“What do you think about taxing wealthy folks?” by Peter Burrows 4/17/24
(I was recently asked that question by my cousin Deb, who is a retired professor at Cornell University. She has a Ph.D. in Education, which she is valiantly trying to overcome. This is my emailed response.)
“What do you think about taxing wealthy folks?” Oh, my. That’s a “prod the bear question,” which I’ll try to answer without it shortening my life too much.
In brief, for as long as I’ve been a reasonably informed voter, at least 55 years, the Democrats have made issues of “taxing the wealthy” and “paying their fair share,” whether it’s from individuals or corporations.
It’s all demagogic BS and the Republicans have let them get away with it. These arguments are easily refuted by a look at the facts, and only once do I remember a Republican taking a Democrat to task about it. That was in a VP debate between Lloyd Benson and Dan Quail. (Yes, I’m that old.)
As I recall, Benson said something about evil President Reagan lowering the top tax rates and Quail responding that the lower tax rates actually raised MORE money, which was true. Benson then said something very revealing, something to the effect that higher tax rates may not actually raise taxes, but they would give the APPEARANCE of fairness.
In other words, f— the facts and fool the people, or something like that. As ever, demagoguery depends upon an ignorant electorate.
As an aside, I have also heard Democrats over the years say something to the effect that there are X-number of corporations who make billions in profits yet don’t pay any taxes, and isn’t that unfair? So, vote for me, etc. etc., as if though once in office the Democrat will make those scofflaw corporations pony up.
The problem is, once again, a little thing called facts. WHY don’t the corporations pay taxes? The implication is they are somehow breaking the law, when in fact the reason they don’t pay income taxes is because they didn’t earn any income!
How is that you say? The answer is slightly arcane, but not so much so that the public wouldn’t understand if properly presented to them, something the Republicans fail to do, which is inexcusable.
Corporations keep two sets of books, both of which are available for public scrutiny. Nothing secret here. One is for the IRS, the other for the shareholders, which is what is reported. What is reported are NORMALIZED earnings, i.e., what earnings would be if they weren’t affected by unusual or one-time occurrences.
The most common discrepancy between IRS earnings and normalized earnings is the use of accelerated depreciation. Corporations use accelerated depreciation when reporting to the IRS and straight-line depreciation when reporting to shareholders.
As an example, a company buys a delivery truck for $100,000 which has an estimated life of 10 years. The normalized depreciation expense would be $10,000 per year, but accelerated depreciation might allow the company to expense $50,000 in the first year.
(The same amount of depreciation expense is going to be deducted, accelerated depreciation just allows it to be deducted sooner rather than later. This saves money by lowering today’s taxes, freeing up funds that can be invested, etc.)
When capital expenditures are in the billions or hundreds of millions, you can see how the added expense from accelerated depreciation could easily wipe out earnings. If the company then reported a net loss to shareholders, this could give a misleading picture about how the company’s business is doing.
That’s why companies report “normalized” earnings, something I’ve long thought was foolish. Corporations should publicly report IRS earnings, with normalized earnings as a footnote. Investors and shareholders are sophisticated enough to figure this out, but the man in the street ISN’T, which is what the Democrats count on.
Similarly, the Democrats depend on the man in the street not knowing the difference between income tax RATES and income tax RESULTS. The top individual rate today is 37%. The top rate when Reagan took office was 70%, which was cut to 50% in 1981, and the top rate when Kennedy took office was a stratospheric 91% which was cut to 65% in 1963.
Both rate cuts resulted in tax revenue increases. What this means is that wealthy people actually paid MORE in taxes than they did before the rate cuts. An economist named Art Laffer became famous for articulating this in what is now known as The Laffer Curve, which you can check out in the Wikipedia link below.
In essence, lower tax rates can result in higher tax revenues which is the case today. In fact, according to a recent article in Reason Magazine, “the wealthiest Americans are now paying a higher share of federal taxes than at any time in the past 40 years.”
The article states that according to 2021 returns, the top 1% of earners paid nearly 46% (!!) of all income taxes, the top 10% paid 76% and the top 25% paid 89%. By contrast the bottom 50% paid only 2.3%. (See link below.)
What this means, not surprisingly, is that there is a large constituency in favor of raising taxes because they don’t pay any. What a sweet deal.
So, to answer your question, what do I think about taxing wealthy people? I think wealthy people are OVERTAXED and that the tax burden should be spread more evenly. That would mean raising the taxes on the bottom 50%. How many votes do you think I’d get running on that platform?
As to raising taxes on corporations, this reflects a basic misunderstanding of how the world works. The rate of return on investment is always calculated after taxes are paid, which means taxes are considered an expense. Expenses are paid out of revenues, aka sales, which means that it is the CUSTOMERS who pay the taxes, just as they pay all the other expenses.
Corporations only appear to pay taxes, which is good enough for the demagogues.
Interestingly, politicians tacitly acknowledge this reality when they offer lower tax rates to attract corporations. Ireland, for example, taxes companies at only 15% while Biden wants to raise rates to 28% from 21%. If you are an international company looking for a place to expand, all things being equal, you go to Ireland.
In my opinion, the corporate tax rate should be ZERO. Competition would force corporations to pass the savings on to the customer, ergo, lower prices.
Well, that’s not going to happen. No politician would ever propose zero taxes on corporations, let alone propose raising taxes on the bottom 50% of wage earners. Maybe if we had term limits we could expect some statesmanship from those we elect, which is one reason to have a Constitutional Convention, but that’s another issue.
Now, aren’t you glad you asked?
https://en.wikipedia.org/wiki/Laffer_curve
(The link to Reason Magazine that WordPress can’t open is to an article published April 12 by Eric Boehm, “The Real Tax Gap.” It shouldn’t be too hard to find.)
FYI, here is JFK’s Message to Congress, 1/24/1963, proposing lower taxes. If you didn’t know, you’d think he was a Republican!
https://www.presidency.ucsb.edu/documents/special-message-the-congress-tax-reduction-and-reform