Music to read by:
You work hard, you make money
There ain't no on in the world who can stop you
You work hard, you went hungry
Now the taxman is out to get you
You worked hard
And slaved and slaved for years
Break your back sweat a lot
Well, it's just not fair
He hates you, he loves money
And he'll steal your shit and think that it's funny
"When I tell my American friends that anyone earning the equivalent of $66,900 a year in Britain pays income tax at 40 per cent, they don’t know whether to laugh or cry. Any American politician who suggested such a thing would be vaporised before he could make his first TV advert. Even Mr Obama, the most Left-wing president in a generation, would think it outrageous."
"Tax” and “fairness”: what a potent rhetorical combination those two words can make. Each by itself packs a wallop in political terms but put together they have become the weapon of choice in the ideological wars that now dominate electoral life on both sides of the Atlantic. Here at home, Nick Clegg’s Tycoon Tax came and went in its original punitive form, but its spirit lives on in the Philanthropy Penalty, which is designed to prevent rich people from indulging in one of their decadent pastimes – giving money away, and from which the Government is, as we report today, desperately trying to row back. Meanwhile, in the United States, Barack Obama has launched his presidential campaign with a phoney (because it will never be passed by Congress) but symbolically significant version of the original Clegg gambit.
Known as the Buffett Rule, after a suggestion by Warren Buffett that millionaires such as him should pay a higher proportion of their earnings in tax, it proposes that anyone earning more than a million dollars a year should pay at least 30 per cent of his income in federal tax. At the moment, many such people, in the US and here, pay tax at a lower rate because their earnings come from capital gains or dividends rather than wages. Mr Buffett concludes that it is wrong for him to pay tax as a smaller proportion of income than his secretary – even though (important point here) he pays much, much, much more actual money in tax than his secretary. In truth, he pays more in tax than all of his staff put together. But, that notwithstanding, Mr Obama agrees with him. Indeed, the president fell on his words with ecstatic gratitude. Here was a philosophical key to an entire moral and ideological programme: the concrete policy that would, at a stroke, embody everything his administration stood for. The rich should pay their “fair share” of the cost of the economic recovery instead of letting the middle class carry most of the burden.
Well, as it happens, this is a peculiar definition of “fair share”. The top one per cent of American earners receive just 16 per cent of national income but pay almost 40 per cent of all federal taxes. But, leaving that aside, what exactly would be involved in bringing those millionaires up to the 30 per cent tax minimum that the White House demands? The capital gains tax (which currently stands at 15 per cent) and corporation taxes now applied to their earnings would presumably have to be brought up to the level of higher rate income tax, which would seriously damage the competitiveness of American business and investments (and therefore delay the economic recovery). Or, at the very least, some complex formula would have to be applied to those on million-plus earnings that would involve the mixing-and-matching of capital gains rates with those of income tax on a case-by-case basis, which would be extraordinarily wasteful of federal tax authority resources and probably be contestable by individuals in the courts.
Even more serious is the confounding this would involve of the principle that taxation on investment (which necessarily involves risk) should be exactly the same as taxation on wages, i.e. just as high. This seems to undermine a basic precept of modern free-market economics: that the accumulation of capital for the purpose of reinvestment is a necessary and good thing because it allows the economy to expand, thereby creating new wealth, more jobs and wider prosperity. So you encourage such reinvestment by taxing the profits from it at a lower rate, thus rewarding those who have risked making losses: that’s how it works. Or do the Obama-Clegg tax policy merchants actually hold to the Marxist view that investment income itself is morally tainted because it robs the workers of the value of their labour? Just asking.
Anyway, you may have been struck by something in this description. Did you take in what I said about the Obama threat to the rich? The minimum tax take that he is proposing for the highest US earners is – 30 per cent. Yes, dear reader. Let me tell you why, whatever Mr Obama might do in a second term, America’s economy will recover: not just because its population has an indefatigable belief in success and self-improvement, but because its rates of income tax make it positively worthwhile to work hard. You may want to take a few deep breaths before you read the following sentences. US federal tax rates begin at 10 per cent and increase in increments through 22, 25, 28, etc up to a stonking top limit of – 35 per cent. If you earn between $34,500 and $83,600 you will pay income tax at 25 per cent. (That is a gross figure: allowing for deductions and exemptions, the actual proportion of your income to be paid will be around 22 per cent.) You would have to earn more than $174,400 to pay tax at 33 per cent, and more than $379,150 before you paid the top rate of 35 per cent. And that’s if you’re single.
