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Income Taxes and Liberal Shibboleths

 

By Kip Dellinger

February 27, 2012 — Warren Buffett tells us that he pays taxes
at a lower tax rate than his secretary.  He’s a liar.  What
Mr. Buffett is referring to is that the tax rate imposed on his dividend
and capital gain income is 15 percent, and he compares it to the higher
rate (perhaps 28 percent) that his secretary pays on her salary. 

However, Mr. Buffett’s salary from Berkshire-Hathaway is surely
taxed at rate higher than his secretary’s is.  And his secretary’s
dividend income is taxed at 15 percent; her capital gain income would
likely be taxed at a lower rate than 15 percent.

More importantly, dividends are paid by corporations after the corporation
has incurred federal and state income taxes, so those dividend payments
are taxed a second time when received by the shareholder.  Even
at an effective federal corporate tax rate of 25 percent, the taxpayer’s
actual tax rate is in excess of 35 percent — that’s the federal
tax rate, to which one would add the double-tax state rate.  That’s
a heck of a lot higher than the tax rate Mr. Buffett’s secretary
pays on her income.

Now there are those who love to remind us that the highest federal
tax rate under Eisenhower was 91 percent (but capital gain still had
a max of 25 percent).  By the time Carter took office, the capital
gain rate was 35 percent and could rise as high as 49.75 percent. 

In interest of disclosure, your writer was responsible for tax returns
of individuals with “over a million dollars” of income in
every decade since the 1950s.  This allows me, as partner in charge
of the tax practice at CPA firms since 1973, to observe first hand
the behavior response of actual, “rich” people to the various
tax regimes over the years – some were very well-known liberals.

Marginal tax rates always need to be taken with a grain of salt because
they ignore entirely the “base” on which they’re levied.
The 50s rate of 91 percent produced a far lower proportion of federal
income tax revenues from the wealthy than did the far lower rates of
the 1980s and subsequent years; capital gain tax revenues along with
the economy stagnated  the 1970s as a result of the confiscatory
rate on that income.

From 1950s through the mid-80s deductions and tax strategies abounded
— and Congress provided many incentives to reduce taxes as a matter
of national policy. Any time rates move to higher levels, it not only
spawns “tax strategies” to offset tax increases, it also
provides a greater incentive for Congress to use tax policy to accomplish
social objectives. 

Moreover, those confiscatory rates existed at a time when state income
taxes were all of 2 or 3 percent, property taxes were nominal compared
to today, sales taxes less than half today’s rates and the costs
of federal, state and local regulation miniscule compared to their
20 to 25 percent drag on the today’s U.S. economy (and worse
in California).

The liberal mantra is to repeal the “2001 Bush Tax Cuts” for
those making over $250,000.  The ignorant members of this crowd
are clueless; the total additional tax revenues, fatuously assuming
no tax strategy changes among “the rich,” would reduce the
deficit less that 5 percent. 

Those who contend it’s “only fair” that the rich pay
more (our President being the most prominent among them) disingenuously
ignore the fact that the “rich” already pay more of the
total tax revenues in this country than any other group – progressivity
at work.  It also ignores the more than $750 billion annual increase
in income tax revenues between 2002 and 2007 – evidence that
the Bush tax cuts served their purpose.

For those who counter that Bush caused the financial meltdown in 2008,
buy yourself a copy of Reckless Endangerment by Gretchen Morgenstern
and Joshua Rosner, curl up in your warm bed, and discover how government
truly is the problem not the solution
as Ronald Reagan told us
32 years ago.  Or try John B. Taylor’s Getting Off Track.

The Tax-the-Rich Crowd believes in steeply progressive, high marginal
tax rates.  It embraces redistribution by punishing the rich as
morally just (thus, the term ‘social justice’ as
mantra) and it does this as an article of faith. An editorial in The
New Republic
last April 25 is illustrative: “The fact is that
much of the moral purpose of government spending is redistribute income
downward – to provide for the least successful and least fortunate
members of society.” 

Now, surely society acting through government should provide for those
unable to help themselves and provide temporary assistance to many
who are displaced.  That’s what the social “safety
net” is about. But to accept as dicta that “the moral purpose
of government spending is to redistribute income downward” is
pure Marx. 

Tellingly, we did once embrace Marx without admitting it.  The
progressives’ dream of graduated tax rates was born in Great
Britain in 1910 with a top rate of 8.25 percent and arrived in the
United States in 1913 with a top rate of 7 percent. The arrival was
accompanied by the progressives’ assurances that they sought
only to achieve “equality of sacrifice” and therefore only
moderate progressively graduated rates would ever exist.

One could follow by saying:

“Yet within 30 years, those figures had risen to 97 ½ percent
and 91 percent.  Thus, in the space of a single generation what
nearly all the supporters of progressive taxation had for half a century
asserted could not happen came to pass… All attempt to justify
these rates on this basis of capacity to pay was, in consequence, soon
abandoned, and the supporters reverted to the original long-avoided
justification of progressivism as a means of bringing about a more
just distribution of income.’

Ah, but of course, if I claimed that statement as my own, it would
be plagiarism.  For it belongs to Nobel Prize-winning economist
Friedrich A. Hayek and appears in The Constitution of Liberty: The
Definitive Edition
(1960).

Today, in the early 21st Century it translates to then-candidate Obama’s
2008 arrogant “let’s spread the wealth around” comment
to Joe-the-Plumber.  That would be the same candidate who admitted
that if capital rates went up, actual tax revenues would decline – but
that was OK because it was more “fair.” That candidate is
now implementing his policies as President and not the least concerned
the destruction of overall wealth in this country as long as we’re
more equal.

The progressives among us never tell us precisely how high they would
raise marginal tax rates nor at what income levels, and when they would
say “enough is enough.”  But then for the progressive,
there is never enough.  We see a lot of these folks in Santa Monica.

As John Ramsey McCulloch said in 1833: “The moment you abandon
the cardinal principle of exacting from all individuals the same
proportion of their income or of their property, you are at sea without
a rudder or compass, and there is no amount of injustice or folly
you may not commit
.”

Or as Hayek put it: But the argument based on the presumed justice
of progressivism provides no limitation, as has often been admitted
by its supporters, before all incomes above a certain figure are confiscated
and those below left untaxed. Unlike proportionality, progressivism
provides no principle which tells us what the relative burden of different
persons ought to be.  It is no more than rejection of proportionality
in favor of discrimination against the wealthy without any criterion
for limiting the extent of this discrimination
.’ [Emphasis
supplied in original text.]

In other words, it is discrimination posing as social justice and
enforced by the power of the state.  One has to laugh when progressives
lay claim to the moral high ground.

February 28, 2012
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