With Obama’s new Tax the Millionaire’s proposal all over the news recently I figured I’d give my take on the matter. I consider myself an independent and see both sides of the argument. The democrats see the growing Income Distribution Inequality in America (excellent article if you’re not familiar with the phenomenon) and see this as a solution. I’m sure you’ve all heard the statistics by now, the top 1% owns 23% of all assets, accounts for over 20% of all annual income per year and this ratio is only growing over time. The republicans argue that taxing the higher income earners at a higher percentage is:
1. Unfair and that’s not what America is about. If someone worked hard to make a nice living we shouldn’t punish them for it.
2. We shouldn’t be increasing taxes on job creators.
3. It’s class warfare.
Now I think both sides are wrong and I will explain why. The democrats are correct in seeing the growing gap in wealth between the rich and poor is bad. Everyone(I think) can agree on the existence of the middle class as being a good thing, however, I do not think their solution of simply taxing the rich at a higher rate is a good solution because it does not get to the root of the problem. The problem is that people are being severely and grossly overpaid for their work which does not correctly reflect the value they are providing to society. In several instances on Wall Street in particular it is in fact the complete opposite. The more damage someone does to society the greater they are paid. The problem is not that people who work hard all their life to accumulate wealth and are successful are making too much and need to pay more in tax. Obama should instead indirectly tax the wealthy and punish those top earners who aren’t providing a value to society that their pay reflects by revising the estate tax, adding a financial transaction tax, and rewriting the copyright laws.
Now for the republicans arguments:
1. It’s unfair and that’s not what America is about. If someone worked hard to make a nice living we shouldn’t punish them for it. I agree. Unfortunately, our system isn’t currently set up this way. Warren Buffet and Bill Gates deserve what they have. They started from pretty good means and worked really hard to attain astronomical means. However, why do their next of kin deserve anything? What value did they provide to society be being born as their offspring. In the 90 years of estate tax it has consistently made up 1% of income in the US, yet in 2010 in the face of record deficits it was completely eliminated despite the value of estates rising and the percent of estate tax income declining.
It’s back in 2011, but the exclusion amount is still $5 million with a top tax rate of 35% down from an exclusion amount of $675,000 and a top tax rate of 55% in 2001. Quoting the linked UCSC article:
“According to a study published by the Federal Reserve Bank of Cleveland, only 1.6% of Americans receive $100,000 or more in inheritance. Another 1.1% receive $50,000 to $100,000. On the other hand, 91.9% receive nothing (Kotlikoff & Gokhale, 2000). Thus, the attempt by ultra-conservatives to eliminate inheritance taxes — which they always call “death taxes” for P.R. reasons — would take a huge bite out of government revenues (an estimated $1 trillion between 2012 and 2022) for the benefit of the heirs of the mere 0.6% of Americans whose death would lead to the payment of any estate taxes whatsoever (Citizens for Tax Justice, 2010b).”
The super committee was told to find $1.2 trillion in budget savings over 10 years. Revise the Estate Tax and you only need 200 billion more in savings. EZ game. Rewriting the estate tax would not affect the 92% of Americans receiving no inheritance and would only affect the wealthy’s offspring who did nothing to earn that income anyways.
What’s another way we could tax the grossly overpaid undeserving wealthy? How about a financial transaction tax But don’t take my word for it. John Maynard Keynes first proposed a financial transaction tax in 1936.
“He proposed that a small transaction tax should be levied on dealings on Wall Street, in the United States, where he argued that excessive speculation by uninformed financial traders increased volatility. For Keynes, the key issue was the proportion of ‘speculators’ in the market, and his concern that, if left unchecked, these types of players would become too dominant. Keynes writes:
“Speculators may do no harm as bubbles on a steady stream of enterprise. But the situation is serious when enterprise becomes the bubble on a whirlpool of speculation.”
“The introduction of a substantial Government transfer tax on all transactions might prove the most serviceable reform available, with a view to mitigating the predominance of speculation over enterprise in the United States.”
That was 75 years ago. What are we waiting for? Mark Cuban’s blog post on this topic is great. If you’re an average middle class investor you buy and sell stocks a couple of times a year. An extra 10 cents or 25 cents a share tax or even higher is not going to affect your investment decisions WHATSOEVER. You know who it will affect? The bankers and traders making 1000s of trades and speculations per day increasing volatility and putting the whole system at risk. All those CEOs that got paid 10s of millions of dollars to create the financial crisis and then even more by us when we bailed them out. Its going to affect those guys big time.
