Tuesday, September 20, 2011

The Leaderless United States of America

"Warren Buffett’s secretary shouldn't pay a higher tax rate than Warren Buffett. There is no justification for it. It is wrong that in the United States of America a teacher or a nurse or a construction worker who earns $50,000 should pay higher tax rates than somebody pulling in $50 million."

-- Barack Obama, September 19, 2011

He also said, "Middle-class families shouldn't pay higher taxes than millionaires and billionaires. That's pretty straightforward. It's hard to argue against that."

So a new tax proposal has been made – eliminate the deficit over the next ten years by reducing expenses by $1.5 trillion and by raising taxes by $1.5 trillion. These tax increases are supposed to be entirely upon the wealthy, so that they pay their fair share. This requires overhauling the federal tax code.

USA Today ran an AP article on this posture today. It was written by Stephen Ohlemacher and is available online at http://www.usatoday.com/money/perfi/taxes/story/2011-09-20/buffett-tax-millionaires/50480226/1

This article reveals that:
  • The 10% of households with highest incomes pay 50% of taxes and 70% of federal taxes, according to the Congressional Budget Office.
  • The IRS receives 237,000 returns with income above $1 million. In 2009, 1,470 of these millionaires’ returns showed no tax (less than one percent of the returns of the very wealthy).
  • Tax Policy Center, a Washington think tank, estimates that those with income above $1 million per year pay an average of 29.1% of their income in taxes
  • Households with $50,000 to $75,000 pay an average of 15% of their income in taxes. Households with lower income pay a lower percentage of income tax.
  • The Tax Policy Center estimates that 46% of households pay no federal income tax at all, most of these being low-income and middle-income households. Such families are still paying social security and Medicare payroll taxes, though.

This news article was used on Fox television news this evening to explain that yes, the rich really do pay more taxes, and, yes they pay a higher percentage than do middle class Americans. Fox Business News anchor Stewart Verney noted that Buffett’s claim about paying less tax than his secretary is disingenuous. If tax rates are raised on the wealthy, Verney speculates, then more wealthy Americans will use insurance to transfer their wealth and avoid taxes; Buffet’s Berkshire Hathaway controls a large insurance company that would profit from such changes to the tax law.

A progressive site on the internet also erupted with a series of complaints about the Associated Press article linked above, shouting that it was slanted and misinterpreted the proposal from the White House.

= = = = = = = and now a professional opinion from the blog author = = = = = = = =

The blog author is a retired certified public accountant and an expert on federal taxation. The only significant mistake in the AP article was oversimplification. But that itself was a major error.

What the White House is purporting to do is propose a method of ending the deficit while growing jobs and reducing unemployment. What the White House isn’t saying, what President Obama has never said, and what the press isn’t telling you is a simple, central fact:

The deficit has exploded to $1.4 trillion a year (or higher) mostly because, under a steady and nearly unchanging tax law, federal tax receipts have collapsed.
The problem isn’t that the rich are dancing away without paying taxes. The few (about 1,470) millionaires who paid no taxes were almost certainly taking advantage of rare tax code features associated with estate planning that can’t be used every year. Those 1,470 returns can’t be squeezed for another $1,500,000,000,000 between now and 2022.

The problem is that, nationwide, businesses, professions, investors and corporations are making a lot less money and paying a lot less in taxes.

The proof that I’m right is that, under such circumstances, they aren’t hiring anyone unless they absolutely have to, which is the heart of the nation’s stubbornly high unemployment rate. Long term unemployment is higher than any rate in the 60 years that this statistic has been calculated.

What Obama is purporting to do is to "catch a falling knife." The rich are making less money and paying less taxes, so let’s increase their tax rate! Further, let’s revise the tax code to soak them! I promise you that ain’t gonna work. No one reading this blog knows the federal tax code as well as I do. It stinks. It’s a mess. It is a swamp of special interest provisions. It hasn’t had major changes since 1993, when taxes were, for the most part, cut. To spike the maximum tax rate is to invite the rich to cheat on their taxes… which… is… exactly what happens in the countries where public debt (now $14.8 trillion in the USA) exceeds gross domestic product (now $14.6 trillion in the USA). By the way, this is why Standard and Poor’s downgraded US government debt.  That S&P downgrade occurred the very day federal debt exceeded the nation's gross domestic product.  So, S&P is now being investigated by the Justice Department for making a decision based on facts.

Part of our needlessly complicated tax code is an existing provision that soaks the upper middle class and the rich. It is called "alternative minimum tax." At a certain level of income – not a lot! – just a few hundred thousand, less than most medical specialist MDs make – the IRS 1040 gets thrown away, deductions get thrown away, and a separate form with separate instructions that disallow most deductions has to be filled out. There is a higher, essentially flat minimum tax associated with this form. We’re already soaking the rich and stripping them of loopholes.

"We are not accountants," Obama has haughtily stated. Indeed. And his tax plan is being proposed knowing that it won’t get passed. It’s a posture for running in 2012. It’s aimed at independent voters, who are unlikely to buy it, and at the "supercommittee" wrangling over the deficit in Congress, who will probably respond with separate partisan postures. So the huge problem of falling tax revenue continues to remain entirely unaddressed.

The present White House is fiscally incompetent. 

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