For the very rich, income is beside the point.
***
- Harold Meyerson
- Opinion Writer
A tax deal only the ultra-rich could love
Almost all of the debate that convulsed Capitol Hill in December concerned the reinstatement of the highest marginal tax rate on earned income — that is, on wages and salaries. But as Fitzgerald said, the rich are different from you and me, and one of the primary ways they’re different is that they don’t get their income from wages and salaries.
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In 2006, the bottom four-fifths of U.S. tax filers got 82 percent of their income from wages and salaries, a Congressional Research Office study found. The richest 1 percent, however, got just 26 percent of their income that way; for the richest one-tenth of 1 percent, the figure is just 18.6 percent.
The study also looked at dividends and capital gains. The bottom four-fifths got just 0.7 percent of their income from those sources. (Those who believe we’ve become an “ownership society,” please take note.) The wealthiest 1 percent, however, realized 38.2 percent of their income from investments, and the wealthiest one-tenth of 1 percent realized more than half: 51.9 percent.
The tax deal Congress passed last week raised the top rate on wages and salaries from 35 percent to 39.6 percent. The rate on income from capital gains and dividends, however, was raised to only 20 percent from 15 percent. There has been no rending of garments nor gnashing of teeth from our super-rich compatriots; they got one sweet deal.
The intellectual foundations of this deal are even more dubious than the deal itself. Taxing investment income at a lower rate than labor income presumably fosters more investment in the U.S. economy. But say you buy a share of General Electric. The money you pay for your stock will be invested both at home and abroad, because GE, like virtually every major U.S. corporation, is a global company that retains a U.S. headquarters. Now suppose you’re an assembly worker at a GE aircraft engine parts plant in Dayton, Ohio. All your work takes place in the United States, and most of your spending is local, even though many of the products you buy are made abroad. Yet our GE employee may be taxed at a higher rate than our GE investor. We reward the investor for, in effect, sending money abroad, while the worker who produces wealth entirely within our borders gets no such reward. Globalization has completely changed the investment patterns of American corporations, but our tax breaks for investments chug placidly along as though U.S. companies still confined their work inside our borders.
Moreover, 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. Pay from work just ain’t what it used to be. As the St. Louis Federal Reserve has documented, income from wages and salaries as of July 2012 constitutes the smallest share of gross domestic product since World War II. The earned-income share of GDP peaked in 1969 at 53.5 percent. In 2012, it was 43.5 percent.
Where did those 10 percentage points of GDP — currently, about $1.5 trillion every year — go instead of to U.S. workers? It went, in significant part, to corporate profits, whose share of the economy has risen as the share going to wages has diminished. In the third quarter of 2012 — the most recent period for which there are data — after-tax corporate profits constituted the largest share of U.S. GDP since World War II: 11.1 percent.
This shift from wages to profits is called redistribution. It is the central fact of American economic life. And it is the primary reason that economic inequality in the United States has skyrocketed.
Yet wages, which are descending, are taxed at a higher rate than income derived from corporate profits — capital gains and dividends. Far from mitigating the consequences of this shift, the U.S. tax code reinforces the redistribution from wages to profits. Broadly speaking, it rewards the winners of this epochal shift and penalizes the losers, who are the vast majority of Americans.
The lower tax rates for capital gains and dividends, then, effectively reward offshoring more than work done within the United States, increase economic inequality and deprive the federal government of revenue it will need to support an aging population and meet its other obligations. None of this upsets Republicans, but it would be nice if Democrats realized that these tax breaks undermine everything they stand for.
***
Who are the very rich?
“In 1985, the top five
percent of the households – the wealthiest five percent – had net worth of $8
trillion – which is a lot. Today, after serial bubble after serial bubble, the
top five per cent have net worth of $40 trillion. The top five percent have
gained more wealth than the whole human race had created prior to 1980.”
