“No Man’s life liberty or property is safe while the legislature is in session”.

- attributed to NY State Judge Gideon Tucker

Monday, August 1, 2011

A Rant Without Evidence- Socialist Senator Bernie Sander's WSJ Editorial

Bernie Sanders, the independent- read 'socialist'- Senator from Vermont, is a member of the Senate Budget Committee and author of a detail-less rant in Friday's Wall Street Journal.

"The rich are getting richer. Their effective tax rate, in recent years, has been reduced to the lowest in modern history. Nurses, teachers and firemen actually pay a higher tax rate than some billionaires. It's no wonder the American people are angry."

Where's Bernie's evidence? Actually Stephen Moore recently wrote a Journal editorial last Thursday in which he debunked the myth of "the rich" paying lower tax rates than lower income filers. Moore wrote,

"During Monday night's national address, President Obama recited the Buffet line that millionaires and billionaires pay lower tax rates than their secretaries. Democrats in Congress routinely cite Mr. Buffett's tax confessions as irrefutable evidence that tax rates on the very rich are too low and the system is unfair. And the system would be unfair, if Mr. Buffett's tax facts were the whole truth. But they aren't.

I don't know the details of Warren Buffet's personal taxes, and he hasn't made them public. But the IRS does provide reliable data on effective tax rates—the overall share of their income that various groups pay in federal income taxes (not including state or local taxes) after accounting for all deductions and exemptions. These are different than marginal tax rates, which are paid on the next dollar of income and now peak at 35% for individuals.

IRS data for 2008, for example, show that households in the top 10% of earners (above about $114,000) paid 19% of their income to the feds. Those in the top 1% (above $380,000) paid 23.3%. The top 0.1% of earners, with incomes of $2 million or more, end up paying a slightly lower tax of 22.7%, because they get more of their income from investments (more about this below).

So what about the rest of us? According to IRS data, a median-income household ($35,000) in 2008 paid about 4% of its income in federal income tax.

Mr. Buffett may have been referring to all federal taxes, not just income taxes, when he said the rich pay less than others. His secretary and most workers in America do pay a lot in Social Security and Medicare payroll taxes, but even accounting for them the federal system is highly progressive.

According to the Congressional Budget Office (CBO), middle-class families in 2007 (earning between $34,000 and $50,000) paid an effective 14.3% of their income in all federal taxes. The top 5% of income earners paid 27.9% and the top 1% paid 29.5%. And what about the highest earners? Americans with annual incomes above $2 million paid an average 32% of their income in federal taxes in 2005 (the most recent year for which data are available).

So how does Mr. Buffett arrive at such a low personal tax rate? He may have been referring to a 2010 IRS study of the 400 richest American taxpayers, a list he's probably on. It showed those people paid an effective federal income tax of 18.1% in 2008.

Yet that study crucially omits the corporate income tax, which is mostly borne by the owners of companies.

Mr. Buffett owns about one-quarter of his investment company Berkshire Hathaway, and his shares are worth about $38 billion. This wealth is mostly stored in what are technically called "unrealized capital gains." Eventually when those gains are converted into income, he will pay a capital gains tax. Even so, in 2008 Berkshire paid $3 billion in corporate taxes. And since Mr. Buffett is the principal owner, he shoulders a big share of that tax.

The reason for the light capital gains and dividend tax is that corporations pay up to a 35% tax on their profits before a dime of it is passed on to shareholders. The real tax rate on corporate income paid to individuals through capital gains and dividends is not 15%. It is closer to 45% once you count the tax on corporate profits. If the dividend tax rises to 20% next year from 15% today, then the total tax on dividends paid to shareholders would be closer to 50%, and that doesn't include state and local taxes.

Overall, though, Warren Buffett is wrong on taxes. The tax system is already far too reliant on the wealthy to pay the government's bills. Taxes on millionaires and billionaires are already near a record high in terms of the share of all income taxes paid. And the effective tax rate on this group is much higher, not lower, than any other income category. The best way to balance the budget is for the economy to produce a lot more American success stories like Warren Buffett."

So, on his first point, score Bernie Sanders a liar.

Then the Senator continues,

"Many corporations, including General Electric and Exxon-Mobil, have made billions in profits while using loopholes to avoid paying any federal income taxes. We lose $100 billion every year in federal revenue from companies and individuals who stash their wealth in tax havens off-shore like the Cayman Islands and Bermuda. The sum of all the revenue collected by the Treasury today totals just 14.8% of our gross domestic product, the lowest in about 50 years.

In the midst of this, Republicans in Congress have been fanatically determined to protect the interests of the wealthy and large multinational corporations so that they do not contribute a single penny toward deficit reduction."

Corporate tax preference items are frequently cited by Democrats interested in class warfare over tax policy. I don't know the source of GE's tax preference items, but Exxon-Mobil makes use of oil depletion accounting which Congress granted decades ago to encourage American oil exploration and production. The company is simply using what Congress granted because Congress wanted more oil production. What's wrong with that?

