Opinion

Felix Salmon

The plight of the 1%

By Felix Salmon
December 20, 2011

Max Abelson has a fantastic column today from simply asking prominent members of the 1% about their embattled status. There’s Home Depot co-founder Bernard Marcus, who characterizes any potential critic of his wealth by asking the timeless question “who gives a crap about some imbecile?”. There’s BB&T‘s John A. Allison IV, who says that any rule requiring public companies to disclose the ratio between the compensation of their CEO and their median employee would constitute “an attack on the very productive”. And then there’s Steve Schwarzman, displaying his legendary deftness of touch in a TV interview:

Asked if he were willing to pay more taxes in a Nov. 30 interview with Bloomberg Television, Blackstone CEO Stephen Schwarzman spoke about lower-income U.S. families who pay no income tax.

“You have to have skin in the game,” said Schwarzman, 64.

This isn’t an “I see what you did there” moment so much as it’s a brazen decision to go on the attack against “the 47%”: Americans who earn so little money that they don’t pay federal income tax. (Of course, they still have “skin in the game”: they still pay sales tax and payroll taxes and local taxes.) 61% of these families — let’s call them the 29% — are earning less than $20,000 per year.

Let’s say that Schwarzman has been working for 40 years and is now worth $6 billion: that works out at $20,000 an hour, every hour of every day, even when he was sleeping, since the day he started working.

But never mind the fact that Schwarzman is earning more per hour than the people he’s criticizing make in a year. There are other billionaires just itching to weigh in. Like Paychex founder Tom Golisano:

“If I hear a politician use the term ‘paying your fair share’ one more time, I’m going to vomit,” said Golisano, who turned 70 last month, celebrating the birthday with girlfriend Monica Seles, the former tennis star.

Remember that, people. If you start agitating to reduce inequality, there might be vomiting in the neighborhood of Monica Seles. And we wouldn’t want that.

And then — just for comic relief — there’s Peter Schiff, who probably needs to bone up a bit on his medieval history:

Schiff, 48, disclosed assets of at least $64.7 million before losing the 2010 Republican primary for a Connecticut U.S. Senate seat, according to filings. He’s wealthier now, even though his taxes are “more than a medieval lord would have taken from a serf,” he said.

Abelson plays all of this for laughs, which is reasonable enough, given his Wall Street audience. But out there in real America, it isn’t funny, it’s tragic. And so it’s worth hearing from a multi-millionaire who can explain the class dynamics of America without trying to defend the indefensible. Here’s Bruce Springsteen, in his introduction to a new book by Dale Maharidge and Michael S. Williamson:

It is the story of the deconstruction of the American dream, piece by piece, literally steel beam by steel beam, broken up and shipped out south, east and points unknown, told in the voices of those who’ve lived it. Here is the cost, in blood, treasure and spirit, that the post-industrialization of the United States has levied on its most loyal and forgotten citizens, the men and women who built the buildings we live in, laid the highways we drive on, made things and asked for nothing in return but a good day’s work and a decent living.

It tells of the political failure of our representatives to stem this tide (when not outright abetting it), of their failure to steer our economy in a direction that might serve the majority of hard-working American citizens and of their allowing of an entire social system to be hijacked into the service of the elite. The stories allow you to feel the pounding destruction of purpose, identity and meaning in American life, sucked out by a plutocracy determined to eke out its last drops of tribute, no matter what the human cost.

A lot of the decline of industrial America was probably inevitable — although not all of it. But rather than sitting on their billions and gloating about their fat-cat status (I’m looking at you, Ken Langone), it surely behooves America’s plutocrats to remember the plight of people who actually produce stuff. I’d love to know how John A. Allison IV measures his own personal productivity and determines that it’s extremely high. Because, speaking as someone who earns a very healthy salary myself, I have no idea where I’d even start on such a quest. I could measure words written per day, I suppose, but how much is a word worth?

The fact is that the ultra-rich really aren’t productive, and instead mostly collect rents from people who are. This is what capital always does, of course: it buys labor (some people call that “job creation”, even if the jobs being created are mostly in China), and then extracts dividends from it.

