Saturday, June 2, 2012

Tax the Rich?


Recently, I had an argument with a friend who claimed that the “rich” in America paid no taxes.  By the “rich” he meant the top 1%, a group that has been demonized by President Obama (although he is a member) as well as by the “Occupy” protestors. I recalled seeing somewhere that the top 1% actually paid almost 40% of all Federal income taxes but my friend could not believe it.

A quick check on the web showed that I was correct. Here are the figures. In 2009 the top 1%, those with Adjusted Gross Income (AGI) in excess of $343927, paid 36.73% of all Federal Income taxes that year. That was not an aberration for the 2008 figures were about the same. This calculation does not take into consideration the amount the 1% paid in other taxes, like state and local income taxes, sales taxes, or real estate taxes.

The top 5%, those with AGIs over $154643, paid almost 60% of all Federal income tax. The top 25% (AGI over $66193) account for 87% of all income tax. Finally, the bottom 50% (AGI below $32396) pay practically nothing (2.25%) of the Federal tax bill. This last group must include most of the Occupy protestors.

Typically, when people like President Obama say, “tax the rich”, they rarely provide any kind of realistic figure of how much revenue will actually be gained by their proposals. When studies show that the increased revenues will come nowhere near closing the ever-growing federal deficit, it becomes clear that “tax the rich” is a political ploy and not meaningful fiscal policy.

Instead of increasing taxes on the rich, government should focus on increasing incomes for everyone. Why does only 10% of the population make more than $112124 per year? Why does 50% of the population make less than $32396 per year? Government should exist to promote and protect wealth accumulation, and not to destroy it.

Even if advocates of higher taxation have their way and increase taxes on income, they will not be able to reduce the deficit. The Federal government will be forced to look for other sources of revenue. Eventually, in addition to taxing income, politicians will discover the tax gold mine of an asset tax.

In my career as a financial advisor I had many clients who had modest incomes and paid very little in Federal income tax, but who could be considered millionaires. I recall one elderly couple with a house worth about $600000 and investment assets of about $400000 from which they took an income of about $10000 per year to supplement their social security income. They lived modestly since their house was free of mortgage debt and paid no Income tax. However, like many senior citizens they did pay a substantial real estate tax on their suburban home.

A real estate tax is an asset tax. It is calculated on the basis not of your ability to pay but on the value of your home. It is the major source for local government funding in most states. It always increases and will eventually drive most seniors from their homes. It will not surprise me to see the Federal government propose some kind of asset tax in the near future. It wouldn't take much to see the government add a tax on mutual fund assets and have the fund companies collect it along with their management fees. An asset tax is a form of confiscation.

Anyone who is in favor of higher taxation should view the attached video from an Indiana newscast to see where his or her taxes actually go. ###

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