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Are The Rich Paying Their Fair Share?


Scott Grannis posts in his blog,  Calafia Beach PunditTax Shares Update:

In 2011, it took $389K or more of adjusted gross income to make it into the top 1% of income earners, and they paid 35% of all federal income taxes. The top 5% of income earners made at least $168K and paid almost 57% of all federal income taxes. The top 10% paid made at least $120K and paid 68%. The top 25% included all those making $70.5K or more, and they paid 86% of all federal income taxes. Meanwhile, the bottom 50% of income earners (those making $35K or less) paid only 3% of all federal income taxes, and the vast majority of them either paid no income tax or received money on net from the IRS.

The Laffer Curve at work: Although the share of total income taxes paid by the top 10% of income earners today has fallen a bit in recent years, it has nevertheless risen by over 40% since the early 1980s, despite the fact that the top income tax rate has been cut in half. Slashing the top marginal rate by half resulted in a huge increase in the share of total income taxes paid by the rich.

Let’s talk “fairness:” In 2011, the top 10% of income earners in this country paid two-thirds of federal income taxes, and the top 1% (the rich) paid over one-third. Is that not enough? Almost half of those who work paid no federal income taxes. Is that fair? Is it healthy for so few to pay so much, and for so many to pay nothing? When almost half the population has no skin in the game, and another quarter pay only a very small share of total taxes, it is easy to demonize or exploit the rich—it’s called the “tyranny of the majority.”

Not surprisingly, top income earners make a large share of total income. However, if you compare the two charts, you see that the share of total taxes they pay is much larger than the share of income they earn. Our tax code is very progressive no matter you look at it. In 2011, for example, the top 1% of income earners made 19% of the country’s total adjusted gross income and paid 35% of total income taxes. The top 5% earned 34% of total income and paid 57% of total taxes. The top 10% earned 45% of total income and paid 68% of total taxes. The top 25% earned 68% of total income and paid 86% of total taxes.


At what point does one acknowledge that the wealthy are in fact paying more than their fair share?  The increase in income taxes does not redistribute wealth from the wealthy to the poor; it simply impedes the opportunity for others to get wealthy.  By focusing more on inequality than economic growth we retard the opportunities for the non-wealthy to improve their lot in life.


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Small Man’s Sin


Kevin Williamson writes in The National Review, The Age of Envy:


Wrath and pride are the sins of great (but not good) men. Envy is the affliction of the insignificant. It is the small man’s sin.

Which brings us to Robert Reich, who, having practically made a cult of envy, has taken to abusing the well-off for their acts of charity. Professor Reich, a ward of the taxpayers of California (at $246,199.84 per annum) and a federal ward before that, is persistently unhappy about how other people use their money, and he scoffs that America’s rich philanthropists are phony and self-serving, investing too much in opera and ballet and fancy colleges, and too little in feeding the hungry and housing the homeless. He particularly resents the fact that our tax code encourages such giving, with deductions that reduced federal revenue by some $39 billion last year — federal revenue that could have gone toward employing men such as Robert Reich.

Beyond stealing altar offerings from the almighty god of revenue, our philanthropists offend Professor Reich’s sensibilities in another way: They don’t give to the sort of enterprises he wants them to give to. “A large portion of the charitable deductions now claimed by America’s wealthy are for donations to culture palaces — operas, art museums, symphonies, and theaters — where they spend their leisure time hobnobbing with other wealthy benefactors. . . . These aren’t really charities as most people understand the term. They’re often investments in the life-styles the wealthy already enjoy and want their children to have as well. Increasingly, being rich in America means not having to come across anyone who’s not.” Unsurprisingly, Progressive America’s favorite non-economist-who-plays-an-economist-on-TV does not bother to document what he means by “a large share.” Giving to art-and-culture organizations amounted to just over $14 billion in 2012, or about 4.5 percent of charitable contributions, far less than was given to health, human-services, or public-benefit organizations. There are a fair number of single organizations that run into the billions per year, including YMCA ($6.24 billion), Goodwill Industries ($5 billion), Catholic Charities ($4.4 billion), and the Red Cross ($3.12 billion).

A question, though: If spending on art, music, and culture is self-serving when private citizens do it, what is it when government does it? Essential, necessary, crucial — of course. The New York City Department of Cultural Affairs by itself spends some $150 million a year on precisely that sort of thing. The state spends dozens of millions more. A good deal of that money goes to subsidizing theater, including big-ticket theater. In my role as a theater critic, I am constantly surprised by how many shows selling tickets for north of $100 are publicly subsidized. It isn’t huge money — without public support for the Manhattan Theater Club, that $120 ticket to see Laurie Metcalf in The Other Place (excellent, be sorry if you missed it) might have been $125 instead. But it adds up: a few dozen millions from the state, a hundred million from the city, a billion and a half from Washington.

