Let’s Hear It For The 2% Who Pay Nearly Half Of Our Taxes

There is something terribly wrong with a governing philosophy that is dependant on stripping from the economy as much money as possible to fund its own growth, provide for the unneedy more than for the needy, invest many times more in its elderly than in its youth and which subsidizes favored industries creating distortions that, sooner or later, destabilize the economy.

Somewhere along the line we decided that everyone should go to college, and that the taxpayers should finance this largess regardless of what the student wants to study or what the nation’s demand will be for the skills or knowledge the student is acquiring.  Well, as the saying goes, if you fund it, they will come.  Consequently, student loans were well in excess of $100 billion last year, and total loans outstanding exceeded $1 trillion for the first time. Americans now owe more on student loans than on credit cards, reports the Federal Reserve Bank of New York, the U.S. Department of Education and various private sources.  These student debtors, upon graduating, now have, as a first order of business, paying off this indebtedness at the expense of buying the goods and services that would otherwise drive the economy.

Do we really want a health care system into which everyone must pay and which determines what coverage everyone must have, regardless of what coverage the individual thinks he or she needs or desires?

Do we want the government to provide incentives or subsidies to encourage people to buy rather than to rent homes? Do we really need or want the government to subsidize certain crops, or to encourage the manufacture of goods for which there is no demonstrated demand. We needn’t dwell, in this essay, on where these distortions ultimately lead. And we hasten to add that this is not merely an Obama Administration problem, although he, unquestionably, has become the greatest spendthrift ever to occupy the White House, as his proposed 2013 pseudo-budget demonstrates.

This government interference in the economic life of the country causes distortions that ultimately create great stresses in the economy and tensions within society.

Enough of the 99% versus the 1%!   Half of the people who claim the mantle of the 99% pay nothing into the system aside from their own Social Security and Medicare withholding premiums, which will only cover a small fraction of what they will eventually withdraw from the system (actually, many get a tax credit in the form of cash on the taxes they didn’t pay).

Let’s show some respect for the so-called 1% who pay approximately 38% of all personal federal income taxes, and let’s really tip our hats to the 2% who pay nearly 50% of all personal federal income taxes.  More importantly, let’s insist that the President do something to promote the economic growth of the nation, instead of his total preoccupation with the promotion of his re-election campaign.

So convinced are the President and his handlers that class warfare is the ticket to another four years at 1600 Pennsylvania Avenue, they have proposed budgets their own party, which controls the US Senate, won’t seriously consider, but which will provide tantalizing sound bites for the campaign.

Meanwhile, by stealth, Obama plans to squeeze more money from taxpayers while simultaneously loading those same taxpayers with the responsibility of shouldering ever more government debt, which now exceeds the size of the entire economy.   The popular zeitgeist on ageing that tells us that the 70’s are the new 50’s is now rivaled by the new Obama zeitgeist on tax fairness that tells us $200,000 is the new $1,000,000…at least as far as his tax policy is concerned.

We have addressed in prior essays, for example, what Obama’s proposed tripling of the tax rate on dividends will mean to frugal families who have, throughout their working years, conscientiously invested in conservative, low-risk, dividend-paying equities in order to provide for a decent retirement.  Not only does the Obama tax plan savage these families, but its negative effects also will stealthily ripple throughout the economy.  Of course, the earnings on the investment our frugal family made in those dividend-paying companies have already been taxed as much as 35% at the corporate rate.   In fact, as recently analyzed in the Wall Street Journal, the real taxes paid by our frugal dividend-oriented families’ is about 65% after accounting for the pending phasing out of certain deductions and exemptions, the ObamaCare surtax and the taxes on earnings at the corporate level, which will be taxed a second time when paid out as dividends on an individual’s tax return.

“But Wait!” as the Shamwow guy says on TV. “There’s More!”  You see, IRS data shows rather conclusively, that when government squeezes dividends, corporations, quite naturally, cut back on paying them, and when government eases back on the tax rates on dividends, more companies pay dividends, and tax revenues soar.  IRS data show that when tax rates on dividends were reduced in 2003, tax revenues doubled, and within three years those tax revenues from dividends actually tripled.

Given that the same IRS data show that nearly 75% of dividend payments go to citizens over age 55 and about half go to retirees, the Obama tax plan is a bitter pill indeed.

It is axiomatic that if a society wants less of something all it needs to do is tax it.  Given this Administration’s strong bias against what it calls investment income, we can expect less investment at a time when the economy desperately needs more investment.

Here’s how the President’s plan to squeeze additional revenue out of those retirees’ dividend checks will, stealthily, retard economic growth.  Economists Raj Chetty and Emmanuel Saez of University of California, Berkeley, found that when taxes on dividends were lowered and firms reacted by distributing vaulted money through dividend distribution, much of that capital found its way to ventures with higher growth potential, which is another way of saying that dividend distribution increases capital efficiency  — something about which the Obama Administration shows little or no understanding.

It is estimated that about 100 million Americans own stock either directly or thorough various mutual funds, and tens of millions more through their pension funds. The returns on their collective investments have already been taxed once, at the corporate level.  It is unfair and unjust to tax those returns again when they are finally distributed to millions of investors as dividends.

Given that the top 1 percent—those earning more than $400,000 per year—pay nearly 40 percent of all income taxes and the top 5 percent pay nearly 70 percent of all income taxes, it is clear that we have a very progressive tax system and if it is unfair, it is because so few pay so much of the freight.  So what is all the “fair-share” rhetoric about?  Well, we think it’s about turning the 95% of Americans who pay but 30 percent of the taxes against the five percent of Americans who shoulder the rest of the tax burden. It is bad tax policy, but darn good campaign strategy, especially if one really can, as Abraham Lincoln once said, fool some (or most) of the people all of the time. The President is loath to reduce the size of government so he is calling for another $1,500,000,000 in new taxes over the next decade, which, according to some analysts, squeezes about $3 in new taxes for every $1 in spending cuts as specified in the debt ceiling deal.  Some deal!

Of course, Obama is depending on the people who make less than $200,000 to vote for him, and he might well succeed. He’ll have his larger government, but it will be at the expense of economic growth and, ultimately, the standard of living of future generations.

President Obama spoke smoothly and persuasively about closing loopholes enjoyed by business, but a close look at what he has proposed accomplishes no such thing.  He merely rejiggers the loopholes to businesses he likes. On the issue of closing loopholes the framework does more harm than good. According to the Tax Foundation, Obama’s tax proposal closes six loopholes, out of around 250, while adding eleven – for a net loophole gain of six.  How does he execute this loophole shell game? He identifies industries he doesn’t like (e.g. “oil and gas” “insurance industry” “aircraft”) and takes away their loopholes, but leaves other industries alone. This selective enforcement of tax simplification would be bad enough by itself, but then Obama makes it far worse by expanding other loopholes and creating brand new ones. Among the skeptics is Obama’s own former economic adviser, Christina Romer, an economics professor at the University of California, Berkeley. In a column in The New York Times, Romer argued that there was no economic justification for the government to favor manufacturers over service-oriented companies. “Our earnings from exporting architectural plans for buildings in Shanghai are as real as those from exporting cars to Canada,” Romer wrote.

Obama is betting more than his election on his statist tax and economic policies.  He is also betting the economic growth of the country and the standard of living of generations of Americans to come.