Ellington

 
The national conversation on our fiscal health for the past few months has been about whether to extend the Bush-era tax cuts for households with incomes over $250,000, or to allow them to expire on December 31st. To my amazement, lost in all this controversy and discussion has been any mention of what this would really mean for high-income people in the context of historical tax rates.

 
During the 1950s this country was flourishing economically and adding new jobs that moved millions of people out of poverty and into the middle class. What kind of tax policy was in place during this period, those years after World War II when the Baby Boomers were growing up?
 
What was the top marginal tax rate during all eight years of the Eisenhower Administration?  91 percent! The increase proposed for today's rates seems paltry, and the top rate seems very low, in fact too low, and incongruent with the needs of the country for investment right now in education, health and infrastructure.
 
This comparison is also true when looking broadly over the mid-century; during the years from 1935 to 1980 the marginal rates were never below 70 percent.
 
One can only wonder what the big fuss is all about. 
 
Right now people pay income taxes on a sliding scale between 10 percent and 35 percent. If the Bush-era tax cuts expire on December 31, the rates would return to between 15 percent and 39.6 percent. Less than one percent of taxpayers now pay the 35% (according to the Wall Street Journal) and less than four percent pay 33 percent. If the tax cuts are allowed to expire, the top tax rate of 39.6 percent would only apply to those whose income, adjusted for inflation, exceeds $363,000 per person.
 
So in reality, the big controversy over the extension of tax cuts boils down to a mere 4.6 percent for those making over $363,000! And remember, they pay that extra amount only on incomes over $363,000, not their entire income. Based on the arguments and emotional forcefulness of those who want all tax cuts extended, one would think that the rates we are talking about are historically high rates. Top rates of 35 percent and 39.4 percent aren't even close to historic highs.
 
At a time when reducing the deficit is a main concern of both the public and of policy makers, it seems incredible that there is even any discussion about this. Letting the tax cuts expire for the top two to four percent of high earners will reduce the deficit by over 700 billion dollars. How can we not do this?
 
The argument that lower tax rates leads to increased employment is belied by the experience during the Bush Administration. The most massive tax reductions in US history occurred during those eight years, and the increase in employment during those years was the lowest in U.S. recorded history. Lower taxes did not lead to increased employment.
 
I have benefited enormously from the infrastructure that strong federal, state, and local governments provide. As a businessman I have used more than my fair share of these public institutions and therefore, I want to pay my fair share. That's why I'm asking Congress to raise my taxes.
 
There is no valid reason to continue these historically low tax rates for those making more than $250,000 or more than $363,000 during a period of economic stress. This country is in trouble and those of us who have benefitted the most need to step up and pay our fair share. The small rate increase will decrease the deficit by over 700 billion dollars and have no appreciable adverse impact on employment. In fact, I would argue it would stimulate job creation if Congress were to invest in this country again. The House has rejected letting the wealthy off the hook for their fair share. The Senate should act now, do the right thing - and also reject the compromise.

Previous Comments

ID

161274

Comment

Good piece. What's even more true is to realize the damage that the Bush tax cuts did to our economy in *good* times. When the economy is growing, taxes should go up... that's what helps create surpluses and rainy-day funds for leaner times. Ideally, as we come out of this recession, we actually *wouldn't* increase rates, because the extra cash flowing around can help pull us out of recession. We should have been taxing at the higher rate for the "aughts" so that we'd be sitting in a better position today. *Maybe* the country will remember that Great Recessions are still possible and start thinking about that for tax policy in the future. That said, one of the most galling parts of the GOP talking-points argument against the small increases in marginal rates is that they would "hurt small business," because many people who participate in sole proprietorships, partnerships, LLCs and S-Corps report their share of profits directly on their personal income tax reports, whether or not they receive that money as dividends. Three problems with that logic. First, payroll is a business expense -- so hiring more people would (all things being equal) lower those profits reported ... making it unclear how the higher tax rates affect employment. To my thinking, if you're facing a high reported profit and want to bring it down some, you could hire more people. (Worst case would be that you make even *more* money from their productivity and just end up wealthy -- paying an extra $4k in taxes for each $100k you bring home.) Second, if you're a principal in the company and your leadership is increasing profits, then your salary can go up. That's also a business expense that lowers reported profits. For you personally it would filter through withholding and so on, so you don't get hit with a big tax bill at the end of the year. (Alternatively you could disperse dividends throughout the year and file quarterly estimates.) In either case, having the owners enjoy their increased profits (while taking a slightly higher chunk on income over $250k in order to defend their freedom to make money) doesn't "hurt small business." Third, the whole system is set up so that a smaller company avoids the double taxation that affects larger companies. But if you run such a company, and you'd like to hold a great deal of cash within the company for whatever reason, then you should convert it to a C Corp. You've done so well that you're a "big" business now, so you can file corporate tax returns and, at the same time, your owners don't take the hit on their personal tax returns. The truth is that these higher marginal rates -- 4.6% on each $100,000 would equal $4,600 in new taxes for folks who make over the $363k quoted above -- would not decimate small business. The increase would affect a small class well-paid professionals, CEOs, and small-business owners who opt for simplified corporate structures. The rates would also affect partnerships -- medical and legal practices in some cases -- as well as passive investors in LLCs and S-Corps. What I don't see happening is a collapse of "small businesses" that are being used as a human shield in the GOP's argument against these increases... there's just no *there* there.

