FEDERAL INCOME TAXES 44

With the sempiternal Democrat/Republican debate over federal income tax increases or cuts, now or any time seems an opportune occasion to weigh in on the issue. The Democrats claim that tax cuts favor the rich and they are right. The Republicans counter that after all it is the rich who pay the overwhelming bulk of taxes and they are right. What then is ‘fair’?

Federal income tax distributions for the year 2000 show two interesting and important factors. (1) Higher income people pay a greatly disproportionate amount of federal income taxes – and naturally the higher their income the more they pay. (2) Despite the notion widely held (correctly I believe) that this is a country of middle class people, there is a mal-distribution of income. The top 1% of income, almost 1.3 million taxpayers, have an avg. Adjusted Gross Income of $1,042,725 and pay an average of $286,216 in taxes while the bottom 50% of taxpayers (more than 64 million) have an avg. AGI of $13,012 and pay an average of $598 in taxes. And the average income for lower income people as represented by the AGI figure as well as the tax paid figure may be overstated because there is a large but unreported number of people outside this IRS report who, because of their low income, do not pay taxes and are not required to file income tax statements. On the other hand there may be significant unreported cash transactions which would cause the income figure to increase.

What is the answer to the question of what is ‘fair’? My answer is to forget about what is ‘fair’. Fairness is (1) impossible to define, and (2) its perception is in the mind of the disputant. Better in my opinion to turn to an objective analysis of federal taxes as explained by the 1940’s to 1970’s economist, Abba Learner, who in 1959 - 1965 taught economics at Michigan State University. According to Prof. Learner, except for relatively minor taxes e.g., the so called ‘sin’ taxes - tax on alcohol and tobacco to discourage consumption, there are two reasons for federal taxes. (1) To redistribute income and (2) take money out of circulation to keep too many dollars from chasing too few goods and services - in other words to keep inflation under control. No, federal taxes are not levied to pay for government spending per se (see Everybody’s Business: A Re-examination of Current Assumptions in Economics and Public Policy by Abba P. Lerner). That is why the current claim, mostly by Democrats, that tax cuts should not be enacted now or at the very most should be minimal since we have an ever growing federal deficit is bogus. The economy needs the stimulus that tax cuts would provide and the bigger the better so long as this does not reignite inflation. We have been in a period of relative low inflation although currently inflation is becoming a greater risk. Forget the deficit so long as inflation is low. We are not saddling future generations with our debt. Just who are these government obligations called bills, notes and bonds owed to? Some foreigners it is true, especially the Chinese, but for the most part owed to Americans - like me for instance. In Lerner’s words: “We owe the deficit to ourselves.”

What is the best way to frame the tax cut debate? First thing is not to turn it into class warfare rhetoric the way some Democrat politicians, especially John Edwards, are doing. Across the board cuts for all taxpayers should be made and since higher income people pay the most in taxes, they should get the higher cuts – not in percentage necessarily, but in amount. To be bluntly candid about it, to varying degrees, people in descending order of tax payments are being subsidized by those who pay more tax to the point that those who pay no federal income taxes are given a free ride and those who even collect money via the so called, ‘Earned Income Credit’ are paid to ride. That is the way it is, which is not to say it is fiscally, socially, or morally wrong, but the reality of it should be recognized and admitted.

The issue of whether there should be such a big disparity in income is a different subject. Some incomes are skewed from a pure free marketplace determination by tax policies which affect enterprises such as professional sports for example. Without businesses being able to expense ticket and sponsorship fees and thereby being able to lower their own taxes, salaries for professional athletes probably would not be quite as high as they are. A major problem in this regard would to decide what are to be allowed as expense items and what are not. In fits and starts, there have been efforts made that discriminate in what is allowable and what is not. Remember the ‘three martini lunch’ brouhaha of the Carter presidential years? Then there is the issue of people who spend many years of sacrifice and depredation to eventually arrive in high income levels only to be ‘punished’ for their efforts by high taxes. Indeed making judgments on who ‘deserves’ high income and who does not is something best left to socialists and communists and other adherents of failed economic systems. To even ask the question of whether, for example, Ray Romano of the hit television show, Everybody Loves Raymond, deserved his $1.8 million fee for each ½ hour program is to exhibit a profound ignorance of free enterprise economics. He deserved it if the marketplace supported it and it seemed to.

Recently the increasingly pixilated Warren Buffett has stated that the top 10% or so of U.S.A. taxpayers should pay more and our tax structure is unfair because his secretary pays a higher tax rate than he does. Let’s analyze this latter assertion. His secretary draws a salary so, apodictically, she pays at the putative income tax rate. Buffett draws no salary so let us say he derives all of his income from long term capital gains. The capital gains rate in the U.S.A. is currently 15% (5% for people in the lowest two income tax brackets). Buffett’s net wealth is estimated at $55 billion or so. With the financial market downturn so far this year (2008) let us round that down to $50 billion and supposing a realized capital gains withdrawal of .1% from all of his assets he would have a pre-tax income of $50 million and a post- tax income of $50 x .85 = $42 ½ million. I could live on that. Incidentally the long term capital gains rate in Belgium, Germany, and Hong Kong, exempli grātiā is zero and in the idyllic country of Iceland (it was rated the best country in which to live in 2007) the C.G. rate is 10%. Wouldn’t you know that the C.G. rate in socialistic Sweden is 30% so perhaps Buffett should move to Stockholm.

If Buffett feels guilty for not paying more federal tax I would like to assure him that he may give the IRS as much money as he desires and they will accept it so long as he makes clear he is voluntarily over paying his taxes.

Buffett is a bit eldritch in other aspects as well. He married his wife Susan in 1952 when he was 22 years old. She died of a stroke (she also had cancer) in 2004. In 2006 when he was 76 he married 60 year old Astrid Menks, from Latvia who had been his assistant and companion for 20 years. What about his wife? They had lived apart since 1977 and allegedly did not disapprove of her husband’s liaison with his paramour.

As an addendum consider the following facts: In 2006 the bottom 50% of federal income tax payers (65 million) paid $27 billion in taxes - 3.5% of all income taxes paid. The ExxonMobil corporation paid $41 billion worldwide in taxes that year. In other words, ExxonMobil paid $14 billion more in taxes than 65 million U.S. tax payers.