It’s a serious problem that so many of our great minds and highest paid workers are working for the financial industry providing questionable value to society. This is a great way to rectify that and bring in some much needed tax dollars. Chicago Political Economy group cites between $750 billion and $1.2 trillion per year in US(2005–2009). Center for Economic and Policy Research cites $177 billion dollars per year in US. Over 10 years that is anywhere from 2 to 10 TRILLION DOLLARS in budget savings. Super committee are you listening?
One last area of law in need of reform is copyright law. The current system grants a copyright for a work for the entire term of an author’s life plus an additional 70 years after the author’s death. The main argument for copyrights are that they provide a financial motivation for the author and promote creativity. Can anyone explain to me why the author’s heirs are still collecting payments on those works for 70 years after they are dead then? How does that provide motivation for their next of kin to work? How does that possibly contribute positively to society. That is someone receiving something for nothing. Stealing from the rest of us. Getting a handout for something they didn’t work for… sound like familiar arguments given by republicans against social programs? It’s not fair.
In the digital age it costs NOTHING to copy a work, charging something for this is an infinite percent markup because no work was performed. I’m not saying that the author doesn’t deserve to be rewarded for their effort, but clearly the laws need to catch up with technology. If anyone can provide data on what percent of a song or movie’s lifetime income is made in the first twelve months of release I’d be greatly interested. The movie and music companies love to cite how many US jobs and dollars are being lost due to piracy but who knows how many jobs could be created if we relaxed the copyright laws let people REALLY let their creativity run wild with the edits, reworks, remixes and remakes of other people’s work.
2. We shouldn’t be increasing taxes on job creators. I’ll let Matt Damon handle this one.
3. It’s class warfare. I don’t understand how when someone brings this up it’s just accepted as the end of the conversation. If you wikipedia class warfare you will be redirected to class conflict which is the tension or antagonism which exists in society due to competing socioeconomic interests between people of different classes. By using the argument “it’s class warfare” implies you are opposed to any one class receiving special benefits over another. Hmmm can’t think of a single tax loophole that benefits a few at the expense of many, but something that benefits many at the expense of a few? Oh, uh that’s class warfare which is bad. Huh? Quoting the linked history of the estate tax IRS article:
“The War Revenue Act of 1898
Throughout the last half of the 19th century, the industrial revolution brought about profound changes in the U.S. economy. Industry replaced agriculture as the primary source of wealth and political powerin the United States. Tariffs and real estate taxes had traditionally been the primary sources of Federal revenue, both of which fell disproportionately on farmers, leaving the wealth of industrialists relatively untouched. Many social reformers advocated taxes on the wealthy as a way of forcing the wealthy to pay their fair share, while opponents argued that such taxes would destroy incentives to accumulate wealth and stunt the growth of capital markets. Against this backdrop, a Federal legacy tax was proposed in 1898 as a means to raise revenue for the Spanish-American War. Unlike the two previous Federal death taxes levied in times of war, the 1898 tax proposal provoked heated debate. Despite strong opposition, the legacy tax was made law. Although called a legacy tax, it was a duty on the estate itself, not on its beneficiaries, and served as a precursor to the present Federal estate tax. Tax rates ranged from 0.75 percent to 15 percent, depending both on the size of the estate and on the relationship of a legatee to the decedent (Figure B). Only personal property was subject to taxation. A $10,000 exemption was provided to exclude small estates from the tax; bequests to the surviving spouse also were excluded. In 1901, certain gifts were exempted from tax, including gifts to charitable, religious, literary, and educational organizations and gifts to organizations dedicated to the encouragement of the arts and the prevention of cruelty to children. The end of the Spanish-American War came in 1902, and the tax was repealed later that year. Although short-lived, the tax raised about $14.1 million.
The Modern Estate Tax
The years immediately following the repeal of the inheritance tax were witness to an unprecedented number of mergers in the manufacturing sector of the economy, fueled by the development of a new form of corporate ownership, the holding company. This resulted in the concentration of wealth in a relatively small number of powerful companies and in the hands of the businessmen who headed them. Along with such wealth came great political power, fueling fears over the rise of an American plutocracy and sparking the growth of the progressive movement. Progressives, including President Theodore Roosevelt, advocated both an inheritance tax and a graduated income tax as tools to address inequalities in wealth. This thinking eventually led to the passage of the 16th Amendment to the Constitution and the enactment of the Federal income tax. It was not until the advent of another war, World War I, that Congress would enact the Federal estate tax.”
Sound familiar? The above is from an article written a couple of years ago about a time in the United States over a hundred years ago. And they say history doesn’t repeats itself. The federal income tax was actually created for class warfare on the rich. This was it’s original purpose. I can’t say I blame Obama for using it. I just think there are more effective ways of accomplishing his goals.