal income taxes. Those making $50,000 to $60,000 paid an average of 6.3 percent.

The country can have a reasonable debate about whether the very wealthy should pay even more in taxes than they do. The country can have a related reasonable debate over the capital gains tax rate, various tax breaks that both reduce tax revenue and create market distortions.* But we can’t have a reasonable debate in which one side says, falsely, that, on average, millionaires pay less in tax, or at a lower tax rate, than middle-class workers.

This reminds me of the debate over the merits of raising the minimum wage back in the mid-90s. Economists David Card and Alan Krueger (the same Alan Krueger who is now tapped to head the Council of Economic Advisors) conducted a study of the effect on employment of raising the minimum wage in New Jersey, and concluded that the higher minimum wage actually increased employment. Now, one could imagine that the effect on employment was essentially zero, or, more likely, that a small decrease in employment occurred but other factors that the authors couldn’t control for more than offset the decrease, but it’s not possible to have a serious conversation about the minimum wage if one side insists that demand curves for labor slope upward.

If, indeed, Warren Buffett - reportedly worth many billions of dollars - is paying a lower average tax rate than his secretary, shame on us. However, if he understands that this is a bad situation for the country and continues to do so while lobbying to have the rule changed, shame on him.

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* For example, mortgage interest deduction, which benefits the middle class (as the poor tend not to own houses and the very rich tend not to have mortgages), encourages home ownership at the expense of the rental market. While home ownership has its benefits, it has costs as well, including increasing the costs of moving.

6 comments:

Edward Pearse said...

A someone who lives in a country where the minimum wage is $15.50 an hour (Federally Mandated, which means States may not set theirs below this) and has free basic public health care, the squabbles of the US over who is and isn't paying enough often leave me wondering whether slavery has truly been abolished in the US or just replaced by indentured servitude.

Warren Buffett didn't get millions of dollars without understanding the tax law. I'm sure Trusts and Tax minimisation are a large part of it. No-one pays more tax than they have to. Even Billionaires who may think the system needs redesigning.

To be perfectly honest it;s not your tax laws that need fixing, it's your pay rates. In Wyoming a tipped employee can get paid as little as $2.13 an hour. Which explains to me why people in the US no longer consider a tip as a thankyou for something well done, but an entitlement.

One of the big complaints that I've seen kicking around the place is the claim that 50% of the population pay no tax. What's not said is that usually these people don't earn enough to get over the tax threshold. I'm sure there are vast numbers of them who would love to be able to pay more tax because they're now earning more money.

Personally I don't see anything wrong with an extra tax on people earning over $1 million a year. This is usually what they're taxed on anyway. The stock options and bonuses that they earn ON TOP of their $1 million+ salary are usually franked so they don't pay tax, or offset against gross company earnings to minimise tax there as well.

The top 20% of the US earns half the nation's income. Yet for the bottom 15% they get barely 3.5% of the total income.

I could probably go on at length about this but then my country would be considered an "evil Socialist" country by some of the US's more right wing nut jobs. (Why yes Fox News I'm looking at you). Hell even Canada gets called socialist.

It's nice to make money. But there are consequences to letting Capitalism run unchecked.

Rhianon Jameson said...

As I said, one can have an honest argument over the proper rate of taxation, including the size of any disincentives to earn. I think the evidence is pretty strong that sufficiently high marginal rates induce the well-off to find tax havens elsewhere. (Recall that a fed-up George Harrison wrote "Taxman" - "That's one for me, nineteen for you" referred to the 95% marginal rate in Britain at the time.) The evidence is pretty weak that small increases in taxes from what are today's relatively low rates will have a significant effect on wealth - and thus jobs - creation.

But the evidence is also pretty compelling that, at the lower end of the spectrum, a permanent welfare state reduces the incentives of people to find meaningful work. Incentives matter.

(As for pay and tips, I'll note that there's a chicken-and-egg issue here: at some point in the minimum wage discussion, it was noted that many service workers earn much of their wages through tips, so the minimum wage on those workers didn't need to be as high to achieve the same result.)

I won't rehash the government-versus-private sector health care provision debate, but it's clear that such a system costs a great deal of money. Again, it would be worth having a serious argument about tradeoffs - but in a world where one political party won't concede that Cowboy Poetry Festivals are probably not something the Federal government should be funding (or, to use a more recent scandal, a party that feels no shame in providing a half-billion dollar loan guarantee to a firm without a reasonable business plan, all in the name of "green jobs"), it's impossible to have a serious argument.

All that ends up happening is that friends passionately debate deeply-held beliefs. :)

Fogwoman Gray said...

Having put in my time as a waitress during college in the late 90's:
I made $2.15/hour and was required to report all my tips for tax withholding. I had no health insurance, as we did not work 40 hour weeks.
We worked the lunch rush for 2-4 hours and rotated turns working dinner (much better tips) and did good to work 20 hours a week. Usually our paychecks were a couple of dollars after withholding. I was lucky since I had a husband with a job. Lots of the women I worked with were single moms who spent a lot of time praying they or their kids did not get sick. These are the working poor, who pay taxes and who wind up having to use the emergency rooms of state funded hospitals as primary care.
This applies to the waitstaff, bartenders, hostesses of most restaurants in many places in the US. A few states have minimum wage laws that apply to tipped employees as well http://www.dol.gov/whd/state/tipped.htm. Note that DC requires only $2.77/hour for tipped employees. And that the minimum tips needed to qualify you as a tipped employee federally is $30.00 a MONTH.

Rhianon Jameson said...

Youngster. :)

I've mentioned before that I have been fortunate in never having worked in a tipped job. (Doubly fortunate, because no doubt my attitude would have been a problem for yielding good tips.) Despite that handicap, I think I have an appreciation for the job. It looks tough and thankless.

But consider that many of the people in the profession are doing just what you did - finding a temporary job to make ends meet while they are on their way to something better. My version of a tips job was as an office temp - much nicer setting, no tips, a fixed hourly wage - but the same deal of no insurance, no security, no guarantee of hours.

Those who are in those jobs for the long haul have my sympathy; those are no positions to make careers out of. But those are the very jobs that can disappear overnight if costs go up. Restaurants often operate on thin margins (well, McDonald's, not so much, perhaps, but most restaurants) where costs matter. Better wages may mean that 95% of the single moms you knew had a better living - and the other 5% had no job at all.

I'd be okay with the country having that argument - and finding some other way to help that 5% that no longer can find work in the market. But, as the Card and Krueger study showed, you can't have that discussion when even smart people won't admit that there is a tradeoff between higher wages and lower employment.

I don't expect politicians to get involved in minutae, but I do expect them to make some effort to get the basics of the arguments right. Alas, I'm often disappointed. :)

Fogwoman Gray said...

Heh, not that young - I took nearly 20 years getting a bachelor's degree :)

Rhianon Jameson said...

Heh. That's what happens when I make assumptions!