So let’s not kid ourselves that the men with the billions (or, for that matter, the 22-year-old Monaco residents with $88 million pied-à-terre apartments in New York City) are in any way hard done by. Not when there’s so much real hardship in America.

Comments
39 comments so far | RSS Comments RSS

We need laws against social parasitism.

Posted by upstater | Report as abusive
 

I get (I think) what you’re driving at, Felix, and these people are in serious need of a smack-down if they make such comments. But as a member of the 99% myself, I still am wary of the class envy whipped up by columns such as this. I’d be much more interested in hearing solutions proposed to the loss of competitiveness of “the West” engendered by globalization. Redistribution can only be a temporary palliative, no? Or should we simply adapt to a leveling of standard of living between North and South (broadly speaking) – and if yes, how can such a leveling down be achieved in the West (for that is what it means) without massive social upheavals?

Posted by Abulili | Report as abusive
 

“The elect are a wrathful people, because they are the natural enemies of the non-elect.” – Daniel Parker

Posted by akammer | Report as abusive
 

I think we *should* be dismissive of the argument that since the rich are getting richer, we should attempt to make rich people poorer instead of poor people richer.

Is the tax system fair and should it be more redistributive? That seems unconnected to the “growth in income inequality.” Just because the super rich are becoming super-richer doesn’t mean the needs of the poor have increased in size.

And it’s unfair to belittle the productivity of the rich as “making rents off labor.” Obviously, they have to choose which labor to attempt to make rents off of, and that choice itself succeeds or fails and they are either much richer or significantly poorer, but in the process they provide all manner of social goods.

It is now and always has been fairly popular to raise someone else’s taxes. There was the old Monty Python sketch about taxing all foreigners living abroad. The “let’s raise the taxes on millionaires and billionaires” thus enjoys some 60% support.

But the question should always be *why* should we raise their taxes. Not because it’s popular. Not because income inequality has increased.

I’m in favor of a more directly redistributive tax system. Rather than the various benefits to the poor, having something like a negative income tax system seems more just and treats the poor like adults rather than children whose finances we’ll control through a series of government programs and subsidies so they earn their government stipend. But that’s absolutely independent of how well the 99% or the 1% are doing. If the rich are getting richer, the impulse to siphon a greater proportion of their wealth is odious to me. We must design a tax system in a way we think is just and that is independent of the plight of the 99%.

Posted by Piesmith | Report as abusive
 

“Just because the super rich are becoming super-richer doesn’t mean the needs of the poor have increased in size.”

True, but there is plenty of evidence that the needs of the poor HAVE increased. If they hadn’t, you wouldn’t see nearly as much complaint about the rising inequity.

“We must design a tax system in a way we think is just and that is independent of the plight of the 99%.”

Isn’t this in contradiction to the line above, where you imply that higher taxation of the wealthy would be justified if the plight of the needy has worsened?

Posted by TFF | Report as abusive
 

“We must design a tax system in a way we think is just and that is independent of the plight of the 99%.”

I hesitate to think of what system could be considered “just” while ignoring the needs of 99% of society. You seem to have derived a form a justice that is divorced from the greater good. A neat trick, but hardly one I’d start applying to the real world.

“Obviously, they have to choose which labor to attempt to make rents off of, and that choice itself succeeds or fails and they are either much richer or significantly poorer, but in the process they provide all manner of social goods.”

I’d assume you’re talking about providing capital and liquidity, which is fine, as far as it goes. But if that’s the case, the onus is on you to prove how capital allocation throughout the sixties, seventies, and eighties was somehow insufficient, when the financial sector was a fraction of it’s former size.

That, to me, is where the idea that the wealthy are the great producers of society breaks down. If investment capital was in such short supply throughout the second half of the twentieth century, then why didn’t the migration of capital to the super rich unleash an economic boom?

If the rich really are needed to properly prime the system, you’d expect to see income inequality positively correlate with higher growth. Instead, you see quite the opposite – which is what you’d expect from a productive economy largely dependent on a broad based consumer class.

