Did Barack Obama take Tax 1 in law school? I did, and I remember the first day of classes, when mild-mannered Prof. Boris Bittker asked a simple question, “What is income?”
I was pretty confident I could come up with a quick answer, and so were a lot of other students. By the end of the hour, after Professor Bittker had politely punched huge holes in every student’s definition, it was pretty clear that none of us could. Income is a slippery concept — especially slippery when you’re trying to tax it.
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Which leads me to think that Obama may have avoided Tax 1. Or perhaps he dozed off in class. For in his April 13 speech at George Washington University, the speech to which Standard & Poor’s responded by reducing the government’s credit-rating outlook to “negative,” he seemed to think he could get all the money we need to balance the budget from higher taxes on the rich.
That’s wrong as a matter of simple arithmetic, as is clear from a chart reproduced on the Wall Street Journal editorial page showing the total amounts of taxable income of each group.
The chart showed that if the government had simply confiscated every dollar from those reporting more than $1 million taxable income in 2008, it would not have gotten the $1.3 trillion needed to close the current federal budget deficit.
What the chart doesn’t show, however, is even more important. And that is that when you reduce income-tax rates, high earners have more taxable income. When you raise them, they have less.
High earners don’t sit around waiting to have their money confiscated any more than chickens sit around and let you pluck out all their feathers. They pursue other options.
This is most obvious when you think about capital gains. The federal government doesn’t try to tax capital gains — the increase in values of your stocks or your house — every year (Professor Bittker had us in knots explaining how it might do this). You pay capital gains on a stock or house only in the year you sell it.
What happens if the capital-gains tax goes up from 15 percent to 50 percent? People stop selling stocks and hold onto their houses if they possibly can. And when cap-gains rates go down? They’re more willing to sell, pay the lower tax, and invest in something else.
That’s why the government’s total revenues from capital gains have tended to rise when the capital-gains tax rate is lowered. And why an increase in the capital-gains tax rate never raises the amount of revenues that static models estimate it will.
You get the same effect, to a lesser extent, when you change tax rates on ordinary income. People working for minimum wage don’t have many options about how they’ll be paid. High earners tend to have more options.
If you go back to the 1970s, when the top rates were 50 percent on salary income and 70 percent on investment income, you’ll find that a lot of high earners were getting company cars, company payment of country-club dues, and big expense accounts.
The reason: They didn’t have to declare those things as income and pay taxes on them. But when rates went down, there was no demand for company-paid perks any more.
You would find also, if you spent time with those 1970s high earners, that they spent a lot of time and psychic energy in finding tax shelters — investments that, thanks to the intricacies of tax law, reduced the amount of taxable income.
After the Ronald Reagan tax cuts, we saw a vast increase in high earners’ taxable income. One reason, I suspect, was that they spent less time seeking tax shelters and more time figuring out how to make profitable investments.
There’s a reason federal tax revenues since World War II have hovered around 18 or 19 percent of gross domestic product, regardless of tax rates. The reason is that higher rates tend to result in less taxable income. You figure out why in Tax 1.
But perhaps Barack Obama understands this. In 2008, he told ABC’s Charlie Gibson that he wanted to raise capital-gains rates even if the government got less revenue because of “fairness.” Evidently he likes taking people’s money away. What he doesn’t explain is why this makes anyone better off.
It's not outside the realm of possibility that this Administration would go so far as to not only raise the capital gains tax, but find a way to penalize those evil high earners if they dared to hold on to their assets to keep from being taxed at the higher rate and the government from confiscating the benefit they might gain from selling those assets and making--God forbid--a profit. Penalizing possible gains not realized? Impossible, you say? Not with this Administration. Heck, they call repealing taxes not yet collected a "cost" and money not yet spent a "cut".
"If you go back to the 1970s, when the top rates were 50 percent on salary income and 70 percent on investment income, you’ll find that a lot of high earners were getting company cars, company payment of country-club dues, and big expense accounts."
you wrote "Evidently he likes taking people’s money away. What he doesn’t explain is why this makes anyone better off."
But it does make some people better off - 1) his administration gains more power, and 2) his peeps (i.e. everyone who gets a 'refundable tax credit', et al) get thrown a bunch of confiscated money stolen from the taxpayers.
The rest of 'us', i.e. the 'makers', exist only to be sheared.
From a revenue standpoint -- which I don't advocate -- the optimal capital gains tax is one the keeps changing the rate. Raising it, with advance notice, will stimulate sales before the rate increase. Lowering it will make sales seem more worthwhile.
Of course revenue maximization may not be good economics.
The government seems determined to raise as much money as possible rather than determine how much is needed to do its work. If it dumps the outgo that is based on unconstitutional responsibilities it has legislated, it would save a lot of money. I am NOT suggesting the entitlements be dumped all at once, tomorrow. I realize a lot of people have made long-range plans that depend on them. Just saying that a charitable government is more expensive. Obviously is also discourages self-reliance and individual charity, because taking up slack becomes perceived as the government's job.
