Tag: class warfare

The White House Has Declared Class War on the Rich, but the Poor and Middle Class Will Suffer Collateral Damage

The 2001 and 2003 tax cuts are scheduled to expire at the end of this year, which means a big tax increase in 2011. Tax rates for all brackets will increase, the double tax on dividends will skyrocket from 15 percent to 39.6 percent, the child credit will shrink, the death tax will be reinstated (at 55 percent!), the marriage penalty will get worse, and the capital gains tax rate will jump to 20 percent. All of these provisions will be unwelcome news for taxpayers, but it’s important to look at direct and indirect costs. A smaller paycheck is an example of direct costs, but in some cases the indirect costs – such as slower economic growth – are even more important. This is why higher tax rates on entrepreneurs and investors are so misguided. For every dollar the government collects from policies targeting these people (such as higher capital gains and dividend taxes, a renewed death tax, and increases in the top tax rates), it’s likely that there will be significant collateral economic damage.

Unfortunately, the Obama Administration’s approach is to look at tax policy only through the prism of class warfare. This means that some tax cuts can be extended, but only if there is no direct benefit to anybody making more than $200,000 or $250,000 per year. The folks at the White House apparently don’t understand, however, that higher direct costs on the “rich” will translate into higher indirect costs on the rest of us. Higher tax rates on work, saving, investment, and entrepreneurship will slow economic growth. And, because of compounding, even small changes in the long-run growth rate can have a significant impact on living standards within one or two decades. This is one of the reasons why high-tax European welfare states have lost ground in recent decades compared to the United States.

When the economy slows down, that’s not good news for upper-income taxpayers. But it’s also bad news for the rest of us – and it can create genuine hardship for those on the lower rungs of the economic ladder. The White House may be playing smart politics. As this blurb from the Washington Post indicates, the President seems to think that he can get away with blaming the recession on tax cuts that took place five years before the downturn began. But for those of us who care about prosperity more than politics, what really matters is that the economy is soon going to be hit with higher tax rates on productive behavior. It’s unclear whether that’s good for the President’s poll numbers, but it’s definitely bad for America.

Treasury Secretary Timothy F. Geithner took the lead Sunday in continuing the Obama administration’s push for extending middle-class tax cuts while allowing similar cuts for the nation’s wealthiest individuals to expire in January. …The tax cuts, put in place between 2001 and 2003, have become an intensely political topic ahead of the congressional elections this fall. Republicans have argued that extending the full spectrum of tax cuts is essential to strengthening the sluggish economic recovery. Geithner rejected that notion, telling ABC’s “This Week” that letting tax cuts for the wealthiest expire would not hurt growth. …On Saturday, the president used part of his weekly address to chide House Minority Leader John A. Boehner (Ohio) and other Republicans who oppose the administration’s approach, saying the GOP was pushing “the same policies that led us into this recession.”

The Deadly Impact of the Death Tax

Australia got rid of its death tax in 1979. A couple of Aussie academics investigated whether the elimination of the tax had any impact on death rates. They found the ultimate example of supply-side economics, as reported in the abstract of their study.

In 1979, Australia abolished federal inheritance taxes. Using daily deaths data, we show that approximately 50 deaths were shifted from the week before the abolition to the week after. This amounts to over half of those who would have been eligible to pay the tax. Although we cannot rule out the possibility that our results are driven by misreporting, our results imply that over the very short run, the death rate may be highly elastic with respect to the inheritance tax rate.

It looks like this experiment is going to be repeated in the United States, but in the opposite direction. There was a rather unsettling article in the Wall Street Journal over the weekend. The story begins with a description of how the death tax rate dropped from 45 percent in 2009 to zero in 2010, and then notes the huge implications of a scheduled increase to 55 percent in 2011.

Congress, quite by accident, is incentivizing death. When the Senate allowed the estate tax to lapse at the end of last year, it encouraged wealthy people near death’s door to stay alive until Jan. 1 so they could spare their heirs a 45% tax hit. Now the situation has reversed: If Congress doesn’t change the law soon—and many experts think it won’t—the estate tax will come roaring back in 2011. …The math is ugly: On a $5 million estate, the tax consequence of dying a minute after midnight on Jan. 1, 2011 rather than two minutes earlier could be more than $2 million; on a $15 million estate, the difference could be about $8 million.