If you are what the federal authorities call a “head of household”, that is,
the breadwinner of a family (a concept that still exists in the US, unlike
in Britain where those raising families are taxed the same as single people
without dependents) it gets even better. Then you have to earn at least
$46,250 per year before you begin paying tax at 25 per cent, $119,400 per
year before you pay 28 per cent and a stupendous $193,350 before you get up
to 33 per cent. Of course, what Americans call “payroll taxes” – social
security and Medicare – are added to this. They are the equivalent of
National Insurance contributions, which add a further 12 per cent to our
higher rate tax of 40 per cent, taking it to 52 per cent.
The current rate of exchange is around $1.50 to the pound. When I tell my
American friends that anyone earning the equivalent of $66,900 a year in
Britain pays income tax at 40 per cent, they don’t know whether to laugh or
cry. Any American politician who suggested such a thing would be vaporised
before he could make his first TV advert. Even Mr Obama, the most Left-wing
president in a generation, would think it outrageous. In fact, he said last
week, in a keynote flog-the-rich speech, that no one earning less than
$250,000 a year (the majority of Americans, as he put it) should have his
taxes raised. He presumably would not adopt the Cameron-Clegg-Miliband
definition of “the wealthy” to mean anybody earning a bit more than the
average. Just as a matter of interest, he also stated last week that one
exemption that he would not tamper with was the tax relief on charitable
giving. Even for a Left-wing president, that would be going too far.
Sophie: I will continue to bang the drum in the hope that, one day, it might get through the thick skulls of the the American Left:
1. There is not a country in the EU that would allow half of its wage earners to be exempted from paying income taxes. As Janet Daley writes above, anyone earning the equivalent of $66,900 a year in Britain pays income tax at 40%. Previously, I have used the example of a senior level nurse living in London earning approximately $49,000. She will pay around $10,500 in income taxes and $6,039 in National Insurance taxes, which works out to be around a 33.75% income tax rate. She pays those before she pays a 20% VAT, council taxes, and other assorted taxes and she is paying those tax burdens while living in a city where it is more expensive to live than in Manhattan or San Francisco.
2. Yes, in some countries, but not all (Sweden, for example, has only 2 income tax rates: 20% and 25%), tax rates on the "evil rich" are higher than they are in the United States; however, the reason that the American tax system is the most progressive in the developed world is that the "evil rich" bear much more of the tax burden than their counterparts elsewhere.
3. "Sock-it-to-the-rich" tax schemes always "trickle-down" to the middle class and even below. The Left may not like "trickle-down economics," but they love "trickle-down taxation." There is a reason that this is a truism and it is really very simple:
1. There is not a country in the EU that would allow half of its wage earners to be exempted from paying income taxes. As Janet Daley writes above, anyone earning the equivalent of $66,900 a year in Britain pays income tax at 40%. Previously, I have used the example of a senior level nurse living in London earning approximately $49,000. She will pay around $10,500 in income taxes and $6,039 in National Insurance taxes, which works out to be around a 33.75% income tax rate. She pays those before she pays a 20% VAT, council taxes, and other assorted taxes and she is paying those tax burdens while living in a city where it is more expensive to live than in Manhattan or San Francisco.
2. Yes, in some countries, but not all (Sweden, for example, has only 2 income tax rates: 20% and 25%), tax rates on the "evil rich" are higher than they are in the United States; however, the reason that the American tax system is the most progressive in the developed world is that the "evil rich" bear much more of the tax burden than their counterparts elsewhere.
3. "Sock-it-to-the-rich" tax schemes always "trickle-down" to the middle class and even below. The Left may not like "trickle-down economics," but they love "trickle-down taxation." There is a reason that this is a truism and it is really very simple:
THERE SIMPLY ARE NOT ENOUGH RICH PEOPLE TO PAY FOR EVERYONE ELSE.