To do its Constitutionally-defined duties would cost considerably less. The other responsibilities should be pushed off to the states and lower forms of government, or to the people. I have faith that people will start taking care of each other when the government gives it up.
Mr. Barone, the politicians benefit. Raising capital gains taxes makes taxpayers more beholden to the politicians, who can grant "waivers" or loopholes or exemptions, or tax credits to offset the increases, and jimmy the tax code to benefit their supporters and harm their non-supporters. So, of course, Obama, who is interested in power and the ability to manipulate taxpayers (think of all the campaign contributions he could get from those he benefits). The tax code is not used for revenue purposes. Long since it has been used for political power and control. That, obviously, was not discussed in Tax 1 when you trained. I dare say that was the whole point of whatever tax class Obama took at Harvard--how to achieve fascist-like control over companies and taxpayers--all you have to do is look at GE to see that the tax code is not a revenue system, but a political control system, designed to benefit friends and punish enemies. Obama plays that to the hilt, to the detriment of the nation. Obama has established a Neo-fascism in America, and the tax system is integral to that project. Wake up, Mr. Barone!
Once again the president is showing tendencies of a fossilized ideologue, not a president seeking practical solutions to our problems. Inflexibility equals an inability to react to the expanding dynamic problems of our times. If this intransience to pursuing pragmatic policies persists, I fear we are doomed to economic and social implosion. It won’t be pretty.
That is the just of the Obama plan after all, along with the government as the solution to your disparity.
You can go all the way back to the mid 1920's with President Harding cutting taxes and resulting in tax revenue increases and lower unemployment. FDR raised the income taxes with his social plan and by 1935 the tax revenues dropped in half. The historic tax revenue charts are proof that when tax rates are lowered tax revenues raise and I find it disturbing that history is sidelined for demagoguery based on speculation and untruths. Obama and his administration cannot be that stupid or blind to history so my only conclusion is that Obama wants a socialist run nation.
Even JFK realized that high taxes put a drag on the economy, reduces incentives and production which results in less revenues. If we could use the championed Democrat President JFK's policies as an example of how to grow the economy, lower unemployment and raise revenues against Obama come 2012, we will open the eyes and win the votes of Independents, and center/right Democrats.
MikeB, you missed the entire point of Michael Barone's piece, which boils down to this: High earners have more options on how to receive their pay than low earners. Haven't you ever asked yourself why is it that even after the Congress passes new tax laws the gap between rich and poor is still wide?
Does anyone remember when John Kerry was running against Bush for President and it was discussed, briefly, that Kerry's wife had more income than the Bushes and yet she paid less in income taxes? How is that possible? Tax "free" investments such as muni bonds. As for Mr. Kerry how about where does one dock your yacht to avoid taxes?
The capital gains tax needs to be indexed to inflation. Especially now that we are looking towards another bout of increased inflation.
If your investment increases by 5% but over the same time period inflation was 10%, you actually lost 5% on your investment, but govt will still tax you as if you had made 5%.
How would one find out whether Mr. Obama took Tax 1 in law school? - Practically, not theoretically, one might say.
Nevertheless, someone with Mr. Obama's mindset undoubtedly considers the concept of "income" to be a corrupt bourgeois notion. The evidence on the table suggests he believes down to his bones that all wealth is the property of the State.
Obama is juvenile in his thoughts. When I was in my late teens and early 20s I had that soggy attitude towards money. Once I grew up that changed. I ain't rich but I don't begrudge the rich. The beauty of this nation is that we are, or were free, to seek our own destiny and fortune. However, that may no longer be the case for we Americans. We will be told what we are to be by people like Obama.....shiver me timbers! The hypocrisy of this all is he hangs out with the very people he maligns. He needs those rich people to keep him on office. I wish someone would flat out call him out.
Do you really think those people in the 70's declared those cars and other perks?
Corruption is another byproduct of excessive and complicated taxation and is one of the prime reasons for lost revenue.
The money belongs to the people not the government. As a people, we agree to give some money to the government for the common good. When the amount of money exceeds the amount of benefit, people feel they are being stolen from. They immediately start stealing back. The resulting corruption slows down the economy as much as anything else because corruption is inefficient to the economy as a whole.
Look at the continent of Africa, the old Soviet Union, parts of the new Russia, Mexico and elsewhere. Right near or at the top of these country's reasons for trouble is corruption.
A few policies need to be implemented immediately after the tax-code is reformed. 1) eliminate the Federal Reserve Bank. Put the monetary policy back with the treasury department, which is what the constitution demands. 2) Move elections to April the 16 so people can vote with the reality of what the government is doing with their taxes. 3) Don't let the politicians how much revenue we are receiving in Washington. Let them act as if it was their money. Whenever we start to generate revenue the politicians find faster ways to spend it.
You just don't understand. Liberals in general and Obama in particular are obsessed with "fairness", but with their definition. To them, fairness requires that everyone get what they need and everyone contributes as much as they are able. Sound familiar? Of course, the liberals get to decide what everyone needs and what they are able to contribute.