The story then features several anecdotes from successful people, along with observations from those who deal with wealthy taxpayers. The obvious lesson is that taxpayers don’t want the IRS to confiscate huge portions of what has been saved and invested over lifetimes of hard work.

“You don’t know whether to commit suicide or just go on living and working,” says Eugene Sukup, an outspoken critic of the estate tax and the founder of Sukup Manufacturing, a maker of grain bins that employs 450 people in Sheffield, Iowa. Born in Nebraska during the Dust Bowl, the 81-year-old Mr. Sukup is a National Guard veteran and high school graduate who founded his firm, which now owns more than 70 patents, with $15,000 in 1963. He says his estate taxes, which would be zero this year, could be more that $15 million if he were to die next year. …Estate planners and doctors caution against making life-and-death decisions based on money. Yet many people ignore that advice. Robert Teague, a pulmonologist who ran a chronic ventilator facility at a Houston hospital for two decades, found that money regularly figured in end-of-life decisions. “In about 10% of the cases I handled at any one time, financial considerations came into play,” he says. In 2009, more than a few dying people struggled to live into 2010 in hopes of preserving assets for their heirs. Clara Laub, a widow who helped her husband build a Fresno, Calif., grape farm from 20 acres into more than 900 acres worth several million dollars, was diagnosed with advanced cancer in October, 2009. Her daughter Debbie Jacobsen, who helps run the farm, says her mother struggled to live past December and died on New Year’s morning: “She made my son promise to tell her the date and time every day, even if we wouldn’t,” Mrs. Jacobsen says. …Mr. Aucutt, who has practiced estate-tax law for 35 years, expects to see “truly gruesome” cases toward the end of the year, given the huge difference between 2010 and 2011 rates.

The obvious question, of course, is whether politicians will allow the tax to be reinstated. The answer is almost certainly yes, but it’s also going to be interesting to see if they try to impose the tax retroactively on people who died this year.

So far in 2010, an estimated 25,000 taxpayers have died whose estates are affected by current law, according to the nonpartisan Tax Policy Center. That group includes least two billionaires, real-estate magnate Walter Shorenstein and energy titan Dan Duncan. …”Enough very wealthy people have died whose estates have the means to challenge a retroactive tax, and that could tie the issue up in the courts for years,” says tax-law professor Michael Graetz of Columbia University.

It should go without saying, by the way, that the correct rate for the death tax is zero. It’s also worth noting that this is an issue that shows that incentives do matter.

Top House Democrat Calls for Middle-Class Tax Hikes (and the real reason why)

Smart statists understand that there are very strong Laffer Curve effects at the top of the income scale since investors and entrepreneurs have considerable ability to control the timing, level, and composition of their income. So if higher tax rates on upper-income taxpayers don’t collect much revenue, why is the left so insistent on class-warfare taxation? The answer, I think, is that soak-the-rich taxes are a “loss-leader” that politicians impose in order to pave the way for higher taxes on the middle class. Indeed, I made this point in my video on class warfare taxation, and noted that are not enough rich people to finance big government. As such, politicians that want to tax the middle class hope to soften opposition among ordinary people by first punishing society’s most productive people. We already know that tax rates on the so-called rich will jump next January thanks to higher income tax rates, higher capital gains tax rates, more double taxation of dividends, and higher death taxes. Now the politicians are preparing to drop the other shoe. Excerpted below is a blurb from the Washington Post about a member of the House Democratic leadership urging middle-class tax hikes, and let’s not forgot all the politicians salivating for a value-added tax.

Tax cuts that benefit the middle class should not be “totally sacrosanct” as policymakers try to plug the nation’s yawning budget gap, House Majority Leader Steny Hoyer (D-Md.) said Monday, acknowledging that it would be difficult to reduce long-term deficits without breaking President Obama’s pledge to protect families earning less than $250,000 a year. Hoyer, the second-ranking House Democrat, said in an interview that he expects Congress to extend middle-class tax cuts enacted during the Bush administration that are set to expire at the end of this year. But he said the extension should not be permanent. Hoyer said he plans to call for a “serious discussion” about the affordability of the tax breaks. …The overarching point in Hoyer’s remarks is the need for a bipartisan plan that includes spending cuts and tax increases, in the tradition of deficit-reduction deals cut under former presidents George H.W. Bush and Bill Clinton. Drafting such a plan would require a reexamination of tax cuts enacted in 2001 and 2003, Hoyer says – cuts that benefited most taxpayers.