Posted by strawman | Report as abusive
 

I think the 2nd half of Bill Clinton’s presidency would qualify as a boom period, or make the conversation. Low unemployment, boosted tax revenues that were reasonably managed into a budget surplus. Seems like a fairy tale, in hindsight. Not all of it was smoke/mirrors.

Yes, that internet stock debacle did make for a nasty end, as did the untimely repeal of glass-steagal.

Posted by McGriffen | Report as abusive
 

Middle Class America is being liquidated wholesale by gutless Politicians. No doubt about it ..

Posted by Woltmann | Report as abusive
 

+1 to strawman. Couldn’t have said it better.

Also, I think a large part of the 99%’s gripe is the air of entitlement that a lot of 1%ers seem to show. Felix’s article highlights this. I’m so sick of hearing about how “hard” the 1% worked to get where they are. Income has way WAY more to do with luck than it does with work ethic. IQ, geography, family connections, family money, and family situation all have much more to do with how much income you end up making than with work ethic.

Last time I played with one of those “what % are you” calculators, my wife and I were in the top 15%. I make nowhere near what most 1%ers make but I feel absolutely blessed that I was born into the family that I was and that I have the god given iq that I have. I don’t feel that I work harder than those lower down the income scale. In fact I know people that are making $20,000 a year that work far harder than I ever will.

My point is that when it comes to “class warfare”, the top 1% seem to be waging a piss poor pr campaign.

Posted by spectre855 | Report as abusive
 

two things, just to start, Felix:

1) I am about as big a Bruce Springsteen fan as you are likely to find. I have seen him live upwards of 40 times. Do you know how much tickets to his show cost these days? upwards of $100. Each. BEFORE ticketmaster fees. Hardly a nod to the workingman…

2) the “skin in the game” concept is vitally important – not to solve the REVENUE problem, but to solve the SPENDING problem. It’s proven fairly easily by simple math that we cannot solve the revenue problem by asking poor people/low wage earners / low tax payers to pay more – but we can change the entire spending mindset of the nation once everyone really cares about wasteful spending – and the only way people care is when they pay. That is what “skin in the game” means

Posted by KidDynamite | Report as abusive
 

Springsteen’s ticket prices actually ARE a “nod to the workingman” since a healthy % of that goes to pay the salaries of venue staff, security, audio and video technicians, lighting professionals, guitar wranglers, stage crews, many of who are union workers making union wages (aka workingmen). Check out the expenses of a major big-venue tour these days.

Posted by Midwesterner58 | Report as abusive
 

“Seems like a fairy tale, in hindsight. Not all of it was smoke/mirrors.”

I would argue that the dot.com boom *was* essentially all smoke and mirrors. Vast quantities of capital were being (mis-) allocated to activities that were grossly unprofitable and had no realistic hope of ever becoming profitable. Not surprising that this led to a boom, but it clearly isn’t a sustainable plan.

Posted by TFF | Report as abusive
 

Ditto to KidDynamite. “Skin in the game” means that, whatever your income, when you vote for the government to do more, your own taxes go up. The payroll tax, being (mostly) fixed and (supposedly) dedicated, does not do this job.

Posted by DCWright | Report as abusive
 

I think what this boils down to is a very simple decision: when it comes to decisions that affect the future of the country, do you save 99% of the people and toss the 1% overboard or not? And the reactions of these people aren’t making it a tough decision.

Being a member of the 2% and a current C-level guy, I can tell you that I have never, and I do mean never, met a CEO worth anything north of 1M a year. Ever. Including me. I know everyone that wears a C likes to think it was hard work, blah blah blah but it wasn’t. It was luck and government regulations from college to business. Period. Level playing field and all. So spare me the “I worked hard” we all did. You just got lucky, like hitting the lottery. And most of you are still profoundly too self-absorbed to tell people that.

These people don’t seem to understand that it will come to a point where their wealth is redistributed one way or another. It always does. They can participate in how, or not.

