Are the Rich Over Taxed?

Carl Milsted, Jr on May 7 13:30:06

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Originally published December 16, 2010

The Obama Administration annoys me. It legislates horrendously complicated healthcare legislation. It applies Keynesian pseudoscience to attempt to restart the economy, driving up our deficit ever higher.

Conservative talk show hosts annoy me even more. They pontificate over how bad Obama is about the deficit even though most of the deficit was inherited from the Bush Administration. Moreover, back when Clinton achieved a budget surplus (cash basis, not actuarial basis!) they whined about being overtaxed. Finally, they and the Republicans in Congress are fighting for tax cuts for the rich.

I am not so sympathetic to the plight of the rich. Yes, they pay a lot of taxes. But they have tax loopholes you can drive a truck through. They get protection of their wealth from the government, including restraints on competition. They get a subsidized return on passive investments because of the monstrous federal budget deficit. And don’t get me started about retroactive extensions of copyrights, and bailouts for the financial industry.

The rich are getting a fine return on the 15% tax they pay.

That’s right. 15%. That’s the long term capital gains tax. This is lower than the marginal tax rate for median income wage earners. Wage earners pay more than that in Social Security and Medicare taxes (14.2% effectively). A 10% income tax rate puts Joe Size Pack in a higher tax bracket than Bill Gates.

OK, the rich also indirectly pay corporate income tax on the stocks they hold. So does Grandma, on whatever she hold in her retirement account. This doesn’t strike me as progressive.

Here is my proposal:

1. Fold FICA and Medicare taxes into the income tax to make a flat tax rate of 25% up to a half million dollars a year or so.
2. Have a somewhat higher (but not outrageous) tax rate for higher than a half million per year. Maybe 35%.
3. Treat capital gains, dividend income, wages, etc. equally.
4. Replace all deductions and exemptions (other than charity) with a fixed amount of free money.
5. Instead of an estate tax, treat gifts and inheritances as ordinary income…maybe.

The last provision is a bit harsh on farmers and small business owners. Clobbering people with taxes when a loved one dies is rather mean-spirited.

So here is a possible alternative: set the tax basis on all non-cash gifts and inheritances at zero. You pay when you cash out, if ever.