Author

Todd Stauffer

Date

2010-12-13T10:55:35-06:00

ID

161279

Comment

Interesting piece and you're going to see more of this: SocGen Cranks Up GDP Outlook By A Full Percent Based On Tax Deal. Societe Generale have bumped up their projections for 2011 U.S. GDP to 3.3% from 2.3%, so long as the tax deal is delivered. Note the relatively large size of consumer spending in relation to U.S. GDP growth, likely a product of taxes putting money back in consumers pockets. While liberals are hot under the collar because the top rates aren't going up (and they could, IMHO, but that's the part that Obama is compromising on) and deficit hawks are concerned that once you declare a payroll tax holiday you'll never fully fund Social Security, the truth is it might make sense to keep taxes lower while we're still in [strike]recession[/strike] slow growth. But we've got to prep the country for the austerity that comes after growth... and that's going to have to mean higher marginal rates for everyone, particularly on the top end of the scale. (Plus, we're going to have to create some industry in this country and come up with some sort of economic Stop Loss program on blue collar jobs. An Apollo Project for renewable energy might be a good place to start.)

Author

Todd Stauffer

Date

2010-12-14T11:33:32-06:00

ID

161283

Comment

Another take on this, as Charles Krauthammer seethed a few days ago in the Washington Post: Barack Obama won the great tax-cut showdown of 2010... If Obama had asked for a second stimulus directly, he would have been laughed out of town. Stimulus I was so reviled that the Democrats banished the word from their lexicon throughout the 2010 campaign. And yet, despite a very weak post-election hand, Obama got the Republicans to offer to increase spending and cut taxes by $990 billion over two years. Two-thirds of that is above and beyond extension of the Bush tax cuts but includes such urgent national necessities as windmill subsidies.

Author

Todd Stauffer

Date

2010-12-14T14:11:29-06:00

ID

161317

Comment

Lila, I think most people would agree that people in public office should not receive so many perks, but cutting their benefits would not make any real impact on government spending. There appears to be a contradiction in your argument, in that on the one hand you decry the low payments people receive under Social Security but on the other you condemn taxes. But taxes make Social Security payments possible. Federal taxes are lower now than they have been since before World War II. It may not feel that way because many counties and states have raised their taxes. But I'm a bit mystified by your claim that tax dollars are wasted on "studies." Only a tiny part of the budget goes to bodies such as the National Science Foundation. The sad truth is that we cannot make substantial cuts to government spending by targeting waste. The only way to cut spending is to reduce or eliminate programs that a majority of Americans support, such as defense, Medicare, and Social Security. Fortunately, we don't need to make steep cuts in spending. To balance the budget, we need the economy to recover. And we need to restore progressive taxation, what I like to call "the Full Nixon." That is, we should tax the super-rich at 70 percent, just as my BFF Richard Nixon did. One of the central arguments for Reagan's huge tax breaks for millionaires was that the boost to the economy would offset the lost revenues. That argument now appears comical. Tax cuts for the wealthy do not pay for themselves. Given a choice between the Full Nixon and gutting programs such as Social Security, I am sure that most Americans would opt for higher taxes on the wealthy. The question is whether our broken political system is still capable of enacting the will of the people when it conflicts with the interests of the wealthy. The Senate vote 53-36 to allow taxes to rise on the wealthy. It being the Senate, a 53-36 vote means the measure failed.

Author

Brian C Johnson

Date

2010-12-17T15:05:46-06:00

ID

161321

Comment

Lila, you've also stated some vast overgeneralizations that have no basis in fact. Certainly, our governments (city, state and federal) have misused some funds, but our taxes have also been put to use in numerous advantageous ways for everything from infrastructures (like the interstate highway system) to defeating megalomanical conquerors (like Adolph Hitler), to medical and technical research that has extended countless lives. Our taxes also regulate industries, provide currency, police and fire protection, maintain national parks and forests, the justice system, and a thousand other services we take for granted. Also, let's not forget that Social Security and Medicare is not a government handout, nor are they "taxes" in the strictest sense of the word. If you're employed, you have been paying into those systems with every paycheck. The "benefits" you receive from them is your money that the government holds in trust until you start to collect them. You decry politician's perks (a pittance in the greater scheme of things), but you mention nothing about the vastly lowered taxes on the wealthy over the past 30 years or so. In fact, federal income taxes for most people have steadily declined since the 1960s, but never so steeply as the top bracket, which hit a peak in 1952 at 92 percent. The bottom bracket hasn't been as low as it is today since 1941. No one likes to pay taxes, but if the option is paying taxes and having the services they provide, or paying no taxes and having no services, I'll choose taxes, thanks much. You are correct that the cost of living has increased substantially, but it's not due to federal income taxes. Sales and excise taxes, perhaps, and property taxes, sure, but the bulk of those are not federal. Prices have gone up because the value of the U.S. dollar worldwide has declined. We have a trade deficit, i.e., we import more than we export, and our weakened dollar has less purchasing power. It's more complicated than that, of course, but that's the nutshell explanation about why we're paying more for everything from bread to electricity. If you want to demonize someone over the hikes in medical care, look at insurance companies and the pharmaceutical industry, not taxes. Try to get beyond the hype and hysteria, and you'll see that taxes, especially federal taxes, aren't nearly as big a problem for Americans as some people make them out to be. And we've certainly never been in danger of any monster tax hikes with the current administration. Here's a good source: FactCheck.org's 2011 Tax Increases.

Author

Ronni_Mott

Date

2010-12-17T20:04:37-06:00