Income Tax Nonsense from Voters and Candidates

Here’s a funny thing that’s, um, not so funny. I have listened to Barack Obama and to John McCain talk about income tax rates to people asking questions about income taxes, and I have watched other people discuss income taxes on television, and read a bunch of people ranting about income taxes, and complaining about income taxes, and whining about income taxes . . . you get the picture.

But not one individual discussing this election—Obama and McCain included—has presented the real picture of what they are talking about. If they did, we would see how utterly ridiculous this discussion is. The only ones seriously looking at income tax policy are places like the Heritage Foundation, and I am sure they are all pulling their hair out over there about the nonsense that is masquerading as policy.

Is anyone looking at data from the Congressional Budget Office, or reading the dry, dull reports of the Bureau of Economic Analysis? Any voter willing to study income tax revenue as it relates to income tax rates? To compare income tax revenues historically as it relates to GNP? Of course not. That’s boring. And yet, everyone is an expert on what income tax policy ought to be. Amazing.

Let’s get something straight. Income taxes are not about redistributing “wealth” from rich people to poor people, or letting rich people “keep their money.” Because even if you aimed to achieve either of these results, it could not really be accomplished through altering tax rates. The income tax does not tax wealth. It taxes income.

Simplified example: if you are a zillionaire, you may structure your finances and assets in such a way that you do not pay any income tax. Suppose you need a few hundred thousand bucks to live on. Well, if you own anything worth more than a few million, just borrow the money against collateral: no taxes on borrowed money. Do you care if you ever pay off the loan? No. Let the estate pay it back when you die, and it will reduce the amount of inheritance tax—which you’ve mostly taken care of through trusts and corporations, anyway.

Put some money in non-taxable vehicles, like T-bills: low return, low risk, but no taxes. And if you have zillions anyway, why do you need a high return? You don’t. Anyone can live on a 4% return if it’s 4% of 20 million bucks: $800,000 per year, tax free. About the only taxes you would have to pay are the same ones as everyone else: property taxes and sales taxes. But Warren Buffet, the billionaire, pays the same sales tax rate as you do if you both buy from the same store in the same state. Naturally, he probably buys more than you do, so I suppose he pays more, but he really doesn’t pay at a higher rate. And the rest of us? Most of us live on our income from our jobs. We all pay through the nose.

So let’s talk about income. Even when you have taxable income, higher rates on higher incomes do not translate into higher government revenues—or mean that the government will receive taxes at the higher rate. Let’s take the Obamas and the McCains. The Obamas file a joint return. In 2006, their adjusted gross income (AGI) was $983,826. Their tax? $277,431, or 28.2% of AGI, after charitable donations of $60,307 and other deductions. John and Cindy McCain file separately. John’s return showed income of $338,809, and he paid $96,933 in taxes, after deducting $96,758 in charitable donations and other items. His rate? About the same as the Obamas: 28.6% of AGI. Cindy McCain, who comes from a wealthy family, showed a whopping income of $6,066,431. I don’t know how much she donated to charity, but her overall deductions were over half a million dollars, and she paid $1,722,283 in taxes. Her tax as a percentage of AGI? About the same as John and the Obamas: 28.4%.

Hmmm. The top individual income tax rate is 35%, which means that people making over $350,000 are supposed to pay 35% of all income above $350,000. Now, between John, the Obamas, and Cindy, you would say that there is a pretty large income disparity. John made below this threshold amount, the Obamas earned a fair amount above the threshold, and Cindy made way over this threshold. But they all paid about the same percentage of AGI. Why? Well, let’s take a look at the tax code. AHA! Tax rates are window dressing. Given the types and amounts of deductions, and a little sound advice, it is fairly straightforward to structure income to avoid the higher rate.

Is that bad? No. I happen to think that they ALL paid too much. Think about it: 28% of their income went to support government operations. In total, two households paid $2,096,647 to Uncle Sam. Plus, they gave (assuming some of Cindy’s deductions are for charity) well over $157,000 to charity. That’s not enough for America? Please. And let’s not kid ourselves that Congress will ever eliminate or seriously tamper with the deductions and other small print; that is the real meat of income tax policy.

If Uncle Sam went ahead and raised the top tax rate to 50% for individuals who make over, say, $500,000, I suspect you would not see any higher revenues, and I suspect few would ever pay taxes near that rate. If you look at historical tax rate tables versus income tax revenues, you find out that there is no direct correlation: higher rates don’t really yield higher revenue. So people can blather on all they want to about whether we should or should not “tax the rich” more, but it is a pointless discussion. Moreover, the top 10% of all income earners already pay 70% of the U.S. revenues received from income tax. So, say thank you to the Obamas and McCains, and stop whining.

And don’t even entertain the notion that Congress will or should tax wealth (at least, I hope, not in my lifetime). According to OpenSecrets.org, 62%, of our Senators and Congressmen have a net worth in excess of $1 million, with the top dogs being: Rep. Harman (D), Rep. Issa (R), Senator Kerry (D), Senator Kohl (D), and Rep. Hayes (R), all of whom are worth over $100 million. I added party affiliation here to illustrate that any sympathetic rhetoric doled out to everyday bumpkins like you and me is a bipartisan load of B.S. These people are not about to cough up anything. So to anyone buying into the “tax the rich” rhetoric: you are living in Lalaland.

One more point: I don’t resent the rich. Every car they buy, every designer outfit, sailboat, expensive dinner, vacation home, bottle of XO, gold watch, and golf club membership puts money in the pockets of people like you and me who work for a living. That’s my idea of wealth redistribution: conspicuous consumption by the wealthy. I would much rather see their money go into the pockets of hard-working Americans than into the pockets of Washington bureaucrats or able-bodied welfare recipients who are too lazy to work. By any measure, the rich handle their money more wisely than Uncle Sam; that’s how they became rich.  (And not $10 trillion in debt.)

So, if you want a piece of pie, baby, stop whining and cook your own.

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