If you don't believe me, then let's just consider some numbers:
Income Tax Summary Statistics for 2009
|
|||||||
All Returns
|
AGI ($Billions)
|
Taxable Returns
|
Income Tax After Credits ($Billions)
|
Average Tax Rate
|
Share of total taxes
|
Share of all AGI
|
|
| All returns, total |
140,494,127
|
$7,626
|
81,890,189
|
$865.9
|
11%
|
100%
|
100%
|
| No adjusted gross income |
2,511,925
|
($199)
|
3,820
|
$0.1
|
0.0%
|
0%
|
-3%
|
| $1 under $5,000 |
10,447,635
|
$27
|
306,587
|
$0.0
|
0.1%
|
0%
|
0%
|
| $5,000 under $10,000 |
12,220,335
|
$92
|
1,899,331
|
$0.4
|
0.4%
|
0%
|
1%
|
| $10,000 under $15,000 |
12,444,512
|
$155
|
2,883,906
|
$0.8
|
1%
|
0%
|
2%
|
| $15,000 under $20,000 |
11,400,228
|
$199
|
4,868,050
|
$2.5
|
1%
|
0%
|
3%
|
| $20,000 under $25,000 |
10,033,887
|
$225
|
4,639,085
|
$4.7
|
2%
|
1%
|
3%
|
| $25,000 under $30,000 |
8,662,392
|
$238
|
4,603,763
|
$6.8
|
3%
|
1%
|
3%
|
| $30,000 under $40,000 |
14,371,647
|
$500
|
9,589,845
|
$20.2
|
4%
|
2%
|
7%
|
| $40,000 under $50,000 |
10,796,412
|
$483
|
8,381,017
|
$25.4
|
5%
|
3%
|
6%
|
| $50,000 under $75,000 |
18,694,893
|
$1,149
|
16,449,393
|
$78.0
|
7%
|
9%
|
15%
|
| $75,000 under $100,000 |
11,463,725
|
$990
|
10,987,101
|
$80.5
|
8%
|
9%
|
13%
|
| $100,000 under $200,000 |
13,522,048
|
$1,801
|
13,374,553
|
$212.3
|
12%
|
25%
|
24%
|
| $200,000 under $500,000 |
3,195,039
|
$905
|
3,178,420
|
$176.3
|
19%
|
20%
|
12%
|
| $500,000 under $1,000,000 |
492,567
|
$332
|
489,904
|
$80.5
|
24%
|
9%
|
4%
|
| $1,000,000 under $1,500,000 |
108,096
|
$130
|
107,416
|
$32.8
|
25%
|
4%
|
2%
|
| $1,500,000 under $2,000,000 |
44,273
|
$76
|
44,015
|
$19.4
|
25%
|
2%
|
1%
|
| $2,000,000 under $5,000,000 |
61,918
|
$183
|
61,535
|
$46.9
|
26%
|
5%
|
2%
|
| $5,000,000 under $10,000,000 |
14,322
|
$97
|
14,236
|
$24.6
|
25%
|
3%
|
1%
|
| $10,000,000 or more |
8,274
|
$240
|
8,211
|
$53.8
|
22%
|
6%
|
3%
|
| Summary for $1 Million+ |
236,883
|
$726.9
|
235,413
|
$177.5
|
25%
|
20%
|
10%
|
| Source: IRS 2009 Data, Table 1.2 http://www.irs.gov/pub/irs-soi/09in12ms.xls | |||||||
The AGI of all those earning over $200,000 was $1.963 trillion. If we taxed everyone earning more than $200,000 at 100%, with no progressivity, (just tax the entire amount at 100%), we would have a budget deficit of around $1.837 trillion. The AGI of all of those earning over $100,000 in 2009 was $3.764 trillion. Now, if we were to take people, who earn $100,000 and more per year, and tax them at 100% with no progressivity, we still would have a budget deficit.
Many on the Left confuse income with wealth and, as a legal aside, a wealth tax at the Federal level would require a Constitutional amendment since it would be a direct capitation tax on unrealised income, but let's even look at wealth taxation or confiscation and how that would affect the numbers.
