A fresh perspective on the myth and the reality of income inequality in the United States.
Ronald Schmidt, professor of business administration at the Simon Graduate School of Business at the University of Rochester, says analysis of IRS data shows a “movement toward less inequality.” Schmidt talks with Bloomberg’s Ken Prewitt and Tom Keene on Bloomberg Radio’s “Bloomberg Surveillance.” Listen here to Ron Schmidt’s interview this morning.
Other pundits are writing about tax cuts and wondering how aloud how the Republicans vote against a tax cut. The answer is simple: the temporary payroll Social Security tax reduction is not, never was, and never will be a tax cut.
There are many ways to look at the 2% reduction in the Social Security tax that is being collected. But effectively, it is no more than a spending increase all dressed up to look like a tax cut. The cost to taxpayers was $120 billion dollars. Congress simply decided to put more money into the hands of the lower and middle class. Rather than write a check, they made the 2% payroll decrease on the Social Security tax collection rate so workers could see a tangible benefit in their paychecks. But because it is temporary, and because it is limited, it has none of the effects of a true tax cut. As it’s been shown in history, most recently with the Making Work Pay tax credit for example, such temporary items have none of the stimulative effects on the economy. It served no purpose other than to create political turmoil among voters, party lines, and taxpayers.
What’s worse, no one is talking about the fact that the Democrats plan to pay for this holiday and its proposed extension ($265 billion), by levying a surtax on successful Americans earning over $1 million. This is legal plunder. It is redistribution of wealth at its core. Our government borrowed money directly intended for the Social Security Fund, and now wants someone else to pay for it. The so-called tax cut is really a net tax increase on the very Americans who are most responsible for job creation in this country. Just the effect of debating this nonsense in Washington continues to stifle businesses and harm our economy.
The late Dr. Milton Friedman cogently expels one of the most persistent economic fallacies regarding the government, spending, and producing. Take 3 minutes and be enlightened and entertained.
While pushing for a Social Security payroll tax extension, Obama wants a 3.25% surtax on millionaires to pay for it. This is wealth redistribution under the guise of “fairness”.
Are you going to cut taxes for the middle class and those who are trying to get into the middle class, or are you going to protect massive tax breaks for millionaires and billionaires?” he said. “Are you going to ask a few hundred thousand people who have done very, very well to do their fair share or are you going to raise taxes for hundreds of millions of people across the country?”
Though I applaud the refreshing boldness that Mr. Cain had shown by proposing to America an actual plan for tax reform, there are two serious drawbacks to his solution that show his fiscal naivete. Most critics would point to the unsavory proposal of having both a sales and income tax in force at the same time, making it possible for future Congresses to increase rates and turn us into Europe. But it is actually the plan’s impact on Social Security that is most devastating.
Cain’s plan would eliminate the Social Security tax and related withholding, and cover retirement pensions as a true “entitlement” (welfare) system out of general tax revenues. This is not what Social Security was intended to be as established by FDR; that is, a system in which people paid for their own retirement. Once liberal politicians started promising individuals far in excess of what their contributions paid for, with no actuarial consideration nor funding whatsoever, Social Security’s demise became assured.
In order to overcome its crippling insolvency, Social Security must go back to its original intent — a self-funded retirement plan. This could be achieved by taking any of many possible forms, but must include the concept that individuals themselves are paying for their own retirement; ie, they are putting money into a plan which will become their invested retirement fund.
By contributing more deeply to the entitlement problem and making Americans further wedded to the government, Cain’s tax plan is a failure. Such a solution ultimately departs from his avowed conservativism.
Senator James Clyburn’s (D-SC) appearance on Fox News Sunday on November 13 regarding the Super Committee was a disgrace. If he is representative of the Democrats on the committeee, there really is no hope that any meaningful conclusion can be reached by November 23rd. His analysis of tax loopholes and deficit reduction was utterly inaccurate.
In the first instance, Clyburn disagreed with the premise that cutting loopholes results in a tax increase. He clearly doesn’t understand that the loopholes to which he is referring are really the tax deductions that taxpayers take. Such deductions are reasonable to a lot of people because they do have some incentives, but, financially speaking, they are revenue losers and detrimental to growth. Cutting the loopholes (deductions) will increases taxes because people will not be able to reduce their taxable income as much, thereby likely ending up in a higher tax bracket.
Additionally, when confronted by the moderator over his analysis, Clyburn declared that he wants to look for the loopholes for those wealthy taxpayers “that allow you to go down to zero in taxes” .Of course, the truth is that there is no way to do that. For Clyburn to assert such a ridiculous idea on national television shows he has no fiscal acumen.
In perhaps the most egregious comment of the interview, Clyburn insisted with a straight face that the Super Committee can and should consider the $917 billion worth of money that won’t be spent on Iraq and Afghanastan to be a tax cut. When confronted with this absurity, Clyburn justified his remarks by arguing that the money should be counted because it can be “plowed back” into the economy.
How could we ever have expected a serious and substantive meeting of the minds when legislators as oblivious as Clyburn are members of the Super Committee?
There are rumors circulating around the country that the Congressional Super Committee may take action that would immediately repeal the $5 million gift tax exemption by Thanksgiving. This is sending countless tax lawyers and accountants scurrying to complete gift planning that the law tells them they have until December 31, 2012 to complete. The lifetime gift level tax exemption was temporarily increased to $5 million under the 2010 Tax Relief Act for 2011 and 2012. Neither the Obama administration nor Congress have commented on these rumors, causing great concern and uncertainty. An about-face reversal with little notice would be extremely disruptive, unfair, and inequitable.
