Sunday, April 8, 2012

Income Taxes and the 2012 Election

It may be a coincidence that I am working on writing notes to Cordell Hull's memoirs just before the 2012 income tax deadline. Cordell Hull claims that when he was a young member of Congress he initiated the plan to use income taxes as the main source of federal revenue. It is probably true, because most people would not boast of such a thing. [See Introduction of the Income Tax]

Taxes, in particular income taxes, will be a big issue in the 2012 election. As usual, the real battles will be in the congressional districts, but to keep it brief we can use the major party Presidential candidates, Barack Obama and Mitt Romney, as surrogates for their parties. Mitt Romney will say he can lower everyone's taxes, with the key point being that everyone includes rich people. Barack Obama will claim to lower taxes overall while shifting some of the burden from "middle class taxpayers" to the rich.

The problem with the Obama stance is that is just a plain old lie. The Democrats held the Senate, House and the Presidency for two years, 2009 and 2010, but did not even reverse the Bush era tax cuts for the rich. They also promised, when running in 2006, to end the war in Afghanistan and the destructive military and homeland security expenses, but they did not do that either, even though they gained control of the House and could have done it.

Mitt Romney probably genuinely believes that even lower taxes on the richest Americans would allow them to keep more of their gains, thus allowing them the capital they need to build more factories in China and datacenters in the U.S. to sell Chinese goods to those few Americans who can still afford them. Of course the reality is that since 2008 most rich Americans, most of the time, put most of their wealth into government bonds, not the stock market or new businesses. [See Where have all the Capitalists Gone?]

Whatever their campaign rhetoric , whoever is elected President will be looking at both an unprecedented national debt and a large by any standards annual deficit. Ever escalating medical costs are eating a hole in the economy even greater than defense spending. Short term, the economy is recovering from the Great Recession, but long term, disruptions are going to happen.

So you can plan on no one reducing taxes, except in specific cases where very large campaign donations are made. The temporary tax breaks of the recession are likely to disappear. On the other hand, general tax increases, even for the rich, are highly unlikely.

So, why not present my fantasy, Log Tax Plan. It is based on a simple idea. Incomes have become so disproportionate between ordinary Americans and our economic Overlords, we need to start using a logarithmic scale. I assume, since this is a fantasy, that all income will be taxed equally, including capital gains and dividends. Stock market gains will be marked to market annually.

Under $200,000, things stay about as they are.
From $200,000 to $1 million the new rate would be 40%.
From $1 million to $10 million, the rate would be 50%.
From $10 million to $100 million, the rate would be 60%.
From $100 million to $1 billion, the rate would be 70%.
From $1 billion to $10 billion, the rate would 80%.

Only those making over $10 billion a year would pay the new maximum rate of 90%.
I can hear the ghost of Steve Jobs crying out: that's unfair! Of course Steve paid almost no taxes in his lifetime, as most of his income was from capital gains. Capital gains are only recognized when stocks are sold. Since he died with his fist closed around most of the Apple shares he ever owned, he never paid taxes. Since he had clever lawyers (who for instance kept him out of jail for backdating stock options), he probably paid little in taxes even in death.

Steve Jobs was a hero for our age, a Silicon Valley Robber Baron who kept his eye sharply focused on the mighty dollar while almost half of Americans lost most of what they had in the Great Recession.

But ask yourself: would you rather make $30,000 and pay about $5000 dollars in taxes this year (mostly Social Security and Medicare), or $10 billion and have the government take away all but two billion? I'm guessing most of you are for the 80% tax rate, and would be happy to pay the 90% rate if you make more than $10 billion in 2012.

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