But envy poisons whatever good intentions they have, which is how men such as Professor Reich come to write resentful indictments of people who are, remember, giving away billions of dollars of their own money. He’d prefer their money be given away by him, or by bureaucracies under the tutelage of men such as himself.

Megan McArdle once observed that in our public discourse, “very rich” is defined as “just above the level a top-notch journalist in a two-earner couple could be expected to pull down.” There is no envy like the envy of a $250,000 man in a world of $250 million men, as Robert Duvall’s crusty newspaper editor explains to a financially frustrated employee in The Paper: “The people we cover — we move in their world, but it is their world. We don’t get the money — never have, never will.” But being in that world, they learn to covet, which helps explain why Professor Reich’s old boss, Bill Clinton, ended up with $50-odd million in the bank after a lifetime of public service.

Americans gave away $316 billion in 2012, and will give away as much or more this year, and Professor Reich composed 731 words to explain the problems related to that. He should have composed two words, especially relevant to this season:

“Thank you.”


A true liberal should be embarrassed about such moral supremacist posturing.  In the world where private  income are capped by the fairness fascists, there would be no money for the rich to give to charities nor revenues to fund the government’s chosen elites…. such as Robert Reich


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Encouraging Conspicuous Consumption

I meet every couple of months with a couple of small groups of diversified small businesses in the Southeast.

Here is what I am hearing.

Few are making any significant capital expenses.  Taxes are too high and conditions are too uncertain. These small businesses run with the purpose of minimizing a profit.  This means that they may rent a fancier office space than they would normally, furnish it nicer and buy more expensive company cars.  Why? Because this maximizes their benefit AFTER TAX.  They would rather spend $10,000 more on a company car than show the $10,000 on the bottom line and then give half of it to the government.

This is how small private companies think.  This is the opposite of the way public companies think.

This same thinking is exhibited in estate planning.  Consider a successful businessman in his fifties.  He has accumulated a net worth of roughly ten million dollars.  He is clearly well off but not private jet, Bentley driving, mansion occupying wealthy.  In fact most of these people drive their cars for several years , go to their children’s ball games and generally lived relatively modestly in order to grow their business.  They are generally not conspicuous consumers.

But looking at their position and thinking they may live another 30 years they realize that this comfortable cushion will double and triple with just modest investment returns, and that this will put them in a very high estate tax bracket.

They will set up trusts for their kids and their preferred charities, but they will still likely face significant estate taxes.  They are thinking that if they leave the financial assets to grow the government will benefit, not their family.  So they start to think like conspicuous consumers.  They will buy the expensive boat and tangible items like jewelry and collectibles that they can just hand to their children or family members.

At first they feel guilty, because they are not used to this way of thinking.  They have been used to postponing consumption and sacrificing to grow their business.  But when they realize that the alternative is to lose that money to government confiscation they quickly adapt.

Some think this is a good thing- that forcing them to spend their money is immediately stimulative to the economy, but that is very short sighted.  We benefit far more when they invest those funds in businesses that increase the GDP.  This not only creates jobs that are sorely needed, but it also creates the revenue stream that the government so desperately seeks.

During the 1970s inflation drove financial returns into higher tax brackets. Investors sought inflation protection in tangible assets.  When inflation was tamed in the 1980s this money flowed heavily back into financial assets and fueled the stock market boom and growth in the GDP for the next 25 years.

Today the problem is not inflation; it is the fear and reality of increasing taxes and stifling regulation.  Investment capital is going to less productive uses, driven by tax avoidance.

One businessman commented that the penalty for not buying health insurance is higher than the profit he currently generates per employee.  Alternatives in his competitive industry are few. His competitors with fewer than 50 employees, who do not have to comply with the health insurance requirement, will have a distinct advantage.  What an anti-growth policy!

Another commented that what was once a mistake in running a business is now a crime.  Whether it is immigration, environmental, health care compliance, or infinite state and federal regulations,  a business owner is assumed to be malicious in his intent and actions.  Fewer owners will want to take the risk of deploying their capital in illiquid small companies, only to be branded a criminal.

Larger businesses with big administrative staffs are better able to manage the regulatory maze.  Very small businesses with only a few employees can manage to stay off the grid.  But the businesses starting to require significant capital investment with 50 or more employees is bearing the brunt of the regulatory damage.  This has always been true to some extent but the increased regulatory burden has made this worse.  This is the economic sector that provides next year’s Apples, Dells and Fords- and most of the new jobs.