Posted by skyman123 | Report as abusive
 

+1 to strawman. And there is nothing more fallacious, in all of history, than the “skin in the game” argument. The guy who cleans my building has ALL of his skin in the game. He can’t leave, he can’t save except through extreme sacrifice, he has no choice but to go to the public schools, he can’t get health care unless its subsidized, he can’t retire unless it’s on Social Security. He is stuck – and there is no more “skin in the game” than that. And, by the way, he pays a much higher percentage of his income in SS taxes, gas taxes, sales taxes, tolls, etc. than Mitt Romney does on his leftover carried interest from Bain.

And oh yeah, who do you think will send his son or daughter to fight in Iraq? It ain’t the F#$%)$%king 1%, unless they plan on buying their offspring a Senate seat later on. Oh yeah – dead or maimed children pretty much defines “skin in the game.”

Anybody who trots out the 47% is not only a parasite, they are a malicious psychopath.

Posted by Dollared | Report as abusive
 

skyman, the 1% do not have to be tossed overboard to save the 99%. That’s the kind of thinking – it’s one or the other – that creates the polarization in politics and society in general, and is completely unnecessary.

The 1% do not have to give up a giant share of their wealth or income; most of the tax proposals that were seriously being considered would have only raised taxes by 3% on the wealthy, and that is hardly tossing them overboard.

It seems clear to me that we cannot convince the 1% to make concessions, so they need to be shown that their wealth is endangered if the income of the 99% shrinks, as it is currently doing. (yes, I am talking about the wealth of the 1% and the income of the 99%, mostly because the 99% doesn’t have a lot of wealth, but also because it’s the wealth of the 1% that will lose value if the economy is not fixed).

The 1% need to realize that their outsized income can not be sustained if the 99% does not have the means to buy things from them. The bigger share of wealth (i.e, value created) that the1 % extract from the economy, the less there is for the 99% to spend. So let’s forget what is fair or nice, and just use the only criteria many of the 1% care about – how to keep making lots of money – as the justification for yielding a little bit on the income distribution curve.

Posted by KenG_CA | Report as abusive
 

TFF, while a huge percentage of the dot coms funded in the 90s never should have been, far more capital was invested in things that did generate returns, although admittedly not as quickly as investors had expected. The biggest investment may have been in the infrastructure, where DSL and cable modems, the switches they were connected to, and the metro and long distance fiber networks that comprise today’s internet, were deployed. Then there were companies investing in websites, server farms, training, and all other kinds of things necessary to compete in the internet-connected world. These investments dwarfed what was wasted on the likes of pets.com and toys.com, and they drove the economy, as they ultimately created long term jobs and yielded savings down the road.

The investments in the internet have also paid immeasurable returns in the form of far greater collaborative efforts (intentional or not, people now get to see the work of others a lot quicker than they used to), more debate (although much of it is worthless, or even negative, this forum excluded), and a more efficient distribution system for just about everything.

Which is why I constantly argue for forcing those with capital to invest it in R&D, capital equipment, training, etc. – new ventures or product lines, because that will create jobs and provide a return to the economy. It almost doesn’t even matter what we invest in, as long as it is something that can generate a return in a decade or so. Capital must be recycled, or it loses value.

Posted by KenG_CA | Report as abusive
 

KenG, both comments are great. I’ll say it another way – the US elites are very close to tipping into the thinking of 3d world elites, where they are far more concerned with relative status, relative wealth, and status as a modern day nobility, rather than on maximizing return on investments. They no longer think like US citizens, and so they are no longer concerned with the health of their community. Their current behavior indicates that they want to suck the US dry and move on. It is the opposite of patriotism.

Posted by Dollared | Report as abusive
 

I can’t provide any greater insight than the commenters here on the larger questions. But based on the quotes, does anyone else get the feeling that, well, these are people you wouldn’t care to have as friends and confidents? There’s not even a hint of an acknowledgement of the society or its members that made their great wealth possible.

Posted by Curmudgeon | Report as abusive
 

Every Saturday, I go to the local Farmer’s market during the growing season. Those folks get up at 5:00 am to drive their trucks and produce to the market, after being up to midnight packing and loading. Then they are there from 8:00 to 1:00, and then repeat on Sunday to go to another market, and then spend Monday through Friday working in the fields to grow, tend, and harvest the produce. And then there is the paperwork and tax work in the evening. They don’t have private corporate jets like Mr. Alison, and I expect they feel lucky if they clear $40,000 after expenses. I expect they know a lot more about hard work then either me or Mr. Alison.

