Regressive Tax System Unfair, but Also Incredibly Destructive

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          The current tax system is unfair.  But it’s not just about fairness, it’s a matter of survival.  A recent Associate Press article by Stephen Ohlemacher appearing in the Albany Times Union (4/18/11) under the headline “Tax day a good day to be rich” reported that:

           “The Internal Revenue Service tracks the tax returns with the 400 highest adjusted gross incomes each year. The average income on those returns in 2007, the latest year for IRS data, was nearly $345 million. Their average federal income tax rate was 17 percent, down from 26 percent in 1992.  * * *  The top income tax rate is 35 percent, so how can people who make so much pay so little in taxes?”

It’s a good question, but Mr. Ohlemacher didn’t answer it.  Since the marginal rate was 40% before the Bush tax cuts, that might help explain the 26% average effective rate in 1992.  But what about the 17% average rate in 2007?

Ohlemacher says: “The nation’s tax laws are packed with breaks for people at every income level. There are breaks for having children, paying a mortgage, going to college, and even for paying other taxes.”   The only “break” he identified for the very rich, however, was this: “Plus, the top rate on capital gains is only 15 percent.”

Of course.  If most of your $345 million consists of returns on investments, which frankly has to be the case, then you’re paying a 15% rate on most of your income.  That would explain an average 17% rate for the top 400.  Consider this graph, which shows how for higher incomes capital gains and dividend income become hyperbolically a higher share of total household income.  This data is for 2003, but we can assume the pattern remains the same today:

This graph shows that if you are making less than $200,000, the favorable capital gains tax rate is not a significant factor in your overall rate.  In fact, if you are not in the top 3% of incomes (over $200,000), as shown above, less than 5% of your income  qualifies for the lower capital gains rate.

It starts to get significant, though, as your income approaches $1 million.  Again, the top 400 had an average income of $345 million in 2007.  Projecting on the graph to that from $1 million, it is obvious that almost all of the income of the top 400 is capital gains and interest income.

This next graph shows that people making over $200,000 are in the top 3%, and $1 million incomes are in the top 1% of households:

Almost all  financial wealth, and thus the opportunity for capital gains, is held by the super rich.  (The top 1% holds more than one-half of all financial wealth.)  The greater your income, the lower your overall rate becomes as you benefit from capital gains treatment.  The biggest tax benefit from capital gains treatment is in the top .1% of households.

Obviously, the capital gains benefits that drive the income tax liability of the very rich are almost totally unavailable to the vast majority of Americans.  Ordinary Americans pay taxes on ordinary income.  Here are the tax brackets for married couples:

0-8,375                        10%

8,375-34,000              15%

34,000-82,500           25%

82,500-171,850          28%

171,850-373,650         33%

373,650-                       35%

You have to be poor to qualify for a rate as low as the super rich in the top .1$ pay on substantially all their income.  In order to qualify for the 15% rate on ordinary income, household taxable income would have to fall in the 8,375-34,000 range, and the official poverty level in 2011 in the United States is $22,350 for a family of four.

Therefore, incredibly, only household incomes falling at, near, or below the official poverty line qualify for a tax rate as low as the super rich enjoy on all of their investment earnings!

Ordinary incomes for the middle class, obviously, are taxed at higher rates, and this is important: People making $82,500-$373,650, in the 28% and 33% tax brackets who have only modest capital gains benefit on average, who are shouldering a huge portion of the income tax burden, are paying the highest percentages of their incomes.

This is a regressive tax system and it’s obviously unfair.  The wealthiest Americans are getting away with murder.  It could be easily fixed by increasing the top rate and the taxes they pay on capital gains.

         The tax system is beyond unfair – It’s destructive, and has been for 30 years.

We emphasize in this blog that the escalating inequality of incomes and wealth has occurred because the marginal income rate was reduced below 70% in the Reagan Administration.  The wealthy top 1% has captured from the lower 99% an estimated $10 trillion since then just from paying lower taxes.  This is wealth that would and should have been held by the middle class and the bottom 99%.

And they financed that wealth accumulation by raising over $12 trillion of federal debt, creating a financial crisis for government that the rich refuse to help fix.

As long as the marginal rate stays below 70%, this improper wealth transfer will continue.  The 35% rate is only half of what it should be, and it’s essential to get the marginal tax rate up to at least 50-55%, and soon.  Obviously, the capital gains rate must be substantially increased.  I would suggest a graduated capital gains tax: It could be kept lower for those in lower-income tax brackets who are trying to establish a bit of wealth (after all that has befallen them), but it should be at least equal to the marginal income tax rate, for incomes over $1 million.

In these awful circumstances, we see Republicans propose to lower the marginal rate to 25%!  Obviously, that’s not to benefit the mega-rich, who are already paying taxes on most of their income at the even lower 15% capital gains rate, the poverty-level rate for ordinary income.  No, it’s designed to lower taxes for the almost-wealthy in the 28%, 33% and 35% tax brackets, who are now shouldering the major tax burden for the nation.

What then?  How will government survive?  How will America survive?  In the face of the debt crisis they created, Republicans in Congress already press to gut federal spending on programs for people, including Medicare and Medicaid and the self-funded Social Security system.  No worse set of proposals could be dreamed up, if preservation of the American economy is on the agenda.

When it comes down to a choice, they apparently will opt to maintain profits on military spending and wars before acting to save the American people.

Since they can no longer hope to sell any part of their agenda to any thinking person, they’ve taken to spending millions on TV ads to lie to the uninformed, claiming for example that the Paul Ryan budget will “protect” Social Security while it actually would dismantle it.

Americans must now turn all Republicans, tea-baggers, and plutocrats out of office.  There is no other way.

JMH –4/19/11, rev. 4/28/11

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