The Truth about the Tax Debate

            With another weak showing by the administration leading to the compromise reached earlier this week, the debate on the Bush tax cuts has been resolved for the present, but only for another two years.

            And so, with an eye to the renewal of the battle in 2012 (right in the middle of the next presidential campaign!) let’s review what all the fuss was about.

            First of all, let’s remind ourselves of why taxes are necessary.  They are necessary to allow the government to provide various services when those services either cannot or should not be provided through private enterprise.   

            Note, however, that whether services should be provided and whether government should provide them are separate issues that are determined by the populace through the democratic processes in our republican form of government.  (Stated briefly, the people elect representatives who make the ultimate determinations.)

            So, taxes are the principal means by which governments (federal, state and local) secure the revenue necessary to carry out the functions that they have been directed to carry out.  Put another way, taxes are merely the method by which governments secure the capital they need to do what the people (again, recall the democratic-republic model that the United States has maintained for over 200 years) have mandated.

            Understood in this light, the “starve the beast” strategy regarding taxes, as espoused by many staunch conservatives today, is anti-democratic.  That strategy consists of three stages.  Stage one is to significantly reduce government revenue by cutting taxes; stage two is to cut the programs that can no longer be afforded; stage three is to repeal them entirely.  In political terms, starving the beast is the equivalent of a coup d’etat, a way to undo what the people voted for themselves.

            But okay, let’s get down to it.  What was/is the issue about the Bush tax cuts? 

            Everyone, save for a few economists on the fringes, agreed that the cuts should be maintained for the lower 98 percent of all income earners in the country, which amounts to everyone making less than a quarter of a million bucks (for a couple) or $200,000 for those filing their returns as individuals.

            But those figures need to be understood, because we’re talking about the adjusted gross income that is the actual amount on which a tax assessment is based.  That figure is the amount we report after we deduct all of those wonderful deductions that we (through our elected representatives) have decided to allow ourselves.  They include things like charitable contributions, home mortgage interest payments, and for those engaged in any kind of business, the expenses required to run that business.

            Thus, depending on the amount of creative accounting one uses (and it stands to reason that the wealthier a person is, the more creative his or her CPA’s accounting is likely to be), the lower the taxable income will be.  So it isn’t far-fetched to assume that for many reporting taxable income of $250,000 a year, the actual income might be closer to a half million or more.

            At this point, it should be clear that we are talking about very wealthy people.  Indeed, we’re talking about two out of every one hundred Americans.  That’s who the debate is all about.

            But now let’s talk about what those poor souls are being asked to sacrifice in the repeal of their Bush tax cuts.  The repeal would increase their marginal tax rate from 35 to 39 percent, an increase of 4 percent. 

            Ah, you say, but four percent of $250,000 is a healthy paycheck.  (Actually, it’s $10,000, according to my trusty old-fashioned calculator.)  But that’s not what we’re talking about in terms of the tax increase, because the added rate only applies to that taxable income over $250,000.  Thus, if a couple reported taxable income of $300,000 (based on real earnings of maybe $500,000 or more), their taxes would increase by a whopping $2,000 (the added four percent only applying to the $50,000 over $250,000 in our example).

            Are you with me?  Starting to get the picture?

            Now let’s review a little history.  Is a 39 percent top marginal rate all that high?  Not by historical standards.  In the 1950s it was 91%.  That’s right, folks who made millions in those days (there were far fewer of them) paid nine out of every ten dollars earned in federal income taxes if their earnings came in over the highest taxed income level.

            So the 39 percent that Bush felt was outrageously high in 2001 (when he pushed through the first of his two tax cuts) wasn’t really all that high.

            But that rate was a bump from the lower rate that had existed before Bill Clinton (with the support of Congress) hiked it in 1993, when the top rate jumped from 31% to 39.6%.  That bump qualified as a big one (so big that many members of Congress lost their jobs over it in the 1994 election).  But what happened to the economy as a result? 

            In case you can’t recall, the Clinton years were astonishingly successful from an economic standpoint, with unemployment under four percent (full employment by most measurements) and sizeable budget surpluses by the end of the decade.

            But George W. Bush wanted lower tax rates (allegedly to revitalize a stagnant economy).  The result?  We’re living it right now: high unemployment and very high deficits.

            So, all other things being equal (and admittedly, they never are), what we learn from this historical review is that 1) taxes wouldn’t be all that high even for top earners if the Bush cuts were repealed and 2) economic vitality is certainly not guaranteed by lower rates nor is economic collapse certain when rates are raised.

            But what about freedom, as in the right to be free to make lots of money?  Isn’t it un-American to tax those who live the American dream?

            That shibboleth shouldn’t require a response, but in this age of tea party activism, it does.

            And the answer is that the wealthy gain their wealth because of the opportunities provided in this great country of ours.  Hence, it’s their patriotic duty to pay taxes.  And aren’t the wealthiest Americans true patriots?