Ableson quotes Cooperman getting atta boys from his fellas at his private Palm Beach club. That wanted to make me vomit. They have really created a bubble for themselves, these super rich.

Posted by sherparick1 | Report as abusive
 

Every Saturday, I go to the local Farmer’s market during the growing season. Those folks get up at 5:00 am to drive their trucks and produce to the market, after being up to midnight packing and loading. Then they are there from 8:00 to 1:00, and then repeat on Sunday to go to another market, and then spend Monday through Friday working in the fields to grow, tend, and harvest the produce. And then there is the paperwork and tax work in the evening. They don’t have private corporate jets like Mr. Alison, and I expect they feel lucky if they clear $40,000 after expenses. I expect they know a lot more about hard work then either me or Mr. Alison.

Ableson quotes Cooperman getting atta boys from his fellas at his private Palm Beach club. That wanted to make me vomit. They have really created a bubble for themselves, these super rich.

Posted by sherparick1 | Report as abusive
 

Fairness is an opinion. Equality is objective.

I believe in equal treatment before the law. One Person, One Vote; One Person, One Tax.

I believe charitable giving is a religious activity and in religious activity I include everyone, whether or not your particular religion is atheism or something else.

I believe income inequality is the representation of a natural curve limited by zero at the low end and approaching infinity at the high end. Efforts to restrict outliers in the distribution always introduce waste and friction into the system.

I believe it is expensive and inhumane to allow persons legally in the United States to be below the poverty line.

There is a conflict between the equal tax each person should pay and the ability to pay it, let alone the ability to remain above the poverty line net of taxes.

The way to resolve this dilemna that I support I call “Equal Taxes with Support to the Poverty Level.”

There are several objective ways to calculate the equal tax. Since I think 40 years is enough to pay tax, I would restrict paying tax to ages 23 through 62. (That gives youngsters a chance to save and get ahead, and while Death and Taxes are both inevitable, I’d like to keep them as far apart as possible.) But pick your own age range. We can have a legitimate argument over what the best range is and that does not affect the rest of the plan: It is a certain number of people I’ll call taxpayers.

Take the budget to be raised from taxes on individuals. (This should not include legitimate user fees, such as “gasoline taxes” that are cheap to collect and which have a rational nexus to the costs of maintaining a public utility [in this case roads] that is proportional to use.)

The budget divided by the number of taxpayers is the equal tax.

The poverty level is subjective and is subject to dynamic tension of the opinions of all voters. The current level is approximately $24,000 for a family of four. That seems to me to be about fair and I would argue has two key features: First, that it is not so low it should force you into homelessness and/or crime to survive, and second, few people would elect to do no work and happily get by at that level.

Support to the poverty level means that if you make zero income, you will get the poverty level if you are legally in the United States.

If persons get to keep about 75 cents on each dollar earn, most will attempt to earn the next dollar. I won’t support that claim in this message, but I think it is close enough and it makes the math simpler to visualize.

Earn one dollar. Report it. Your income becomes the poverty level plus 75 cents. Continue. When you earn enough your net subsidy will be zero. But you have not yet paid any taxes. Continue earning, and 25 cents on each dollar earned will actually contribute to the equal tax you owe (if you are a taxpayer.) When the sum of your 25 cent per dollar payments reaches the equal tax, you are done.

In summary, if you are below the poverty level then all who can pay to get you to the poverty level with no trap to prevent you from working. If you are on the dole, we will pay you 25 cents less for each dollar you earn, but your total income will rise 75 cents for each dollar you earn. Further, if you are a taxpayer, you will pay 25 cents on each dollar earned after you are off the dole until that reaches the equal tax. No deductions and no income tax report at all except the check if you are actually paying your equal share.

