As Warren Buffett pointed out, the rich are paying more money in taxes because they are richer than the rest of us, but the rich are not paying as high a proportion of their income for taxes. Even their secretaries pay a higher proportional rate of income tax on what they earn than the rich do. Why is that?
Because, as F. Scott Fitzgerald once wrote, “Let me tell you about the very rich. They are different from you and me.”
For one thing, the rich can always move.
Oh, they may not want to, but the fact is they can and do move, if not themselves personally, they move the companies or parts of the companies that they make their money from owning. Workers can only be in one place at a time. Not so investors!
It’s great to be free to invest anywhere in the world. You can make lots of money abroad and never have it be taxed as long as you don’t bring it home. That’s a small price to pay for having the leverage that “owning” all that money gives you for borrowing even more money at home and spending it to own even more assets so you can grow ever richer.
Legal tax evasion via deductions and loopholes
The rich also benefit from incredible tax loopholes where not only do they not pay taxes, they even get money back from the government. Take the gas companies, for example. Or General Electric.
Or take charitable deductions. Why is giving the rich a tax deduction for giving to charity really a function of government? Why should those who can’t afford to give to charity pay taxes to the government so that the government can turn around and give a tax break to those who can afford to give to charity? Does paying taxes for this kind of wealth transfer make sense?
In the name of charity for the poor, tax breaks for charitable donations and non-profit enterprises simply transfer money from the poorest to the wealthiest. These transfers assuage the guilt of those with wealth who give to charity and leave them feeling righteous and superior to others who don’t give.
The rich can afford to hire lobbyists to get them these tax breaks and subsidies from the federal and state governments. The rich can afford high-priced tax advisers too to tell them how to take advantage of those tax breaks and loopholes.
Legal tax evasion by not earning income
Unlike the rest of Americans, the rich have an easy way to get out of paying taxes. All they have to do is work less. Of course, most of the rich don’t do that. They work hard. But they purposefully don’t work hard in order to earn money. Earned income is anathema to the rich.
And there’s no reason why the rich have to earn money from the purposes they pursue. They can afford to choose, as some CEOs have done, to work for a mere $1 annual salary.
And why not? These CEOs get millions in stock options. If they leave the money in the company for over a year and then sell their shares, they’ll pay a much lower proportion of their income in tax than than the people who work for them will pay on the income they’ve earned by working. That’s because the US government taxes profit made on the sale of investments and other assets such as property, held for a year or more, at the the low capital gains tax rate of 15%.
Capital gains taxation essentially sets a flat tax on the money made by the wealthy. The more the rich make by owning assets, the more they get to keep as compared to higher-paid workers who move into higher income tax brackets as they get more earned income for their jobs. Why should we keep the capital gains tax? It simply transfers money from the working class and the middle class to the rich.
Legal tax evasion by earning portfolio and passive income
Why do those of us who don’t invest or own real property and/or business assets have to pay taxes so that the government can use that money to give a tax beak to those of us who do invest or own other assets?
The low capital gains tax rate on sales of owned assets is said to be an incentive for the rich to not speculate on short-term investments. That’s because short-term investments held less than a year are taxed at the higher ordinary income tax rate. The ordinary income tax rate is the very same tax rate that applies to earned income in the US.
In contrast, income from sale of passive-investment assets, such as businesses or properties, and portfolio income assets, such as stocks, is taxed at a flat rate of 15%. The capital gains tax rate simply provides an incentive for the rich to speculate on long-term investments.
Favorable capital gains tax rate on sales of long-term investments certainly did nothing to keep many of the rich from getting stiffed after they speculated in new-fangled long-term investments in the 2000s.
Nor did it keep our pension funds safe as they too got partially wiped out by investment and land speculation in the last decade. Even foreigners got burned by the politics behind US taxation.
The politics of US taxes
Taxes are a creation of politics. The rich can afford gigantic political donations to candidates and office holders who will campaign and work hard for that money by putting a lid on “excessive budget deficits.”
The rich know such budget deficits will ultimately have to be paid for by themselves. They count on being about to run up high budget deficits while their people are in office doing things on their behalf, such as lowering taxes on the wealthy. Then they turn around and focus on bringing down government spending when the opposition gets in power.
That’s why they pay good money for politicians.
Right now, that objective is very important to them. Why? Because, who knows if the US will ever be able to run up a huge deficit again? And if it can’t? What if high unemployment now has a “structural” cause? What if the US never gets its unemployment rate down below 10% again? What if poverty in the US just gets worse and worse?
Well, as I said at the beginning, the rich can always move wherever they want. And wherever they live, they can and always will invest in companies that take advantage of a much cheaper labor market in the US. What’s good for GM will just have to do for the rest of US!
For a discussion of taxation of the rich in Europe as well as America, see John Plender, “Underestimate the revolting rich at your peril” Financial Times, Sept. 10-11, 2011, p 7.
Follow Nancy Humphreys on Twitter @brucenomics