Elsewhere in this same CBS “60 Minutes” interview, Mr. Stockman describes
America's obsession with tax cuts as "religion, something embedded in the
catechism," "rank demagoguery, we should call it what it is," and
"We've demonized taxes. We've created... the idea that they're a
metaphysical evil." And finally, this encompassing observation: "The
Republican Party, as much as it pains me to say this, should be ashamed of
themselves." Reagan Budget Director, David Stockman, who oversaw the biggest tax cut in the history of humankind: http://www.cbsnews.com/video/watch/?id=7009217n&tag=contentMain;contentAux
***
The cliff deal is better than it looks
E.J. Dionne
To be deemed a serious analyst at the moment seems to require a lot of hand-wringing and sneering over how awful Congress looked the past few days as it rushed a “fiscal cliff” deal into law.
So permit me to burn my membership card in the League of Commentators and Pundits.
Of course, there was much wrong about how Congress, particularly the House of Representatives, dealt with the best-known deadline in recent political history. A better deal was available weeks ago. But in the end, some very important and positive things happened.
Democracy, in its messy way, worked. An election had a real impact on public policy, moving it in a more progressive direction. Thus, for the first time since 1990, a significant number of Republicans voted to raise taxes — and they raised them most on the very rich. House Speaker John Boehner allowed a bill to become law on a vote in which far more Democrats (172) than Republicans (85) said “aye.” The old rule that Republicans would allow floor action only on bills that could pass with GOP votes was swept away, at least this time.
The cliff deal made our tax code more progressive. The top income tax rate is back up to 39.6 percent. Capital gains taxes, cut repeatedly since the 1970s, were raised. Consider: The provisions enacted Tuesday night, combined with the tax hike in the Affordable Care Act, mean that capital gains taxes will now be 18.8 percent for couples with annual incomes of more than $250,000 and 23.8 percent for couples earning over $450,000.
True, Democrats caved in by failing to tax dividends as ordinary income, as the government used to. Capital gains should also be taxed as ordinary income or, at the least, at around 30 percent. But is this progress? The answer is yes.
There are other pieces of good news in the bill, including an extension of unemployment benefits and of the various refundable tax credits that are especially helpful to lower-income people. The estate tax rises to 40 percent on fortunes of more than $5 million. Yes, it’s still too low. But at the end of George W. Bush’s second term, we were looking at a complete repeal of the estate tax. Isn’t 40 percent better than zero?
It is a real shame that Congress didn’t include more stimulus measures, especially an extension of the payroll tax holiday for another year, as President Obama originally requested. This would have helped the overall economy and hard-pressed families. But it was blocked not only by conservatives but also by liberals worried about the financing of Social Security. This was a mistake.
Nonetheless, the broadly progressive thrust of the accord is the only way to explain why Boehner had to face down a rebellion from his right and why a substantial majority of his GOP colleagues voted against it.
Many liberals are unhappy for the same reasons that Republicans who backed the bill are hopeful. Both groups assume that (1) Obama has now lost all his leverage; (2) he will fold during the next round of negotiations as a vote on the debt ceiling approaches; (3) this was the last chance to win tax increases; and (4) the deal contains a lot less new revenue (roughly $620 billion over a decade) than it should have.
There’s no question significantly more revenue will be needed to avoid steep cuts in social insurance programs. And it’s useful that many on the left have signaled their dissatisfaction because this will expand their influence (and Obama’s negotiating room) in the coming months.
But we should at least consider the possibility that this week’s Midnight Madness was actually a first step down a better road. This will be true if Obama hangs as tough as he now says he will; if he insists on more revenue in the next round of discussions; and if he immediately begins mobilizing business leaders to force Republicans off a strategy that would use threats to block a debt-ceiling increase to extract spending cuts. Real patriots do not risk wrecking the economy to win a political fight.
Obama has to prove wrong both his skeptical allies and foes inclined to underestimate him. He needs to move the discussion away from a green-eyeshade debate over budgets and foster a larger conversation over what it will take to restore broadly shared economic growth. His presidency really does depend on how he handles the next two months.
