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Thursday, April 1, 2010

It's Time To End Entitlements For The Wealthy

The sense of entitlement by the wealthy never ceases to amaze me. The wealthy are no smarter, nor do they work harder, than anyone else in society [and for those that think so, I can point to examples of wealthy and poor who are dumber than rocks and who don't work hard]. The continued right wing claim that a robber baron whose company purchased another with borrowed funds, fired a bunch of people to show “profit” at the end of the quarter, then bankrupted both companies by strategic errors is “smarter” or that he “worked harder” than other people and therefore deserves his $100 million bonus is so blinded by ideology that he cannot see the facts.

So here is a fun fact, from the IRS, about the super wealthy–they paid an effective tax rate of 16.6% on their average income of $344.8 MILLION, a tax rate slightly lower than my tax rate, because of loopholes, capital gains and other tax gimmicks that favor the wealthy.

Here’s another fun fact about how the tax system transfers wealth from lower income people to the wealthy—Social Security tax is paid on wage income up to $106,000 at a rate of 7.65%. An individual making $50,000 per year has $3825 taken out of his wages. An individual making $2.5 million has $8109 taken out of his wages, for a net tax rate of .00325%. The lower paid person pays a rate 2,354 times HIGHER than the millionaire.*

All the screaming by the wealthy that they pay too much serves to disguise the fact that they pay too little and benefit from a tax code that is riddled with special favors and tax breaks for the wealthy that the rest of us do not get.

If we really want to fix the structural deficit and our national debt we could start by removing all those tax breaks for the wealthy and for corporations from the tax code so that they pay their fair share.

We have all heard the protest of the “Tea Party” movement that taxes are too high, but the facts seem to suggest otherwise. The objective of the tax cutting movement is to lower the “marginal” income tax rates to benefit the wealthiest Americans and the essence of the argument supporting lower marginal income tax is “fairness” and the tactic is a proposed “flat tax” that everyone would pay at the same rate that would have the added benefit of simplifying the tax code.

The question of “fairness” is a complicated one and could be answered in different ways depending on what values and assumptions are considered, but regardless the practical effect of lowering taxes on the wealthy inevitably involves shifting more of the burden onto the middle class and the poor.

It is reasonable to argue that “fairness” of the tax burden means fairness in terms of ability to pay and that those who are wealthy have profited more from society and should pay more for its support. It is also obvious that requiring a wage earner with a middle class income to pay 10% of their income as tax, which cuts into the amounts required for food, clothing and shelter, creates a much greater burden on the middle class than 10% tax on the income of a millionaire creates on the lifestyle of the wealthy.

Contrary to the argument made by the wealthy, lowering taxes on the wealthy and shifting the burden onto the middle class involves a wealth transfer (redistribution of wealth) from the lower and middle class to the wealthy, and that cannot be fair in any reasonable sense of what “fairness” means.

It’s time to end the entitlements for the wealthiest American taxpayers that are built into our archaic tax code.


* In a recent email I was asked the source for that data. There is no link to an external source. I did those calculations myself. Here are the actual calculations:

$50,000 x 7.65% = $3825 total social security tax on the individual.

$2,500,000 income is taxed only on the first $106,000. $106,000 x 7.65% = $8109 total tax on the individual.

$8109 divided by $2,500,000 is a rate of 0.0032436%.

The person making $50,000 pays 7.65% of their income ($3825) to social security.

The person making $2,500,000 pays 0.0032436% ($8109) of their income to social security.

7.65% (the rate paid by the lower income) divided by 0.0032436% (the rate paid by high income) is 2,358 times higher.
This is not fair or reasonable by any measure of fairness. Even advocates of a flat tax (same tax rate for everyone) would have to concede the inherent bias in favor of the wealthy of this particular tax.

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