This will all be cheaper than our currently failing welfare system of “prove you are worthless and we’ll toss you a few bucks.” (Another claim I will not support in this message. But start thinking: No justifiable crimes of survival. No overhead to support an expensive judgemental bureaucracy to dole out benefits. And the positive feedback on the economic system is huge.)

Leave no one in poverty. Persecute no one. Steal from no one. Covet no one else’s possessions. Treat each person equally before the law.

Posted by pudge1954 | Report as abusive
 

Sorry regarding my typos of dilemma and judgmental.

Posted by pudge1954 | Report as abusive
 

pudge, your argument suffers more from logical flaws than from spelling. The federal budget right now is ~26% of GDP or roughly $12k per capita (not per household). You begin by exempting half the population from the tax. Next you exempt the first 50% of income for a median earner. Then you cap the tax liability so that households pay no tax at all on earnings above ~$100k.

Yet you expect a 25% tax rate to raise revenues equal to 26% of GDP? With all your exclusions, you’ll need a tax rate well over 50%.

Posted by TFF | Report as abusive
 

Pudge, the real answer is to EXPAND the tax base not SHRINK it. Reduce the exemptions, exclusions, credits, and special treatment under the law. Tax every penny earned and marginal tax rates wouldn’t need to be quite so high.

Posted by TFF | Report as abusive
 

This piece made me sad. I always liked Monica Seles.

Posted by AndrewBW | Report as abusive
 

Sigh. TFF: You seem to expect the budget and GDP will remain constant. Knowing how much you owe (whether or not you can pay for it) affects what you will support. Knowing the divisor (the number of taxpayers) allows a very simple calculation of what each proposed piece of pork costs you. My expectations, not what you wrote, are that equal justice before the law and no one in poverty is more efficient and ethical than the status quo. Before you start throwing out numbers such as 50% as hyperbole, it might behoove you to do the math. First, take the poverty report, exclude those not legally present here, and multiply by the weighted average beneath the poverty level. It is a lot, but remember to subtract the costs that will be eliminated (including both the eliminated agencies and the cost of law enforcement and incarceration for crimes of survival).
Those who can pay will pay what they can. Those who can pay in full equally will pay in full equally. The income required before you actually are paying your equal share will probably surprise you, but the math all works out quite reasonably. Many people will be surprised that they are not in fact paying an equal share.

Apparently you agree with no exceptions, exclusions, and no fancy rules to create a need to file a tax return that requires an accountant. Report your income. Whether a support payment or a tax bill for a portion of what you actually owe will come back.

Trying to tax people who cannot pay is expensive and is certainly a net loss. My liberal friends should support this on humanistic grounds. My objectivist friends should support this because it is not pity, but rather the most efficient way to establish a framework for opportunity and success.

Posted by pudge1954 | Report as abusive
 

Pudge, my estimate of 50% wasn’t hyperbole. Your proposal excludes a LARGE segment of GDP, including half the income for the median household, all the income for the elderly, and most of the income for the 1%. I don’t see how you can generate revenue equal to 26% of GDP while excluding that much income without very high marginal tax rates.

If instead you are proposing a magical way to shrink the budget by 50% while increasing services, then I’m all for it. But I want to see some actual numbers before I accept your idea as being anything more than pure fantasy.

“Apparently you agree with no exceptions, exclusions, and no fancy rules to create a need to file a tax return that requires an accountant.”

Sure. But you were excluding income left and right. Unless you are planning to eliminate Social Security, Medicare, Medicaid, and the Department of Defense, then I don’t see how your numbers can possibly work.

I’m happy with paying more, if that is what it takes to put together an equitable system.

Posted by TFF | Report as abusive
 

TFF and Pudge, neither of you are operating in the real world. TFF, you think that making poor people poorer will somehow make the world better. But you haven’t explained how that makes their life viable. And yes, their life has to be viable because they are citizens of your country and you want them to have enough resources to be productive workers, and you want their children to be raised with enough resources so they in turn can be productive workers. The alternative is concentration camps or death. And pudge, you can pontificate all you want, but it’s time to get out Excel.

Posted by Dollared | Report as abusive
 

“TFF, you think that making poor people poorer will somehow make the world better.”

