Amazingly, I now have people who at first were upset that Obama was going to raise taxes on the middle class (or so they believed) now upset that his tax plan is actually "socialism" and basically class warfare. And, most of the people telling me this are the people who are supposed to be trickled on by the Bush and McCain plans! They tell me I've been bamboozled into buying into a socialist agenda and that this is just another step in a plot to make America a socialist country. Well, I haven't been bamboozled at all and I'd like to tell you why I think Obama's plan is more fair than John McCain's. As I said in an earlier post, there is a fundamental difference in the philsophy behind the two men's plans. Starting where we are today (without revamping the whole system), Obama wants to increase the marginal tax rates on the most wealthy so he can decrease the marginal tax rates on the middle class. I'll even concede the argument that Obama's plan amounts to an increase in taxes for the wealthiest even though it's simply not true (and I'll show you why later- histiorically the rates he's proposing are pretty low). For the sake of argument, let's say it is true.- Obama's plan is a tax increase on the wealthy. I still say "Big whoop". John McCain, OTOH, wants to give huge tax breaks to the most wealthy because they are the "movers and the shakers" providing the jobs to the peons of society. And the peons are defending John McCain's plan. How ironic is that?
Wow. Where to start? First of all, people have been throwing statistics at me showing how the very tippy top percentage of people pay a huge share of the income taxes. Oh, poor rich people. Excuse me while I grab a tissue. I'm being told that they're paying way more than their share. Let me show you how looking at statistics too simplistically gives you an extremely false picture of what is going on and what is fair. I'm going to make some very broad assumptions here and do some rounding just to make a point and keep the numbers simple. The average CEO now makes about 400 times what a production worker in his company makes. He actually makes in a day about what one of his workers makes in a year. Let's assume we have a land where all the companies are made up of one CEO and 399 worker bees. Let's call it Fairtaxland. The worker bees make $40,000 a year. That means the CEO is pulling down $16,000,000 a year. Because we want to be fair, in Fairtaxland we have a flat income tax. Everybody pays 10% of their gross. No deductions. No loopholes. Just what did you make? Send Uncle Sam 10%. So, the worker bees each shell out $4,000 a year. And, the poor CEO has to pay out $1,600,000/year. The CEOs in our land represent just 0.25% of the population. But, of the total revenue collected from each company, the lone CEO pays $1,600,000 while the rest of the workers (99.75% of the population) pay $1,596,000. In this illustration, 0.25% of the population pays 50% of the taxes. If you read this headline "In Fairtaxland, 0.25% of the population pays 50% of the taxes" would you be outraged? As I said, this is a simplistic example. In America, we have people making hundreds of millions and even billions of dollars a year. Oprah Winfrey makes more in an hour than the average workers makes in a year. Bill Gates and Warren Buffet make more than a lot of countries. Of course, they are going to pay a huge percentage of the income tax revenue because they're making gobs and gobs of money. G-d bless America!
Let's take the illustration just a little further. The worker bees making $40,000 have to spend (let's make a number up) $24,000 just to pay for basic needs. Food, shelter, clothing, health care, etc. That leaves them with $16,000 in "disposable income". The $4,000 they pay in income tax represents 25% of their income not dedicated to basic living expenses. Let' s allow the CEO twenty times their non-discretionary spending. We'll give him $480,000 in basic living expenses. That leaves him with $15,520,000 of disposable income. His tax burden of $1,600,000 is roughly 10% of his "disposable" income. Again, that's allowing him twenty times the living expenses of his average worker or 12 times their total gross annual income. So, as a percentage of their disposable incomes, the worker bees are paying at a rate 2.5X what the CEO is paying. [Disclaimer again- I'm not claiming these numbers are accurate and taxes are not optional. So, they really should be included in basic living expenses. I'm trying to keep this simple] I'm simply trying to illustrate why you can't just look at some of the stats people throw at you and feel sorry for rich people and their tax "burden". That guy making $16,000,000 a year is not going to even notice an additional $4,000 or $8,000 or $12,000 of his income. Money that would make up the entire tax burden of several of his employees.
What I have just shown above is first of all that you have to understand statistics before you start falling for dramatic numbers like X% of the American public already pays Y% of the tax revenue. They should! Some of them are making ungodly amounts of money. Even in our imaginary Fairtaxland, without a progressive tax rate, if you make 400X more money than the Average Joe, you're going to pay a bigger percentage of the tax burden. Just one quarter of one percent of the population pays 50% of the taxes. What I attempted to illustrate in the paragraph about discretionary spending and living expenses is the reasoning behind progressive taxation. It's more "fair". If someone is making more than he can possibly spend in a year (or a lifetime), it's reasonable to expect him to pay a little more in taxes.
The next thing that a lot of people don't really seem to grasp is "marginal tax rates". The rich don't pay 35% on every dollar earned. That is their "marginal" tax rate. For the very poor, the marginal tax rate and the effective tax rate are the same. For the very rich, they are very different. The rich pay the same rates as the poor on the first $8,000 as the poor, then they pay the same rate on the next $24,000 as the middle class, then they pay the same rate on the next $45,000 as the upper middle class and so on and so on. While 35% sounds like a lot, their effective rate (the rate you get when you blend all these and then divide it out) is actually a lot lower than that number.
Lastly, as to the word "socialism" being bandied about. Absurd. I have two points. First of all, a little socialism is not necessarily the worst thing in the world. But, socialism would be if we capped people's incomes at a certain amount and took the excess and gave it equally to bring everyone up to same level of income. I'll concede that progressive income tax rates are more socialistic than a flat tax. But, they are a long, long way from socialism. We have a blend of economic and political systems in the United States. Secondly, progressive tax rates are as American as apple pie. There are some who seem to worship at the altar of capitalism and "free markets". I can almost hear Gordon Gekko saying "Greed is good.". Well, greed is good. America is a shining beacon, due largely to greed. Capitalism has allowed us to build a nation that is rich enough to help its poor, to protect its citizens and to reach out to the world. Hallelujah. But, contrary to what some would like to believe, America has never been a land of unfettered Capitalism or even a pure Democracy for that matter. Things like anti-trust laws are not purely capitalistic. Without getting bogged down in details, the government has always done things to help the capitalistic system along, to protect the weak the from the strong and create opportunity for a mericracy rather than an aristocracy. Our Founding Fathers fought some of these things out and we may still disagree on some of them. When our economics systems get into trouble, the government steps in to help, as we just saw with the $700B bailout, even some of the staunchest "Conservatives" want some government intervention when the market goes off the rails. Capitalism must be constrained by regulation and sometimes helped along by government programs doing what the government does best.
Obama's tax rates on the wealthy are not some dangerous social or economic experiment, BTW. Historically speaking, they're not even all that high. Since the 1920s, we've had marginal tax rates as high as 90% and most of the time they've been, much, much higher than they are right now. (see the chart below).
Nobody likes to pay higher taxes, including me. But, you know what? I'd love to hit Obama's top bracket and be able to complain about all the taxes I'm paying. If my customers have more money in their pockets, thanks to his tax cuts, just maybe I will hit that bracket. Barack Obama, under his own plan, will pay higher taxes. I'm sure that's not something he's thrilled about doing. But, let's call a thing what it is and let's look at what is the most fair plan for everyone and the best plan for the economy as a whole. If we have disagreements about which philosphy is better, that's OK.