Is Hillary Clinton Ignorant about Geography, Fiscal Policy, or Both?

Hillary Clinton recently opined that Brazil was a great role model for the idea of soaking the rich with higher tax rates. She didn’t really offer evidence for that specific assertion, but Politico reports that she did say that “Brazil has the highest tax-to-GDP rate in the Western Hemisphere and guess what — they’re growing like crazy.”

I’m not sure if “growing like crazy” is an accurate description, particularly since poor nations normally have decent growth rates because they start from such a low baseline.

But let’s excuse that bit of rhetorical excess and focus on the really flawed portion of her remarks.

Contrary to her direct quote, Brazil does not have the “highest tax-to-GDP rate in the Western Hemisphere.” It may have the highest tax burden in South America. And it may even have the highest tax burden in all of Latin America, but its overall tax burden of about 24 percent of GDP is slightly below the aggregate tax burden in the United States.

I suppose I should issue a caveat and say there’s a very slight chance that the recession has temporarily pushed U.S. tax receipts as a share of GDP below the Brazilian level, but that isn’t apparent from the IMF data. Moreover, there’s no doubt that the tax burden in Canada is significantly higher than the Brazilian burden.

So Secretary Clinton either was unaware that the United States and Canada are in the Western Hemisphere, or has no clue how to read fiscal statistics.

But let’s suspend reality and assume that Brazil has a higher tax-to-GDP ratio. Would that somehow be proof that Brazil is a role model for class-warfare taxation? There is no precise definition of that term, to be sure, but high tax rates on the rich presumably are a necessary component of any class-warfare system. Yet Brazil’s top tax rate is 27.5 percent. That’s not exactly a low-rate system such as Hong Kong, and it’s 27.5 percentage points higher than the zero-percent rate in the Cayman Islands, but it also happens to be significantly lower than the 35 percent (soon to be 39.6 percent) rate in the United States. If that’s class warfare, sign me up for the Brazilian approach.

I suppose it’s possible that Brazil’s top tax rate recently has been boosted, but that didn’t show up in a Google search. And even if the rate was just increased, that would hardly be proof of Secretary Clinton’s strange hypothesis that high tax rates and/or high tax-to-GDP rates are a magical formula for growth. That would require looking at future economic performance with the higher top tax rate, not the recent growth rates with the 27.5 percent top tax rate.

But pointing out Secretary Clinton’s mistakes seems a bit rude and I do like to be a gentleman, so let’s at least give her points for consistency. Earlier this year, she urged higher tax rates on the so-called rich in Pakistan, so at least she doesn’t discriminate in her desire to punish success.

The Capital Gains Tax Rate Should Be Zero

Every economic theory – even socialism and Marxism – agrees that saving and investment (a.k.a., capital formation) are a key to long-run growth and higher living standards. Yet the tax code penalizes with double taxation those who are willing to forgo current consumption to finance future prosperity. This new video, narrated by yours truly, explains why the capital gains tax should be abolished.

Unfortunately, Obama wants to go in the wrong direction. He wants to boost the official capital gains tax rate from 15 percent to 20 percent - and that is after imposing a back-door 3.8 percentage point increase in the tax rate as part of his government-run healthcare scheme.

The video concludes with six reasons why the tax should be abolished, including its negative impact on both jobs and competitiveness.

Ultra-Rich Leftists Want to Atone for their Guilt by Paying Higher Taxes…And They Want to Impose their Neurotic Views on the Rest of Us

A Washington Post columnist reports on a group of limousine liberals who are lobbying to pay more taxes. Of course, there’s no law that prevents them from writing big checks to the government and voluntarily paying more, so what they’re really lobbying for is higher taxes on the vast majority of investors and entrepreneurs who don’t want more of their income confiscated by the clowns in Washington and squandered on corrupt and inefficient programs:

A group of liberals got together Tuesday and proved that they, too, can have a tax rebellion. But theirs is a little bit different: They want to pay more taxes. “I’m in favor of higher taxes on people like me,” declared Eric Schoenberg, who is sitting on an investment banking fortune. He complained about “my absurdly low tax rates.” “We’re calling on other wealthy taxpayers to join us,” said paper-mill heir Mike Lapham, “to send the message to Congress and President Obama that it’s time to roll back the tax cuts on upper-income taxpayers.” …They are among 50 families with net assets of more than $1 million to take a “tax fairness” pledge – donating the amount they saved from Bush tax cuts to organizations fighting for the repeal of the Bush tax cuts. According to a study by Spectrem Group, 7.8 million households in the United States have assets of more than $1 million – so that leaves 7,799,950 millionaire households yet to take the pledge. …Of course, if millionaires really want to pay higher taxes, there’s nothing stopping them. The Treasury Department Web site even accepts contributions by credit card to pay the public debt. …His donation will, however, ease the sense of guilt that comes with great wealth, described poignantly by the millionaires: “In 1865, my great-great-grandfather Samuel Pruyn founded a paper mill on the banks of the Hudson River in Glens Falls, New York,” Lapham explained. Judy Pigott, an industrial heiress on the call, added her wish that her income, “mostly unearned income, be taxed at a rate that returns to the common good that I have received by a privilege.” Confessed Hollender, who now runs the Seventh Generation natural products company: “I grew up in Manhattan on Park Avenue in a 10-room apartment.”

P.S. It’s also rather revealing that Massachusetts had (and maybe still has) a portion of the state tax form allowing people to pay extra tax, yet very rich statists like John Kerry decided not to pay that tax while urging higher taxes for mere peasants like you and me.

P.P.S. I debated one of these guilt-ridden, silver-spoon, trust-fund rich people on CNN last year and never got an answer when I asked him why he wanted to pull up the ladder of opportunity for the rest of us who would like to become rich some day

Real World Evidence for the Laffer Curve from the Government of Washington, DC

President Obama is proposing a series of major tax increases. His budget envisions higher tax rates on personal income, increased double taxation of dividends and capital gains, and a big increase in the death tax. And his health care plan includes significant tax hikes, including perhaps the imposition of the Medicare payroll tax on capital income – thus exacerbating the tax code’s bias against saving and investment. It is unclear why the White House is pursuing these punitive policies. The President said during the 2008 campaign that he favored soak-the-rich taxes even if they did not raise revenue, but his budget predicts the proposals will raise lots of money.

Because of the Laffer Curve, it is highly unlikely that all of this additional revenue will materialize if the President’s budget is approved. The core insight of the Laffer Curve is not that all tax increases lose money and that all tax cuts raise revenues. That only happens in rare circumstances. Instead, the Laffer Curve simply reveals that higher tax rates will lead to less taxable income (or that lower tax rates will lead to more taxable income) and that it is an empirical matter to figure out the degree to which the change in tax revenue resulting from the shift in the tax rate is offset by the change in tax revenue caused by the shift in the other direction for taxable income. This should be an uncontroversial proposition, and these three videos explain Laffer Curve theory, evidence, and revenue-estimating issues. Richard Rahn also gives a good explanation in a recent Washington Times column.

Interestingly, the DC government (which certainly is not a bastion of free-market thinking) has just acknowledged the Laffer Curve. As the excerpt below illustrates, an increase in the cigarette tax did not raise the amount of revenue that local politicians expected. The evidence is so strong that the city’s budget experts warn that a further increase will reduce revenue:

One of the gap-closing measures for the FY 2010 budget was an increase in the excise tax on cigarettes from $2.00 to $2.50 per pack. The 50 cent increase in the cigarette tax rate was projected to increase revenue but also reduce volume. Collections year-to-date point to a more severe drop in volumes than projected. Anecdotal evidence suggests that Maryland smokers who were purchasing in DC in FY 2008, because the tax rate in the District was less than the tax rate in Maryland, have shifted purchases back to Maryland now that the tax rate in the District is higher. Virginia analyzed the impact of demand when the federal rate went up by $0.61 in April and has been surprised that demand is much stronger than they had projected–raising the possibility that purchasing in DC has moved across the river.  Whatever the actual cause, because of the lower than anticipated collections, the estimate for cigarette tax revenue is revised downwards by $15.4 million in FY 2010 and $15.2 million in FY 2011. Given that cigarette tax rates in neighboring jurisdictions are now lower than that of the District, future increases in the tax rate will likely generate less revenue rather than more.