No, I do not. I almost certainly believe in greater wealth re-distribution than you do. Moreover, I’m willing to pay higher taxes to make it happen.

I believe in fewer exclusions on the income tax and a national sales tax or VAT tax to increase the tax base.

I also believe we need to nationalize health care. Health insurance for a family of four costs $20k. If you provide that as a welfare benefit to somebody with no income (as humanity demands that we do), then you cannot eliminate that benefit at any normal level of income without seriously skewing the marginal tax rate. (E.g. if that benefit phases out by $40k income, then you have an implied 50% tax rate for that alone!!!)

And yes, that will be expensive. Expensive but necessary. Go ahead and don’t believe me — the decision will be forced within a decade as the present system steadily falls apart.

Posted by TFF | Report as abusive
 

Dollared, I’m wondering how you got the wrong impression. Perhaps you believe that “exclusions on the income tax” are referring to the pittance that lower-income households are able to deduct? That pales in comparison to the mortgage interest exclusion, the health insurance exclusion, and the capital gains/dividend exclusion.

Adding insult to injury, we assess FICA tax on earned income but not unearned income — as if those who earn income have less right to keep their money than those who receive it on investments?

The highest effective marginal tax rates presently apply to those below the median. Really, honestly, truly. If you believe otherwise then you are mistaken.

Posted by TFF | Report as abusive
 

TFF, you said “I’m wondering how you got the wrong impression.” after you said

“the real answer is to EXPAND the tax base not SHRINK it. Reduce the exemptions, exclusions, credits, and special treatment under the law. Tax every penny earned and marginal tax rates wouldn’t need to be quite so high.”

If I had read that from somebody else, I would have had the same reaction as Dollared, except I have had enough conversations with you here to know better (I was waiting for your detailed explanation).

I live off accumulated capital (i.e, dividends, interest, and capital gains) and pay no FICA taxes, which is absurd. I guess if you view SS as an annuity, it makes sense that I shouldn’t be paying into it, but it’s not that, it’s a safety net that is absolutely necessary for the economic well being of the nation, and as such everybody should be paying for it. Just eliminating the ceiling on FICA income and the exclusion that investment income would allow the rate to be dropped by more than 90%, I’m guessing.

Posted by KenG_CA | Report as abusive
 

I gave you the entire formula and you seem unable to work out the numbers. Perhaps if you start by figuring out the legally resident population aged 23 through 62 (that is your divisor, easily available for a close enough approximation from the 2010 census) and use it to divide either 2010 actual income personal income tax receipts (and either do or don’t add in some part of the deficit depending on whether you think it is legitimate to run a deficit during an ebb in the business cycle) for the numerator. Now add in the amount required to subsidize legal residents to the poverty level. Finally you have to add in the subsidy for those who are unable to pay their equal share. It all works out. Billionaires don’t end up paying more than multimillionaires, but they pay the same full equal tax. Most people discover they are actually on the dole, paying less than an equal share of the costs of government. But paying the equivalent of a marginal flat rate of 25% with no deductions beginning with a base of the poverty level is plenty. Run the actual numbers and you will see.

There is no magic in costs that will be eliminated. And if you think people at the median income will pay less actual tax paying an effective rate of 25% of that half I wonder what you think they currently pay. Most of the burden will be borne by people above the median, true, but we will all know how much we need to earn in order to contribute an equal share, and what that share is.

Posted by pudge1954 | Report as abusive
 

“Just eliminating the ceiling on FICA income and the exclusion that investment income would allow the rate to be dropped by more than 90%, I’m guessing.”

Think you might be overestimating that, KenG. The top quintile begins at roughly $100k of household income, and wages surely represent the vast majority of income for those earning less than $100k. The upper quintile does represent 50% of the total income, but even THAT is dominated by well-compensated two-earner households. My guess is that only 20%-30% of household income is not subject to FICA tax (with the vast majority of that belonging to the top 5%).

http://www.census.gov/compendia/statab/2 012/tables/12s0694.pdf

“I gave you the entire formula and you seem unable to work out the numbers.”

