Common Wisdom on Taxing the Rich Is Commonly False

I. Common Wisdom on Taxes Commonly False

There is a phenomenon in this country by which a supposed truism gets circulated in the media and then becomes a staple of common wisdom. This phenomenon has happened with regard to the belief that a significant dent can’t be made in the deficit by taxing the rich. This species of newly reiterated common wisdom is based primarily on two fallacious assumptions: 1) the top marginal income tax rate can’t be more than 39.6 percent; and 2) capital gains and dividends must be taxed at a lower rate than wages and salaries, because the former represent earnings of the job creators.

George W. Bush believes that no one should pay more than one-third — or a little more — of his/her taxable income in federal income tax and Barack Obama differs little from Bush, as he has never proposed a top marginal rate of over 39.6 percent.

The very high marginal tax rates between World War II and the advent of the Reagan administration were linked to a period of economic prosperity in the nation. Tax experts who have analyzed the federal income tax structure for FY 1961, when the top marginal tax rate was 91 percent, and factored in inflation since then, have calculated that the 1961 rates and other provisions would have generated an additional $781 billion in this fiscal year. Carried over for ten years, the 1961 tax structure would have brought in nearly $8 trillion in new revenue, not even factoring in inflation. 

Harold Meyerson wrote an enlightening article in the Washington Post on how investment income distribution, globalization and the earned-income share of GDP relate to tax fairness and extension of most of the Bush tax cuts.

In the most recent tax year studied, the wealthiest one percent realized 38.2 percent of their income from investments (capital gains and dividends) and the wealthiest one-tenth of one percent realized more than half: 51.9 percent. Meanwhile, the bottom four-fifths got just 0.7 percent of their income from capital gains and dividends. [1]

Taxing investment income at a lower rate than labor presumably fosters more investment in the U.S. economy; however, as Meyerson points out, since virtually every major U.S. corporation is a global company, we reward a company like GE for, in effect, sending money overseas, while the GE employee who produces wealth entirely within U.S. borders, may be taxed at a higher rate than a GE investor.

Harold Meyerson says that globalization “has completrely changed the investment patterns of American corporations”; also, he warns that taxing wages and salaries at a higher rate than investment income means that the tax code is taking a bigger bite out of a steadily shrinking share of Americans’ income. The St. Louis Federal Reserve has documented that income from wages and salaries as of July 2012 constituted the smallest share of GDP since World War II. The earned-income share of GDP peaked in 1969 at 53.5 percent; in 2012 it was 43.5 percent. This ten percent loss (about $1.5 trillion a year), went in significant part, to corporate profits. In the 3rd quarter of 2012, after-tax corporate profits constituted the largest share of U.S. GDP since World War II: 11.1 percent. [2] 

This shift from wages to profits is called redistribution. It is, argues Meyerson, the primary reason that economic inequality in the United States has skyrocketed. The shift awards offshoring more than work done in the U.S. and deprives the government of needed revenue. 

II. The Blankety Blank Ryan Budget

In commenting on the budget plan of Rep. Paul Ryan, I neglected to include Washington Post reporter Dana Milbank’s very concise summary of it: “The former Republican vice presidential candidate’s budget eliminates (blank) loopholes in the tax code, cutting the (blank)  and the (blank) deductions. It reduces spending on the (blank) program by (blank) and the (blank) program by (blank). Retirees would see (blank), students would experience (blank) and the poor would be (blank).”

                                                      Footnotes

[1] Harold Meyerson, “A tax deal only the ultra-rich could love,” The Washington Post, January 8, 2013.

[2] Ibid.

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