Tax System Favors Wealth Over Work

Sunday 07 November 2010

by: Gerald E. Scorse, t r u t h o u t | News Analysis

Tax System Favors Wealth Over Work
Warren Buffett. (Photo: Mark Hirschey)

Tea Partiers rage against taxes and say they’re too high. Wrong, says billionaire Warren Buffett: on the rich, they’re too low.

The tax code holds the answer to this standoff, and the code backs Buffett. Taxes may be the bane of the Tea Party, but they’re a relative boon for the wealthy. Let’s look at some of the ways America’s tax system keeps Warren Buffett’s fortune in Warren Buffet’s hands.

The major vehicle is George W. Bush’s 15 percent levy on long-term capital gains - the lowest since FDR’s first term - and on corporate dividends. The top 1 percent of US households owns nearly 40 percent of all privately held stock, from which the dividends flow. Similarly, the super-rich get more than half their income from capital gains, as documented by tax expert David Cay Johnston in his book “Perfectly Legal.” In the meantime, for the working middle-class, the tax rate on wages is 25 percent.

Taxing income from wealth at little more than half the rate of income from work: it’s the perfect recipe to make sure that Warren Buffett (and all the Buffett wannabes) pay effective tax rates far below what their incomes suggest.

How far below? In 2006, Buffett told an interviewer that his tax bill was “far, far less as a fraction of his income than the secretaries or the clerks or anyone else in his office” (and he repeated the statement only recently). His shame in 2006 hits home still: “How can this be fair? How can this be right?”

The tax code sets marginal rates too, and these were gutted by President Reagan in 1981 and again in 1986. He slashed the top rate from 70 to 28 percent, and made the code even less progressive by cutting the number of brackets from 15 to four. The yearning for tax simplification (fewer brackets) trumped the case for progressivity (more brackets).

There are six today, with the top four taxed at 25, 28, 33 and 35 percent - a narrow spread, easily offset by provisions like the capital gains rate. The top rate kicks in at about $400,000 of taxable income, a practice Johnston told Truthout he finds “bizarre.” It’s a long way, he argued in a recent email, from $400,000 to $1 million, $5 million, $100 million and hedge-fund billions: “Why don’t we have higher rates for those incomes?” he asked.

Even the bottom marginal rates help top earners. A millionaire, filing singly, pays the same 10 percent on the first $8,375 of taxable income as the working poor, and so on, up the income scale. As the Center on Budget and
Policy Priorities notes, the real winners from extending Bush’s middle-class tax cuts wouldn’t be middle class: “In fact, a family making more than $1 million will receive more than five times the tax cut benefit, in dollar terms, as a middle-class family making $50,000 to $75,000 … ”

The tax code is also loaded with deductions that effectively rain down dollars on the rich. The code doesn’t overtly discriminate, but it’s hardwired to make every tax break worth more at the top. All deductions get written off at 35 percent, starting with personal exemptions and standard deductions. This alone trims $7,315 off the tax bill of a post-65-year-old couple. The serious money goes to itemizers, with Uncle Sam handing out five-figure amounts to help pay mortgages on pricey real estate. (Step limits on personal exemptions and itemized deductions are set to return in 2011. The limits expired in 2010 as the last phase of Bush’s 2001 tax cuts.)

President Obama once proposed capping the mortgage interest deduction at 25 percent, the middle-class rate. His idea was attacked as class warfare and quickly died. This summer, in a piece titled “The Class War We Need,”
conservative columnist Ross Douthat was aghast to learn that the owners of McMansions were defaulting at twice the usual rate. “The rich are different from you and me,” he wrote. “They know how to game the system.”

They also know that Congress always stands ready to tilt the tax laws their way. When the market crashed in 2008, lawmakers rushed to pass a one-year suspension of required distributions from retirement accounts. Only the haves stood to gain. Those who actually needed the distributions had to take them and pay taxes. The haves took a pass and saved thousands. Back to Douthat: “In case after case, Washington’s web of subsidies and tax breaks effectively takes money from the middle class and hands it out to speculators and have-mores.”