Does Sanders want less US oil production? Further, American business wouldn't have these tax preference items if members of Congress like Sanders, and their staffs, didn't sell their power to write tax law for various favors- campaign contributions, for example- now and in the future. Think senior executive posts and/or board seats.

If Congress now wants fewer tax preference items with lower, simpler, fewer rates, by all means they should reform the tax code. But Republicans aren't necessarily defending the tax codes, and the companies Sanders mentioned aren't doing anything illegal.

Sanders then turns to entitlements with these passages,

"If the Republicans have their way, the entire burden of deficit reduction will be placed on the elderly, the sick, children and working families. In the midst of a horrendous recession that is already causing severe pain for average Americans, this approach is morally grotesque. It's also bad economic policy.

President Obama and the Democrats have been extremely weak in opposing these right-wing extremist proposals. Although the United States now has the most unequal distribution of wealth and income of any major industrialized country, Democrats have not succeeded in getting any new revenue from those at the top of the economic ladder to reduce the deficit.

Instead, they've handed the wealthy even more tax breaks. In December, the House and the Senate extended President George W. Bush's tax cuts for the rich and lowered estate tax rates for the wealthiest Americans. In April, to avoid the Republican effort to shut down the government, they allowed $38.5 billion in cuts to vitally important programs for working-class and middle-class Americans.

The Reid plan is bad. The constantly shifting plan by House Speaker John Boehner is much worse. His $1.2 trillion plan calls for no cuts in the wars in Afghanistan and Iraq, and it requires a congressional committee to come up with another $1.8 trillion in cuts within six months of passage.

Those cuts would mean drastic reductions in Social Security, Medicare and Medicaid. What's more, Mr. Boehner's plan would reopen the debate over the debt ceiling, which is now paralyzing Congress, just six months from now.

While all of this is going on in Washington, the American people have consistently stated, in poll after poll, that they want wealthy individuals and large corporations to pay their fair share of taxes. They also want bedrock social programs like Social Security, Medicare and Medicaid to be protected. For example, a July 14-17 Washington Post/ABC News poll found that 72% of Americans believe that Americans earning more than $250,000 a year should pay more in taxes."

I wrote these two posts- here and here- recently on my business blog, building upon this July 4th post, America's Porkiest Generation. The theme of those posts is that the US Congress and various administrations of both parties have misled the American public into believing that three existing and one newly-created, poorly-designed, common-pool, defined-benefit social welfare programs- Social Security, Medicare, Medicaid and ObamaCare- were and are affordable, sustainable and constitute valid, binding promises by future generations to pay for pensions and healthcare of prior ones.

Sanders includes some numbers in those passages from his editorial, but not ones that matter to the point at hand- whether the four programs are, in reality, unenforceable Ponzi schemes whose promises were never valid. It's no surprise that a socialist would cherry pick from many polls, though he does not enumerate the "poll after poll," to claim that "the American people have consistently stated that they want wealthy individuals and large corporations to pay their fair share of taxes." Of course, not only do we not know the sample compositions, sizes, etc., of those alleged many polls to which Sanders refers, but we also do not know whether those polled believed that "wealthy individuals and large corporations" already "pay their fair share of taxes," do we? Further, as I wrote in those prior linked posts, who is to say what is fair?

Bernie Sanders? The Democratic party? I think not.

As I cited in this recent post,  AEI head Arthur Brooks noted that,

"Between 1986 and 2009, the percentage of Americans who pay zero or negative federal income taxes has increased to 51% from 18.5%. And all this is accompanied by an increase in our national debt to 100% of GDP today from 42% in 1980."

So it should come as no surprise, when 51% of Americans pay no federal tax, that, in some survey whose provenance is unknown, an alleged 72% want Americans earning over $250,000/year, hardly a 'wealthy' income for a family anymore, to pay more in taxes.

Having failed to clearly justify any of his points thus far, Sanders concludes his rant by asserting,

"In other words, Congress is now on a path to do exactly what the American people don't want. Americans want shared sacrifice in deficit reduction. Congress is on track to give them the exact opposite: major cuts in the most important programs that the middle class needs and wants, and no sacrifice from the wealthy and the powerful.

Is it any wonder, therefore, that the American people are so angry with what's going on in Washington? I am too."

I want "shared sacrifice" in spending reductions, not merely deficit reductions. The former are real spending cuts, whereas the latter is the difference between tax receipts and spending. A significant matter over which Sanders silently glides. In my view, that shared sacrifice means cutting the unearned, unaffordable, unfunded, larded-up defined-benefits to various groups from the four entitlement programs which are bankrupting our nation.

That would be true shared sacrifice- for every federal largess recipient to experience the same effects of inflation, higher taxes, average wage change and overall US GDP growth each year as the average working, tax-paying American.

How about Bernie? Want to go there in the name of fairness and shared sacrifice?

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