Envy-Driven ‘Fairness’ Taxes

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Mr. O's Fairness Taxes Could Backfire and End Up A Big Zero for America Tax Reforms Appeal to the Envious Masses, Protect Friends of Mr. O and May Backfire To Crash the Economy

by Bill Sardi

Recently by Bill Sardi: Bankers Want Entire Industry To Become One Giant MF Global

     

In an era when growth in the private sector of the economy has ceased and an unprecedented compensational expansion of the federal deficit budget has been launched in a massive wealth-transfer maneuver, instead of lowering taxes to free up capital to grow the economy, Mr. O appeals to the American masses that the wealthy aren't paying their fair share of taxes.

The widening gap between rich and poor creates believability to the idea the wealthy are a bunch of tax cheats who have helped create an unprecedented decline in the American economy. In fact, the wealthy may be scapegoats who may take a bullet that should be aimed at crony capitalists who own the White House. Truth-be-told — proposed tax increases will likely backfire and lead America over the cliff into a financial morass while the real tax cheats hide behind the Presidential Seal.

I thought the problem was government over-spending but the widening income gap between the very wealthy and poor has been exploited to gain votes for the upcoming election. It's a bait and switch maneuver that is gaining traction in the streets as the slogan about the 99% vs. the 1% has now spread across the globe. In fact, it appears the 99% vs. 1% banner is nothing more than a hidden campaign to restore undeserved confidence in Mr. O and aid his re-election. There are powerful forces in play here, the same forces that were able to award Mr. O a Nobel Peace Prize in 2009, barely a year into his Presidency, at the height of the public's first realization Mr. O was not living up to his campaign promises.

Then Presidential candidate Mr. O faced ABC's Charles Gibson in the 2008 primary debates. Gibson said: "history shows that when you drop the capital gains tax, the revenues go up." Obama's reply: "Well, Charlie, what I've said is that I would look at raising the capital gains tax for purposes of fairness." So this fairness theme for taxation has been on Mr. O's mind for some time.

Don't pin the tale on the wrong donkey

In this game of pinning the tale on the donkey, blame has been laid on the super wealthy for the sour state of the American economy. The super wealthy are mischaracterized as tax evaders rather than high income individuals who are simply avoiding taxes by taking all the deductions the tax code provides. And upon examination, the super-wealthy become anyone making $200,000 or more a year.

Mr. O isn't talking about fairness taxes for his cronies in the banking and investment industry who are plundering the American economy via fast electronic stock trades, insider trading, exorbitant bonuses for government bailed-out financial institutions, government guaranteed stock trading, money laundering, disregard for reserve requirements, side-stepping of accounting rules, overvaluation of real estate, and violation of other existing laws. Mr. O's administration is laced with cabinet members and other White House consultants from the financial industry. If you don't believe Mr. O is buddy-buddy with Wall Street banksters, watch this video.

Instead, Mr. O is aiming at American entrepreneurs like Larry Ellison of Oracle, Bill Gates of Microsoft and Mitt Romney of Bain Capital fame, who derive a great deal of their income in the form of capital gains that aren't taxed at the same rate as normal income. It should be remembered that Mr. O promised when he was running for office in 2008 that he would cut the budget deficit in half by the end of his first term.

Now in 2012 it is the evil millionaires and even quarter-millionaires that are to blame for the sour economy. The change of subject by Mr. O is achieved only because of a news media that doesn't point all this out to the public.

NPR presents Mr. O's fairness taxes:

Here is what NPR has to say about Mr. O's fairness tax plan:

Under current law, the top capital gains rate is scheduled to rise next year from 15 to 20 percent. You’ll hear a lot in the coming months about how this tax increase will destroy jobs. That’s demonstrably untrue. Indeed, we’d like to see capital gains rates rise to the level of income taxes. For one thing, it would prevent the sort of tax-code gaming that occurs when wealthy investors disguise what’s actually income as capital gains, just so they can pay the lower rate. For another, a capital gains tax lower than the regular income tax causes the U.S. Treasury to forego a vast amount of revenue — and, given the budget deficit, that’s something we can ill afford.

