Friday, October 14, 2011

Obama and Taxes

I thought I'd share something I wrote for other purposes on Obama's initial tax proposals.  As you are no doubt aware, I thought the original plan was somewhat flawed but vastly better than Reid's alterations.  I also continue to think it was really shady how quickly the media shifted the dialogue to average tax rates which had nothing to do with what Obama was trying to say, which I think I make clear below.

The speed with which stories appeared in many news sources that sought to obscure the focus of Obama's September 19th speech and deficit reduction plan from his own focus on how his plan “eliminates tax loopholes that primarily go to the wealthiest taxpayers and biggest corporations – tax breaks that small businesses and middle-class families don’t get” with irrelevant details about how the “average” millionaire in the top 1% of income pays somewhere around 29% of their income in taxes has been troubling. It is quite clear from Obama's speech, as well as the actual Office of Management and Budget report on the plan, that there was never any intention to focus on raising revenue from the “average” wealthy individual but rather to focus on the “companies that get out of paying a lot of taxes,” and the millionaires and billionaires who “get a better deal than ordinary families get” and not the corporations who end up footing the bill for those that avoid taxes through loopholes or the wealthy individuals who pay their “fair share in taxes to contribute to the nation that made our success possible.”

The theme of the problems that loopholes create to fair taxation is struck throughout both the President's speech and the deficit reduction plan, the intent of the tax policies in Obama's plan is to close the loopholes that allow a minority of the top 1% to pay taxes at a rate below that of most of the middle class. The “average” wealthy individual who isn't getting rock bottom tax rates through exploiting tax loopholes is likely to see less change in their tax rate; what change they will see will mainly result from not extending the Bush tax cuts for high earners. To give an example of the variation in tax rates based on Obama's speech, looking just at effective income and payroll taxes, which would include deductions and credits but not income from sources such as capital gains, using data from the Tax Policy Center [there was an error in initial estimates, I've been checking for revisions and will hopefully remember to correct this piece when they are published, I can't imagine the errors are large enough to change the general point made below] the teacher mentioned in Obama's speech making $50,000 paid an effective median tax rate of 15.1% for the $50,000 to $75,000 bracket, among those making $1,000,000 or more, one quarter paid effective tax rate of only 12.6% or less. While the “average” wealthy individual paid taxes at a higher rate than the schoolteacher, a quite considerable portion of the wealthy paid far less. These numbers don't even get into the complications highlighted in the Obama speech, such as the 15% capital gains rate, which is much lower than marginal taxes on most other types of income and makes up a much larger proportion of the income of most wealthy individuals than it does most schoolteachers.

In addition to keeping in mind the disparities of the rates of taxation between the wealthiest and the rest of us it is also important to know that the share of income going to the wealthiest has increased far more than their share of taxes. More data from the Tax Policy Center indicates that the share of income going to the top 1% has increased from 9.3% in 1979 to 19.4% in 2007 while their share of tax liabilities has only increased from 15.4% in 1979 to 28.1% in 2007. In other words, while their share of income has more than doubled their share of taxes has only increased by about 80%. Of course, this also means that for the rest of us, including many that see half or more of our income going to the basic modern necessities of food, clothing, shelter, and transportation, our share of Federal taxes has not declined nearly as much as our share of income. All the push back against Obama's tax plan appears to indicate that the rich feel that their fair share of taxes has changed quite a bit less than their share of income.

These changes are why President Obama's focus on the tax breaks that allow some wealthy people to pay far less in taxes is so important. Over the last few decades we've seen a vast increase in the share of national income going to the top 1% but their share of taxation has failed to keep pace with this increase. But this isn't universal, even at the top. Arguments about the top 1% being “producers” or needing low taxes to create jobs ignores the fact that some corporations pay no corporate income tax at all while other pay close to 35% of their net incomes in taxes or that a quarter of the nation's wealthiest individuals pay an effective rate of only 12.6% or less on income and payroll taxes while a tenth of individuals making over $1 million pay an effective rate of 31.1% or more in income and payroll taxes. There seem to be individuals and corporations just as able to create jobs and new opportunities when paying tax rates closer to 35% than 15%, why should some individuals get tax advantages when others don't seem to need it? How are these tax breaks part of anyone's fair share of taxes? Writing about “average” wealthy individuals serves to distract from Obama's central point, some people are getting breaks that others are not, which is bad for all of us. Looking at averages subtly shifts the conversation away from the point that there needs to be a very good explanation for why “somebody who's making $50 million a year in the financial markets should be paying 15 percent on their taxes, when a teacher making $50,000 a year is paying more than that ” mentioned in Obama's speech by lumping him in with the somebody not getting these breaks paying closer to 35 percent of their income in taxes. Reading Obama's speech or his deficit reduction plan makes it obvious that his intention is to close some of the loopholes allowing some wealthy “lucky duckies” (if I may borrow the Wall Street Journal's term for those lucky people too poor to pay income tax) to pay a lower percentage of their income in taxes than someone making $50,000 a year. It is essential to keep the focus on what Obama has actually said and the problem he is trying to address rather than allow the story to be spun into a different story more favorable to those that are trying to preserve their lucrative tax loopholes.

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