Regardless of how many or few people this change would affect, the fact that this Congressional committee would have the ability to alter the law midstream on the taxpayers who have been working on their long-term plans is outrageous. Any taxpayer – wealthy or not – should be entitled to be able to rely on their current tax law when making tax decisions, and, if a law might be modified, have ample time to implement necessary changes. The real possibility that the aforementioned law might be changed as of the super committee deadline is unconscionable.
This disruption, just by the speculation that is not being refuted or confirmed, is causing great stress. Most of the taxpayers to be impacted by such a change are the very people who create the jobs in this country. With business people dropping everything to deal with these rumors which could have major effects on their business transition plans, it could also impede job growth.
If there were to be such action taken by the Super Committee, it is likely to do serious harm to the United States economy. But more importantly, it reveals the shallowness of any real commitment to tax equity and transparency. The country seems to be rallying around the concepts contained within the Simpson-Bowles and the Rivlin-Domenici reports, both pushing for greater transparency and comprehensive and reliable tax reform. It would be abhorrent if this ‘new direction’ had, as its first implementation, a huge gotcha moment.
The most irksome thing about the Occupy Wall Street (OWS) movement is the phony crony capitalist fever going on. The truth of the matter is that, if OWS individuals were honestly seeking to engage and change, and really understood how capitalism works, they’d be for capitalism and against Obama.
The very act of bailouts is anti-free market. It is the opposite of capitalism.
Those companies who received bailouts abused their free market capitalist competitors by cozying up to the government and getting politically motivated handouts. These bailouts were substantially shared by the very unions that were substantially responsible for the companies going bankrupt in the first place. The only thing to enable the cronyism was Obama, who decided to not allow capitalism to work by letting the losers lose — which would have been more beneficial for everyone, except those cronyists.
Those Occupiers who are against capitalism and the bailouts simultaneously clearly don’t understand the difference; it shows naivete on the part of the OWS movement. Their fiscal ignorance undermines their cause and promote a crony socialist agenda.
The Alternative Minimum Tax (“AMT”) presents hardships to the practitioner as well as the taxpayer who prepares his own return by, as its name implies, imposing a second tax calculation mechanism on taxpayers. It serves virtually no useful purpose, other than the raising of an ever-increasing amount of tax revenue. But it has become very clear in recent years that this AMT tax revenue is not coming from just the taxpayers who were the intended targets of this tax.
The AMT was instituted in its present form when the prior “add on” Minimum Tax was transformed into the AMT in the early 1980’s. Its stated purpose was to require that all taxpayers paid at least a fair share of tax. It was to do this by identifying “loophole” type deductions, also known as “preferences”. There would then be an alternative calculation using lower tax rates applied against this taxable income as increased by the preferences. Whichever of the taxes is higher is the one the taxpayer must pay.
However the AMT was seriously flawed from the outset. Instead of focusing on these loophole type preferences (which would have limited the tax to a very small number of tax law “abusers”), the law that was passed included items that were not loopholes at all. A convoluted formula compares the differences between income and deductions to determine who falls under the guidelines.
A very substantial majority of all AMT paid by taxpayers results from the following four factors:
Treating state and local taxes as a preference
Treating miscellaneous deductions as a preference
Not modifying the rate to correspond to changes in the regular income tax rates.
Allowing lower exemptions than the regular tax.
Each of these, however, can be quickly shown as inappropriate factors with which to base a tax system intended to just make sure everyone pays a “fair share” of tax.
State and local taxes are hardly a loophole. The taxes exacted by state and local governments are hardly “voluntarily” paid by taxpayers in an attempt to avoid paying federal taxes.
Miscellaneous deductions is the category of deductions that consists primarily of expenses incurred to earn income that is subject to tax. It includes unreimbursed employee expenses, investment expenses, etc. This is the most basic and important deduction needed to have a truly fair income tax system. For example, if an individual pays a lawyer a fee for collecting back wages, the legal fee is a miscellaneous deduction. If an individual pays the lawyer $300 for collecting $1000 of back pay, netting $700, the AMT would tax the individual on the full $1000.
The AMT rate is generally 28%. This was its rate when regular tax rates were 39.6%. Regular tax rates have dropped to 35% currently, but the AMT rate remains at 28%.
The exemption available under the AMT tax system is a fixed dollar amount which, unlike exemptions and standard deductions under the regular tax system, is not indexed for inflation. Furthermore, it is phased out entirely over certain income levels. And each year Congress has to approve an annual “patch”, which raises the threshold for inflation, in order to raise the exemption limits of the tax so that less wealthy taxpayers won’t be subject to the AMT.
It must be noted that the annual AMT patch is not a tax cut at all, but merely the avoidance of a massive tax increase on millions of middle-income taxpayers’ families. Congress likes to point to the patch as some major revenue loss, had the AMT been applied to those families, as an excuse to raise to raise taxes in order to offset this “potential missing tax revenue”.
The AMT in its present form has no place in tax law. The AMT does not serve the purpose for which it was intended and functions in a most inequitable manner while adding enormous compliance burdens. It should therefore be changed to eliminate the adjustments for state and local taxes and miscellaneous deductions, update its rates, and modify its exemption, or else be eliminated completely.