But, perhaps most importantly, there’s a basic matter of justice at stake: Why should we tax labor at a higher rate than capital? Why should the wealthy be able to contribute at lower rates than other Americans? These were some of the principles behind a 1986 tax reform bill that taxed capital gains at the same rate as wages. It was signed by a notorious left-winger named Ronald Reagan. It did not cause the sky to fall. And it made America, however temporarily, a fairer place.

Rebuttal to NPR But, but, please NPR, just how does the growth of more federally-backed jobs do anything but put more unemployed people on the backs of the remaining employed? Taxes don't create real jobs, private capital does. The federal government swipes 15% of its revenues just for overhead.

And why, asks NPR, should America tax capital at a lower rate than labor? Answer: because this attracts more investment and growth in the economy. The idea is to keep the wealthy from hoarding wealth and not putting it to use. For example, Mr. Romney, like many retirees, derives a great deal of his income off of capital gains in the form of stock dividends. You can ridicule Romney and make him your poster boy for fairness taxes, but sticking tax pins in a Romney doll would drastically reduce the retirement income of many seniors who wisely invested their money years ago rather than relying solely upon Social Security to see them through their retirement. It is a misdirected idea to raise capital gain tax from 15% to 30%, as Mr. O proposes. His appeal for fairness taxes only polarizes Americans, pitting rich against poor in a convincing vote-getting tactic that preys upon the desperate masses and their financial plight.

There goes the consumer economy

Another proposed fairness tax would be to ditch the Bush tax cuts and raise the tax on top tier wage earners from 35% to 39.6%. This suggestion has gained great traction in the news media but it too will backfire like the rise in capital gains taxes.

With manufacturing and exports having dwindled, 70% of the American economy is now represented by consumer spending. It has become clear that wealthy Americans have continued to go shopping during this economic downturn. Sales of luxury goods are up. American Express beat forecasts in January 2012 largely on higher spending per card by its more affluent customer base. Federal Reserve Chairman Ben Bernanke has said economic recovery depends upon consumer spending, "the willingness of households to spend," he said.

Now, take away that additional 4.6% that top wage earners get to keep (difference between 35% and 39.6% top-tax rate) and the consumer economy is likely to collapse.

It seems like Washington DC is mindless in its quest to dig itself out of deficit spending, risking a backfire that would bring down the whole economy. That the masses are herded into this factitious corral is even more frightening.

Tax hikes appear inevitable regardless of the election

Regardless of who is elected to the White House in the 2012 election it appears that these proposed tax hikes are going into effect. Take a gander at the Congressional Budget Office chart (click here for link) showing annual federal spending is charted to decline from –$1.079 trillion in 2012 to –$585 billion in 2013 and -$269 billion by 2015. That is all accomplished by the proposed tax increases.

Something that is lost in the history of the Bush tax cuts is the fact GW Bush reduced taxes by about $400 billion, tax cuts that were enacted in 2001 and 2003. Immediately thereafter, sharp rises in gasoline prices followed. Bush was a former oilman. He simply released money that would have come into the federal coffers into the economy so oil producers could raise their prices. But now we have the opposite, with gasoline prices rising rapidly and a major oil producer (Iran) threatening to re-direct its oil to non-western countries. We now have the prospect of $4-a-gallon gasoline. The proposed tax increases will further diminish the disposable income of Americans.

Peter Ferrara lowers the boom on fairness taxes

Peter Ferrara, writing at Forbes.com, explains the outcome of President O's fairness taxes this way (excerpted):

….Already enacted under current law for 2013 are increases in the top tax rates for virtually every major federal tax. In that year, the tax increases of Obamacare go into effect, and the Bush tax cuts expire, which Obama refuses to renew for the nation's small businesses, job creators and investors. That is the English translation of individuals making over $200,000 a year, and couples making over $250,000 per year.

As a result, if the Bush tax cuts simply expire for these higher income earners, the top 2 income tax rates will go up by nearly 20%, the capital gains tax rate will soar by nearly 60%, the tax on dividends will nearly triple, the death tax rate will rise by nearly a third, and the Medicare payroll tax will explode by 62% for these targeted taxpayers.

