It is time to end welfare for the rich and super rich!

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October 16, 2009

            My support of taxes in my August column generated some heat. In his on line response Andy chastised me for not sympathizing with the middle class tax burden. Although I admitted that taxes are wasted and spent on the wrong projects I didn’t name any. This column addresses both points.

            For nearly thirty years we have been under the influence of Reaganomics– one that George H. W. Bush called “voodoo economics” in the heat of a Presidential campaign. At the heart of this economic policy is the “trickle down theory” -  the more money the government allows rich  people to keep, the more benefits will “trickle down” to the rest of us. We were duped into believing that theory through the alleged offering of middle class tax cuts.

            David Cay Johnston wrote in Perfectly Legal:  between 1970 and 2000 “when the federal income tax burden on Americans overall rose by 18 percent, it fell by 16 percent for the top 400 taxpayers” and they paid a rate comparable to a single person making $123,000 or married couple with two children making $226,000. Their average income was nearly $174 million. (1) The top 13,400 taxpayers had an average income of nearly $14 million in 2000, more than six times the average of this group in1970.

Capital gains taxes

            In addition to having a phenomenal increase in income the rich and super rich also decreased their tax liability. The reason is the tax rate maximum of 15% on capital gains and dividends. My middle class friends argue that the cap of 15% is good because it stimulates investment. For my friends, however, who make a few thousand in dividends and capital gains, the tax benefit is merely a few hundred dollars. For the super rich however, it is a substantial boon because two thirds of their income is from capital gains and dividends. So instead of paying the maximum rate of 35% on their income, their taxes are capped at 15%, a savings of 20% on millions of dollars.

Tax subsidies

            Another benefit for the rich taxpayers are tax subsidies for their business. George W. Bush was hailed as an astute businessman for his handling of the Texas Rangers. He and a few partners bought the Rangers and made some changes. When Bush sold his share of the Rangers, he pocketed a cool $16 million on which he paid the lower capital gains tax rate rather than the regular tax rate, according to Johnston. The real kicker here, however, is that the profit made by Bush and his partners was less than the tax subsidies granted to the Rangers. In other words, Andy, you and other middle class taxpayers paid this profit to Bush. This is not a unique example. Subsidies for sports arenas have been occurring all over the country even though studies have shown they offer no economic benefit to a community or society.

Property tax abatements

            Another form of tax subsidy is property tax abatements. We have, of course, witnessed them in Midland and they are a common business practice all over the country with one community vying against another. The Mackinac Center wrote in a report twenty years ago “abatements have generally not delivered what their proponents promised.” (2)  Still the practice flourishes.

            Cabela’s has made a practice of soliciting abatements and subsidies based on projections that have been discarded by reputable economic studies. Cabela’s received tax subsidies totaling $40 million, according to Johnston in Free Lunch, for its store in Dundee, Michigan. These subsidies include Cabela’s retention of all sales taxes it collects at that store! (3)

Eminent Domain

            The government’s right to eminent domain was an important factor in Toledo’s efforts to keep the Chrysler Jeep plant there. Chrysler stayed with the promise of “$280 million in breaks through the state's investment-tax credit and other vehicles…. The Jeep factory didn't create as many jobs as expected. It led to the destruction or removal of 83 homes and 16 businesses, including Kim's Auto and Truck Service, owned by Herman and Kim Blankenship.” (4)

 Blankenship refused to sell and took her case all the way to the US Supreme Court. Chief Justice Roberts ruled that the case had no merit and wouldn’t even hear it according to Johnston in Free Lunch.

Tax Acts of 2001 and 2003

            President Bush promoted the tax cuts of 2001 and 2003 as benefits for the middle class. The middle class did receive reductions but they are paltry compared to the hundreds of thousands and millions of dollars the wealthy received.

Alternative Minimum Tax

The Alternative Minimum Tax (AMT) was originally established in 1969 to ensure the wealthy did not get away with paying too few taxes. When Congress decided to add inflation factors for exemptions and tax brackets, it purposely left this tax unaffected so the government could get the revenue generated by the AMT. According to Johnston in Perfectly Legal, the Bush tax cuts will double the number of taxpayers affected by the AMT from 17.9 million to 35 million in 2010. This affects taxpayers with income as low as $75,000.

Conclusion

As Johnston stated so well in Free Lunch these are all examples oftaking from the many to benefit the few.” Collectively these tax breaks amount to billions of dollars of lost or misspent taxes every year.  As a result, there is a heavy tax burden on the middle class. If the TEA Parties start advocating changes in the above tax policies I may join them. When the income tax was established nearly 100 years ago, it was considered morally offensive to tax an income earned by the sweat of one’s brow. Now our wages are taxed to benefit the rich. It is time to change that.

 

(1) Johnston, David Cay. Perfectly Legal: The Covert Campaign to Rig Our Tax System to Benefit the Super-Rich -- and Cheat Everyone Else, New York: Penguin Books, 2003.

 

(2) Kaza, Greg and Dr. Gary L. Wolfram Property Tax Abatements

/ Posted: June 1, 1989

http://www.mackinaw.org/article.aspx?ID=6244

 

(3) Johnston, David Cay. Free Lunch: How the Wealthiest Americans Enrich Themselves at Government Expense (and Stick You with the Bill), New York: Penguin Group, 2007.

 

(4) Shlaes, Amity. When Chrysler's Jeep Runs Over the Little Guy, March 1, 2006.

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aYbnXJNIe0VA