It’s taken a fortune in lobbying and campaign contributions, but America’s tax system is bearing golden fruit. As even a conservative can see, it’s shifting income to the wealthy.

This work by Truthout is licensed under a Creative Commons Attribution-Noncommercial 3.0 United States License.

Comments

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Excellent article, but it is

Sun, 11/07/2010 - 13:32 — Linda (not verified)

Excellent article, but it is also important to discuss what happened to the "alternative minimum tax" under Bush. The tax laws were changed to EXCLUDE dividends and capital gains taxes from the AMT, making this a tax that increasingly hits only the middle class, who get most of their income from wages. Not bad for a tax that was put in place to assure that the super-wealthy paid at least some income tax! The AMT has NEVER been adjusted for inflation, and is subject to a yearly battle in Congress to keep it from reaching ever lower on the income scale.

Also note that inheritance

Sun, 11/07/2010 - 13:56 — Anonymous (not verified)

Also note that inheritance taxes have fallen to zero. From what I understand, people like Bill Gates have never paid taxes on most of their wealth because it remains in stock that has never been sold, so gains have never been "realized." When he dies, this untaxed wealth is passed along to his billionaire kids who never worked for it. And if they sell it, they never pay a tax on their dead Dad's gains since the inheritance was revalued to the day Bill Gates died.

The tax code benefits the

Sun, 11/07/2010 - 15:15 — RoughAcres (not verified)

The tax code benefits the rich?

I'm shocked, shocked.

You're just now realizing

Sun, 11/07/2010 - 16:37 — nazani14 (not verified)

You're just now realizing that corporations are the biggest "welfare queens" out there?

I doubt that he is just now

Sun, 11/07/2010 - 19:44 — Mike Haubrich (not verified)

I doubt that he is just now realizing it, but it needs to be brought to light often that the rich benefit from government far more than the poor and the middle-class.

Any benefit sought for the lower and middle class (economically) are echoed as being welfare and that our tax dollars are being used to support the lazy ones who haven't happened on wealth.

One of the odd things that I run into is that people at work sincerely think that the rich should get the breaks; "they deserve them," while the poor should be paying their share. These are working class people who think this way because they have bought into the idea that someday soon, they will be wealthy themselves.

this author should support

Sun, 11/07/2010 - 20:27 — Anonymous (not verified)

this author should support the FairTax on this basis then: everyone and every good would be taxed at the same rate

That FairTax...that's like

Sun, 11/07/2010 - 21:21 — Anonymous (not verified)

That FairTax...that's like the people in my town rejoicing that the latest valuation of the Town showed a drop in the average value of a home. They were celebrating the idea that their taxes would go down. Silly Wabbits! It costs the same amount of money to run the town and schools, so their home value went down, but the tax rate will go up. Bummer! Welcome to reality!
So, with a FairTax, the top 5% paying 40 or 50% of the taxes would now pay 5% and the remaining 35 or 45% would be laid upon the backs of the rest of the 95% of us. Expect to pay at least 50% more in taxes.
Even if you cut all the social welfare programs, all the agencies, you would still be funding the military and it's entitlement programs (Right? Or will you tell those veterans to go pound sand now?).
FairTax...hah!

In 2006, according to

Sun, 11/07/2010 - 21:29 — Anonymous (not verified)

In 2006, according to taxfoundation.org, 41% of the US population paid no income tax. Warren Buffet should pay more, and everybody should pay something.

The reason that 41% paid no

Sun, 11/07/2010 - 22:28 — AML (not verified)

The reason that 41% paid no income tax is that the incomes were below the poverty line, and that percentage will grow until the top 2% start putting in their fair share again.

The Bush Tax cuts were passed through "reconciliation", (if that term sounds familiar, it's because the GOP has been railing against it in this administration). And since they were designed to expire, the vacuum left is the deficit that will occur if they don' expire. $700 million added to the deficit. But heaven forbid we should inconvenience our billionaire friends.

