Friday, July 27, 2012

Making the Rich Poorer Doesn’t Enrich the Middle Class

Here’s a question for you: Would you rather have more money, or keep your current income and see the rich become less wealthy?
It’s not a trick question. Any member of the middle class would rather have more money. Income inequality may be a problem for society at large, but it isn’t a concern for those struggling to make ends meet. Give more to those with less, and they will be better off. Making the rich poorer does nothing for the middle class -- it may even hurt -- except assuage some jealousy for the next guy’s material success.

About Caroline Baum

Caroline Baum, a columnist for Bloomberg News since 1998, is the author of "Just What I Said: Bloomberg Economics Columnist Takes on Bonds, Banks, Budgets and Bubbles."
More about Caroline Baum
Polling by the Pew Research Center shows that people aren’t interested in taking money from the wealthy. They just want a chance to get rich themselves.
So why does President Barack Obama conflate his stated goal of helping the middle class with the need to impose higher taxes on the rich? Maybe he thinks he can “spread the wealth around,” as he told Joe the Plumber during the 2008 presidential campaign?
Alas, a “middle-class welfare state can’t be supported solely by taxes on the rich,” says Peter Sepp, executive vice president at the National Taxpayers Union in Washington.
The president’s Buffett rule, which would impose a minimum effective rate of 30 percent on those earning more than $1 million a year, would generate no more than $162 billion over 10 years, according to Congress’s Joint Committee on Taxation. That’s hardly enough to enrich the middle class, no less sustain existing entitlement programs. Besides, the committee’s estimates assume the rich blithely fork over the money rather than engage in tax-avoidance strategies.

Unequal Burden

More importantly, Obama’s fairness argument doesn’t hold up under scrutiny: The rich already pay the lion’s share of taxes in the U.S. In 2009, the last year for which complete Internal Revenue Service data are available, the top 20 percent of earners received 50 percent of pretax income and paid almost 70 percent of federal taxes, according to a study by the Congressional Budget Office. (In the CBO study, federal taxes include individual, corporate, payroll and excise taxes.) Income may be skewed, but the tax burden is even more heavily weighted toward the rich.
These trends have been in place for at least 30 years. In 1980, the top quintile paid 19 percent of the federal personal income tax compared with 36.7 percent in 2009. At the same time, the tax burden of the bottom 50 percent fell to 2.3 percent from 7 percent. And, thanks to an array of tax credits, the percentage of filers with no tax liability has crept up during the last two decades to 42 percent in 2009.
Yet the president rarely misses an opportunity to rally the huddled masses with his fairness doctrine: “I want an America where everyone gets a fair shot, everyone does their fair share and everyone plays by the same set of rules.”
The president would be better served if he focused on the “rules” part. Tax experts have already debunked the notion that millionaires pay a lower effective tax rate than their secretaries. (Warren Buffett may, but it’s his prerogative to overpay his taxes to help the Treasury reduce publicly held debt.)
As for soaking the rich, no country does it with quite the same aplomb as the U.S., according to Scott Hodge, president of the Tax Foundation in Washington. Using data from a 2008 study by the Organization for Economic Cooperation and Development, Hodge found that the U.S. placed third among the 24 developed countries in income inequality and first when it came to the tax burden borne by the rich. By Hodge’s calculation, the ratio of the share of taxes paid by the top 10 percent to the share of income earned was 1.35, the highest of the group.
The rich, it seems, pull their weight and pay more than their fair share. If the middle class has a legitimate gripe, it should be with the rules department.

Rich Rule

What rules do the rich manipulate that the middle class has neither the time nor the resources to exploit? Why, the U.S. tax code. That would be a good place for the president to start if he wants to ensure that everyone plays by the same rules.
“Many clever tax-reduction strategies are just not available to middle-class families,” Sepp of the National Taxpayers Union says.
The rich employ people to lobby Congress on behalf of their particular business or industry. They make large campaign contributions to committee chairmen, who might be persuaded to craft a specific tax break or vote in a certain way on a piece of legislation. And they hire tax consultants and lawyers to walk them through the maze of loopholes, shelters and strategies to shift income and reduce the estate-tax burden on their heirs.
Even then, some small and medium-sized businesses are saying thanks, but no thanks, to many tax breaks as “too cumbersome or too confusing” or more costly to obtain than the benefit is worth, according to a July 23 article in the Wall Street Journal.
Of course, the convoluted tax code has spawned “a cottage industry of tax-credit consultants,” the article says.
Now there’s something Obama can point to the next time he touts his job-creation record on the campaign trail.

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