Actually, I roughed them out and they are very different from what you conclude. But I think I now understand why. You originally stated:

“If persons get to keep about 75 cents on each dollar earn, most will attempt to earn the next dollar.”

When what you really meant was:

“If persons get to keep about 60 cents on each dollar earn, most will attempt to earn the next dollar.”

Because it appears that you intend to only replace the *personal income tax*, not the FICA taxes. In 2010, the personal income tax represented $900B of revenue with FICA tax representing another $900B. (Corporate income tax and all other taxes and fees came to just $400B.)

If you replace just the personal income tax, then there is a combined 40% marginal tax rate on wages above the poverty-level exclusion (and a 15% rate below that). If you replace both the personal income tax and the FICA tax, with the exclusions you suggest, then you will need to bump your tax rate to around 50%. (Certainly over 40%.)

Posted by TFF | Report as abusive
 

TFF, yes the upper quintile may represent only 50% of all income, but most of it isn’t even taxed now. Let’s say all income is taxed at 2%, this would surely generate as much revenue as taxing only the first $100K of earned income.

And if we can reduce the employer contribution to FICA, it would be less of an obstacle to getting companies to reduce the work week and expand the payroll.

Posted by KenG_CA | Report as abusive
 

KenG, FICA is proportional to pay, so I don’t see any connection there between that tax and reduction of the work week (in which more people presumably would be each paid less). Health care is the elephant in the room there, since if you hire five people on 40 hour weeks it costs you ~$75k for health insurance while if you hire four people on 50 hour weeks it costs you just $60k. The $15k/employee (assuming the employer pays 75% of a family plan) for health care is perhaps a quarter the cost of hiring a lower-level employee.

I have two principal objections to the FICA tax:
(1) It is heavily regressive, since your median family relies almost exclusively on wages (which are taxed) while your wealthier families rely on investment income (which are not taxed). Moreover, the Social Security portion is capped at a level designed to capture the entire middle class while excluding 20%-30% of the wages in the country belonging to the wealthy.

(2) By lumping it on top of the income tax, we have the majority of our revenue structure resting on a single point in the economy — getting a job and earning money. Taxes create a disincentive for the activity taxed. Marginal tax rates of 40% on earned income (and most of the lower/middle class has marginal tax rates at least this high) are a fiercely strong incentive to avoid working. A VAT or sales tax could scarcely be any more regressive than the FICA tax, and it would broaden the revenue base, tapping the economy at multiple points.

A “wealth tax” could also be useful, though you need to watch out for the “family farm” effect here. Might be better to tax wealth through a steadily increasing money supply? (Perhaps even more than we’ve had over past decades.) That ought to be dilutive of the value of the wealth, even if the nominal figures increase.

Posted by TFF | Report as abusive
 

TFF, yeah, your’e right, I had forgotten that the cap on FICA is above $100K now, and wouldn’t affect the number of employees (if the cap was at a lower #, companies would rather have less employees earning more money). And you’re right about health care, if it was publicly provided as in every other modern country, companies would have less incentive to minimize the number of employees.

I’m with you on FICA, SS should be financed by the general fund, but good luck getting that passed.

I think a wealth tax would cause lots of problems – how do you value non-liquid assets? Why would anyone want to own stocks or bonds that are valued by the market? And who is going to appraise all those non-marketable assets? Sounds like a recipe for corruption.

If we have a corporate tax that penalizes hoarding, and an income tax that doesn’t allow exclusions, we’ll effectively be taxing wealth as it happens in real time.

Posted by KenG_CA | Report as abusive
 

“I think a wealth tax would cause lots of problems”

Agreed. But inflation is also a form of a wealth tax (especially in conjunction with a capital gains tax) that strongly discourages hoarding, and avoids the problems you cite. Try plotting wealth inequity against the inflation rate some time?

The inheritance tax is also a wealth tax, also mostly avoiding the problems you cite.

Posted by TFF | Report as abusive
 

I have no problems with the inflation tax or inheritance tax. :-)

Posted by KenG_CA | Report as abusive
 

Post Your Comment

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/
  •