The GOP is also claiming that extending the cuts would stimulate job growth, which is a myth. The cuts have been in place since 2001 and have shown no evidence of stimulating job growth, even in a decent economy.

One compromise would be to raise the ceiling for the extension to $500k or $1 million.

As Jim Hightower's dad would say, "When everybody does better, EVERYBODY does better." The wealthy have higher taxes, but their income goes up as well.

I prefer a flat tax.

Sun, 11/07/2010 - 23:39 — Anonymous (not verified)

I prefer a flat tax. Everyone should have to pay $100K/year to be a US citizen. Only citizens should be allowed to own real property or businesses. :)

Two pervasive

Mon, 11/08/2010 - 08:51 — Anonymous (not verified)

Two pervasive mis-perceptions among voters is that the wealth "deserve" low taxes and that someday they too will join the ranks of the rich. To help combat the latter, we need to reveal just how the current wealthy attained their riches. I believe the top two methods are inheritance and marriage. If we could show that a overwhelming percentage of today's wealth was gained via those two methods, we would have some good ammo.

A couple of things I would

Mon, 11/08/2010 - 09:35 — sdcloke (not verified)

A couple of things I would like to clear up here, and I can't believe people or so fickle.
The Bush tax cuts that went into effect in 2001 and set to expire this year; From 2001 - 2008 depending on the math and what stat. you read, the Bush administration created 1 million to 3 million jobs, OVER THE ENTIRE 8 YEARS! Hardly a case for the tax cuts creating more jobs, and this should be brought up every time a Republican tries to lie and say they will.
For proponents of a flat tax or a consumer tax; The major problem here is that rich people don't pay for goods and services as you and I do, and corporations use no goods or services for the most part. Let me over simplify this with an example; Years ago as a bartender, I never paid for a drink in the town I worked in, and no other bartender paid for a drink in my bar, so I in turn never paid for a drink in their bar. Same with movie stars, they do not pay for their designer clothes, they do not pay when they go out to eat, etc. it amounts to a barter system for the elite.

The biggest problem is that

Mon, 11/08/2010 - 12:26 — Anonymous (not verified)

The biggest problem is that voters believe taxes on the rich are too high, and lowering taxes will allow the rich to give them jobs.

Talking about percentages of percentages of billions of dollars just makes people less likely to even try to understand.

Tea partiers like Sarah

Mon, 11/08/2010 - 17:02 — Anonymous (not verified)

Tea partiers like Sarah Palin, don't have a clue

Looks like the 2 references

Mon, 11/08/2010 - 18:15 — G. BUD Budlong (not verified)

Looks like the 2 references to the FairTax.org have no idea how it works or what it does.
It doesn't tax everything and everyone the same.
It taxes ONLY NEW items and services...so want to pay less tax don't buy new stuff.
It has a "prebate" which is calculated on the poverty level...why higher than you might think...and that covers the poor and the basics that they need...so they would pay very little tax.
The greatest benefit is there is no exemptions or exclusions for anyone so if you buy new stuff you pay taxes on them. Rich poor criminal and illegal alike would pay if they buy the right things.
Go to the website and do your research and stop listening to Faux Noise or the Congress protecting their tax code bargaining chips and the Unionized IRS workforce voting block.

I like articles like these,

Tue, 11/09/2010 - 14:02 — Anonymous (not verified)

I like articles like these, but to seal the deal, it seems to me that the likely response from the "tax cut" crowd needs to be squarely addressed.

For they will claim that it's fine if the tax regime benefits the rich, because that keeps their money in the economy, available for loans, expansion of businesses, increases in jobs, etc. that benefit those that don't benefit as much from the tax regime. They will claim that it's simply a matter of efficiency, about what's best for the economy as a whole, and so for working Americans as a whole.

Without a fact-based refutation of such arguments, I think that articles like this one, about the disproportionate benefit that goes to the wealthy, will continue to fall on deaf ears. I also notice that, in the linked NYT article featuring Mr. Buffett's hand-wringing over the injustice of the current tax regime, there was no mention of any Buffett-backed campaign to change that regime.