Thursday, September 09, 2010

Another Upper Class Myth

Greta von Susteren accurately laid out the issue for her GOP TV viewers at On The Record when on Wednesday she explained

Orszag publicly breaking with the administration! Now, Orszag in the column published endorses extending the Bush tax cuts for two years, but then ending them in 2013.

But that's not what his now ex-boss, President Obama, supports. President Obama wants a permanent, not temporary, extension of the Bush tax cuts for the middle class but wants the Bush tax cuts for the richest 2 percent of America to expire at the end of the year.

But say it ain't so, Greta! A few minutes later she would allege

Now, the rich may need to pay more for whatever reason, because we need to get the economy going or whatever, but they certainly were paying their fair share in that they were paying everything that was asked of them.

On one level that's undeniably true. If a wealthy taxpayer did not pay the amount on the bottom line of the return, he/her presumably would be handcuffed and led out in a perp walk. Otherwise, however, the rich are not "paying everything that was asked of them."

In August, Reuters reported

Most U.S. and foreign corporations doing business in the United States avoid paying any federal income taxes, despite trillions of dollars worth of sales, a government study released on Tuesday said.

The Government Accountability Office said 72 percent of all foreign corporations and about 57 percent of U.S. companies doing business in the United States paid no federal income taxes for at least one year between 1998 and 2005.

More than half of foreign companies and about 42 percent of U.S. companies paid no U.S. income taxes for two or more years in that period, the report said....


of the 275 Fortune 500 companies that made a profit each year from 2001 to 2003 and for which adequate information to draw conclusions is publicly available, only a small proportion paid federal income taxes anywhere near that statutory 35 percent tax rate. The vast majority paid considerably less.

Over that three year period, 28 corporations generated enough tax breaks that they were entitled to tax rebates from Washington and received more in revenues after, than before, taxes.

As for corporations, so it is with individuals, though to a lesser extent. As (from which the graph is taken) noted, in February, the IRS released an analysis (in PDF) of the 400 richest tax filers from 1992 to 2007, in which the

finding drawing the most attention is that these 400 earned about $138 billion, collectively, in 2007, the most recent year of data. In contrast, the bottom 90 percent of Americans, over 24 million filers, earned $247 billion.

One less-noticed finding in the report is that the super rich have been paying smaller and smaller portions of their incomes to taxes. The chart below shows the effective tax rate for the richest 400 American filers from 1992 and 2007. The blue line represents the highest income tax bracket, the red line is the tax rate on long-term capital gains, and the orange line is the average tax rate that the richest 400 filers actually paid.

These 400 wealthiest accrued an average of $345 milllion in 2007 and paid approximately 16.5% in federal income tax. That would be the relatively progressive federal income tax, rather than the more regressive property tax, state income tax, and FICA (Social Security and Medicare) tax. The 16.5% compares to the 35% rate set in the tax code for income above $373,650. (Even given the lower rate paid by the wealthy for income below that figure, the presumptive rate for that taxpayer would be close to 35% because the vast majority of his/her income is above $373,650.)

So the rich have not paid everything that was asked of them. Now, the GOP and some Blue Dog Democrats want their rates dropped to the level resulting from the tax cuts enacted in 2001 and 2003 by a Republican Congress under a Republican President, which directed that the cuts expire on January 1, 2011.

Lowering rates for wealthy individuals, who customarily save a greater portion of their income than do middle class taxpayers, will do little to rev up the economy. Instead of spending those extra dollars at a WaWa or 7-Eleven convenience store for milk, at the gas station for fuel for the work commute, for health care, or to pay the mortgage or the rent, wealthy persons will save some of the money and seek the greatest returns for the rest. As Reuters noted, "the GAO said corporations escaped paying federal income taxes for a variety of reasons including operating losses, tax credits and an ability to use transactions within the company to shift income to low tax countries."

Nor is it likely that lowering the marginal tax rate at the upper end of the income spectrum would spur GDP growth. Writing in Slate in February, Elliot Spitzer, observing "there is no correlation between higher marginal tax rates and slowing economic activity," presented the following graph:

There is little economic reason for extending the Bush tax cuts for the wealthy. There probably would be no political reason, either, were Democrats this fall to say: Republicans are for lower taxes for the wealthy; we're for lower taxes for the middle class.

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