Obama explains these tax policies in his budget message, saying "everyone must shoulder their fair share," and "we need an economy where everyone shoulders their fair share to put our fiscal house in order." The taxpayers targeted for these tax increases are the top 3% of income earners. But as the Wall Street Journal noted Tuesday, those top 3% pay more in federal income taxes than the bottom 97% combined! So if that is not their fair share, what would that fair share be, Mr. Obama?

By contrast, the bottom 40% of income earners as a group paid no federal income taxes. Instead, they received net payments from the income tax system equal to 3.8% of all federal income taxes. In other words, they paid negative 3.8% of federal income taxes.

This was after more than 25 years of supply-side Reaganomics cutting tax rates! The share of federal income taxes paid by the top 1% was 17.6% in 1981, when President Reagan brought his supply side economics to Washington. After a quarter century of rate cuts, that share had more than doubled by 2007, as indicated above. That is because with the lower tax rates, incomes boomed along with the economy, and high income taxpayers had the incentives to pull their money out of tax shelters and invest it in the real economy, fueling the boom while increasing their reported incomes. That is why Jack Kemp always used to say if you want to soak the rich, cut tax rates.

Jack Kemp always used to say if you want to soak the rich, cut tax rates.

President Obama explained in his budget message, "a teacher, a nurse, or a construction worker who earns $50,000 a year should not pay taxes at a higher rate than someone making $50 million. It is wrong for Warren Buffett's secretary to pay a higher tax rate than Warren Buffett." Agreed, it would be wrong if it were true. That is why conservative Republicans propose a flat tax, where everyone pays the same rate, and "everyone plays by the same rules," to use the President's words.

In fact, if President Obama's comprehensive tax rate increases are not averted, the result will be revenues falling far short of projections, or even declining further, and deficits and debt increasing even more, rather than declining as Obama wrongly projects.

Ferrara goes on to say that when the capital gains tax rate was cut in 1997 from 28% to 20% that revenues increased by $84 billion over the pre-tax cut projections for 1997-2000. There are similar examples of this same phenomenon in 1999 and in 2003.

Other rationales for lower capital gains taxes

There are many other rationales for a low capital gains tax:

We should not forget that America is in competition for capital. Germany, Holland, Mexico and India have no capital gains taxes while Canada, China and Japan have tax rates much lower than 30 percent. It's possible a rise in the capital gains tax will drive capital overseas.

There are 21 States that tax capital gains as normal income and at least major State is reevaluating that tax. Tax-free states like Florida beckon investors. Competition for money is keen.

Furthermore, it may be an unpopular fact that many wealthy individuals over-pay capital gains taxes on property they bought years ago and sold years later at a loss or break-even because of offsetting inflation. Currently there is no provision for inflation in capital gains taxes. A lower tax rate on capital gains, which is the current state of affairs, would help offset this problem, says Ray Madoff, writing at Bloomberg News.

The wealthy who own stocks may choose to hold onto their stake in a company for a long time as taxes are not generated until shares are sold. The very wealthy, like Larry Ellison of Oracle fame, can borrow money to purchase yachts and homes using their stock as collateral and pay no tax. So Mr. O wants to enact "the Buffet rule" — a new minimum tax of 30% for households earning at least $1 million a year. But imagine what that minimum 30% tax would do to Mr. Ellison who has pledged 95% of his wealth to charity. The main point here is that the wealthy have many avenues to avoid taxes.

Just exactly how Mr. O pretends to be helping the poor while enriching the wealthy is revealed in an increase in taxpayer-funded subsidies, proposed by the White House, for those who purchase new-technology vehicles, like the Chevrolet Volt. The subsidy would be $10,000 per buyer for an automobile that sell for $41,000. The typical Volt buyer has an average annual income of $175,000.

In summary, Mr. O's fairness taxes may result in a big 0, or even worse, a big minus-zero, for the American economy. If you are wearing a Mr. O T-shirt and you retain it as a keepsake, it might become valuable when Mr. O becomes known as President Zero.

Bill Sardi [send him mail] is a frequent writer on health and political topics. His health writings can be found at www.naturalhealthlibrarian.com. His latest book is Downsizing Your Body.

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