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. ###

Millionaire Tax Sham

                                             

Any thinking person should recognize President Obama’s current attempt to implement the so-called “Buffett Rule” by imposing a higher tax rate on millionaires as the sham it is. Here are the reasons.

1. Budget experts report that at the most it will raise only $47 billion in taxes over the next ten years. That’s an average of less than $5 billion per year. This year’s budget deficit alone is projected to be over $3 trillion!

2. The President knows that this tax has no chance of passing through Congress this year. It is a bald faced attempt to gain headlines and win votes in an election year. It is not a meaningful attempt to cut the budget deficit.

3. Why didn’t he propose it three years ago when he had a majority in both houses of Congress? Instead, he and his party voted to extend the notorious “Bush” tax cuts. The President has just released his own tax return for 2011. Isn’t it funny that now that his book royalties are drying up, and his own income has dropped below a million, that he now proposes a tax on millionaires? In 2009, his income was over $5 million dollars, and in 2010 it dropped to $1.7 million. His recently released 2011 return shows an adjusted gross income of only $789674. This still keeps him in the 1% group but no one is occupying the White House in protest.

By the way, his income shows no capital gains and very little dividend income. Is this why he is so willing to increase taxes on those items?

4. A proposal to increase taxes on capital gains overlooks a very important factor.  Capital gains can only be taxed when they are realized. In other words, a taxpayer must actually sell something for a gain before it can be taxed. Someone like Warren Buffett will only pay tax on his Berkshire Hathaway gains if and when he decides to sell some stock. History shows that when taxes are raised investors usually put off taking gains.

Instead of a millionaire’s tax I would like to propose a tax that would have broad appeal. I call it the “Liberal” solution but it should appeal to Conservatives as well. Taxpayers are already allowed to voluntarily pay more taxes than they have to. On line 60 of his tax return President Obama could have elected to pay an additional or voluntary tax. He opted not to do so, and paid according to the prevailing Bush rates.

I propose that anyone who has condemned the Bush tax cuts just ask their accountant to calculate what they would have owed under the old system that prevailed during the Clinton years. This proposal should especially appeal to rich liberals in blue states like New York and California who are always in favor of higher taxes.

While they are at it, these liberals could ask their accountants to go back and re-calculate their tax liability for the past 10 years and pay up the difference. For example, President Obama could lead the way by re-calculating the tax on his 2009 income of over $5 million.

The “Liberal” solution does not have to stop with income taxes. Wealthy liberals could opt to pay their estate taxes under the old rules as well. Moreover, instead of setting up tax-exempt foundations that will never die and never pay estate taxes, liberal aristocrats like the Clintons, the Gores, the Kerrys, the Kennedys, and the Buffetts could leave their estates to the government. Don’t they think the government will use their money as wisely as their foundations? ###