This has been the picture for four years, and even I get tired of small business people including myself whining about it.  Since the last election we have had to accept a realty that we wish was different. These small but successful business people will change their behavior even if they are not professional golfers from California.  The greater good, which the dominant leaders so promote, will suffer from the actions these small business people will take to minimize the damage from the policies of this administration.


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The Other Taxes

While tax rates are often stated as the burden on individuals and businesses there are other “mandated expenses” that are much more insidious.  Federal agencies are often charged with funding themselves with fines and penalties. Much too often these fines are levied on noncompliance to rules that are capriciously vague and in conflict with other rules.  It is not unusual for businesses to pay these fines rather risk fortunes in legal bills in defense.

With the proliferation of regulations what was once a mistake is now a crime.  May father used to complain that the government makes criminals of all of us, and that was decades ago.  In my short period in the business world I am stunned at how often I have known  some of the most righteous and ethical people I have ever met treated like common criminals.

The government can change deductions and depreciation schedules without the fanfare of talking heads arguing the merits and demerits of changing tax rates. While these changes in rules increase the money paid to the government there is never a headline about the new tax increase.

These changes have the same stifling effect of tax increases without the exposure or the debate.  When taxes are lowered but other mandated costs are changed to more than counteract the decrease and no new revenues appear, the Laffer Curve will be deemed, wrongly, to have failed.

The better way to look at taxes are as a part of the overall friction costs that reduce the return on risk and capital investment.

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Why The Middle Class Does Not Want to Soak the Rich

From The American Lee Harris writes Why Not Soak the Rich? 3/6/13

Lee raises the question of why so many middle class republicans are so reluctant to raise the taxes on the wealthiest.  This confounds liberals who voiced this question in What’s The Matter With Kansas?

His article traces the redistribution of property through brute force and through the philosophical elite to settle on our system of  laws and why the middle class holds these property rights to be “sacred”.

He concluded:

Clearly Blackstone himself is a bit puzzled how nothing more than “a set of words upon parchment” came to hold such a grip over the imagination of his countrymen — and their American cousins, too, it must be added. Yet the brief sketch we have offered up to this point indicates that there should be nothing very surprising about this. A society whose members have been imbued from birth with superstitious awe before “a set of words upon parchment” will keep their quarrels and conflict over property restricted to courts of law. They will not resort to violence for their own gain, nor will they tolerate anyone attempting to do so. They will not try to rise up in revolutionary frenzy in order to expropriate the wealth of others. Nor will they long tolerate a government that refuses to honor their own sacred rights of property, confirmed by their own “set of words upon parchment.” All these factors taken together will redound to the general welfare, both politically and economically, of any society in which this peculiar superstition — or taboo — has taken root at the unshakable visceral level. Any society that has reached this point has traveled an immense distance from the world in which the ownership of property was decided simply by brute force.

Throughout history, soaking the rich has proven a quick fix to temporary emergencies and crises, like the one we are facing today. But it is inevitably a fix that comes with a high cost. By undermining the taboo against expropriating wealth, it makes all private property less secure, including the property of the middle class. Let liberal intellectuals poke holes in the myth of the sanctity of private property, but respect the power for good that this myth has conferred on those societies that are, for the most part, strongly under its spell. The superstitious awe and visceral reverence that ordinary people feel toward “a set of words upon parchment” has proven indispensable to securing economic prosperity and political stability over the course of centuries. The ordinary man’s reluctance to speculate philosophically about property, and its origins and rights, might make him appear dense or incurious to the sophisticated intellectual, who relishes such abstruse discussions, but this indefatigably hard-headed approach to such questions has had the altogether salubrious effect of steadying the boat and keeping it on an even keel, despite the winds of revolution that have tossed and wrecked those ships that lacked their ballast of common sense.


We know that the wealthy do not have the resources to support the welfare state that is proposed.  The educated middle class know that eventually the “rich” must be defined to include them. The mobility of the Americans also  creates the aspiration to be wealthy and may create some empathy as well.   We saw that the taxes on millionaires and billionaires made great campaign rhetoric but the first application came to those who made only $250,000.  Howard Dean noted that the middle class will ultimately have to increase their tax load to fund the government.

The real question is not why do conservatives vote against their self interest  as posed in What’s The Matter With Kansas.  The real question is why some think the middle class is so stupid that they will not recognize they they will ultimately be targeted for higher taxes as well. They understand that unless spending is reduced they will also have to pay higher taxes.