The 400 wealthiest people in America have assets valuing approximately $1.36825 trillion dollars. If we were to tax those assets at 100%, i.e., confiscate them, we still couldn't fund Social Security and Medicare for one year. Oh, and, obviously, that goose would be dead so don't bother seeking any golden eggs in the future.
Now, imagine if Obama could figure out a way to seize the assets of the 1,226 billionaires on the planet...without starting a world war or getting himself knocked off by Carlos Slim or a Chinese or Russian billionaire in the process. Such an action would result in a treasure trove worth $4.6 trillion being deposited into the Treasury. He could fund the government for a whole ONE YEAR AND TWO AND ONE-HALF MONTHS....oh, and those geese would never again lay another golden egg.
4. The first reiteration of the Buffett Rule was the Alternative Minimum Tax. There was a tremendous outrage in 1969 when it was learned that a tiny few of the richest Americans weren't paying "their fair share." To make sure that these "scofflaws" paid "their fair share," Congress introduced and passed the ATM. It was aimed at a whole 155 people. This year, it will affect 30 million Americans. As I said above, the Left love "trickle-down taxation" schemes. According to the Obama Administration, the Buffett Rule would likely only affect 130-135 American households....for now.
5. The incomes of the wealthy are more volatile than those of the lower classes. As a result, the taxes that they pay are much more a factor of the stock market. Too many countries and states -- like California -- have or are learning what happens when you attempt to put the tax burden on the "evil rich" while giving more and more a free ride. When the economy hits a rough patch, the greater the government is dependent upon the taxes paid by a few, the exponentially greater revenues will sink.
It is for this reason that a flatter tax system with no or few loopholes and deductions is best. Everyone should play a part in paying for their society and for the programmes that they want. If you are going to demonise the producers and claim that they do not pay "their fair share" while simultaneously stating that "at a certain point, you've made enough money," then don't be surprised when they stop and agree with you:
"You know, President Obama, I think that you might be right. I have made enough money and I am happy with my life. I would love to continue to produce and work and make even more money, but you continuously say that I don't pay my fair share. You denigrate my efforts while beatifying those that believe they are entitled to what I earn. You have dismissed the private sector while lionising the public sector. Obviously, you don't like us very much and I have to admit that the feeling is kind of mutual.
So, this is what I am going to do. I am going to make your day. I am going to quit being one of those "fat-cats." I am going to stop working and making all of that money that you find so ignoble. I am just going to live off of what I have. OK?
Now, I understand that you claim to be a constitutional scholar. I have my doubts. Just to be clear, let's just run quickly through 2 amendments. OK? The first is the Thirteenth Amendment. I am sure that you are very familiar with this amendment. It bans slavery and indentured servitude. It means that you can't force us to work. The second is the Sixteenth Amendment. It grants the Federal government an exemption to the Constitution's ban on direct capitation taxes, but only on realised income. What does that mean? It means that you can't tax what we already have. So, you are going to have to find a way to fund your redistributive utopia without us."
6. Americans may be happily entering into the European phase of taxing themselves other people's money, but they had better wake up fast because soon they will find themselves on the menu. At this point in time, I just do not see Americans prepared to pay the kind of taxes that it would take to have a "Sweden" (which, by the way, has a 57.77% average tax rate and is moving away from socialism). If you doubt me, then witness the disconnect that exists between what people want and for what they are willing to pay in America. Ask a group of Americans what the government should do and they'll give you a list. Ask them if they are willing to pay higher taxes for any of it and you are likely to get a blank stare. Remember, George Bush's tax cuts took even more middle class taxpayers completely OFF of the tax rolls....3 million of them. Fewer Americans are paying taxes while more are demanding more services. Even the Democrats recognise this disconnect. Obama campaigned on not raising taxes -- by one dime (untrue, but anyway) -- on couples earning $250,000 or individuals earning $200,000 per year. His Buffett Rule wouldn't hit anyone earning under $1 million. There was a fight between Democrats over this. Some wanted it to be applied at the $200,000/$250,000 "millionaire" level, but the millionaire "millionaire" level won in the end.
There is absolutely NO WAY that we can have a government that consumes 25% of GDP when less than 50% pay income taxes and the top 10% are expected to foot 70% of the bill.
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