Class Warfare? Or Fair Shares?

I've gotten several emails in the last few days from people who think my position on the estate tax and on the best way to handle the approaching sunset date of the Bush tax cuts is "class warfare."  The emailers don't like my suggestion that those at the top of the income distribution should pay more in tax, not less. 

This "class warfare" label is used as an attack to divert the attention from the way money, prestige and power is accruing to those at the very top of our society while the vast majority are losing purchasing power. The label is intended to squelch discussion, without engaging in consideration of the underlying fairness issues. 

Yes, I'd leave the estate tax in place without the huge increase in the exemption amount that most in Congress appear to be contemplating.  And for good reason.  The death of the person who accumulated a large estate is a reasonable time to tax that estate.  Much of the accumulation won't have been taxed during the lifetime.  Most of the accumulation is in the form of financial assets.  If inherited, they are received with a step up in basis.  If held til death, they are passed on with another step up in basis.  Yet during the holder's lifetime, many advantages accrue merely because of the accumulated wealth, even when it is unused.  Status, prestige, power--all flow from accumulated wealth.  And the person with that wealth benefits enormously from the society that allowed it to accumulate--a stable environment for further investments, a vigorous market, a healthy federal reserve bank safeguarding fiscal policies, institutions from local to state to federal that provide advantageous investments (e.g., municipal bonds that pay interest that can be excluded from income for federal income tax purposes).   The danger from enormous accumulation of wealth is that the decision making processes in democratic institutions will be captured by those influential wealthy and the concerns, needs and views of the vast majority of ordinary citizens will be ignored. 

So a position in favor of an estate tax isn't class warfare.  Rather, a position that is in favor of repeal of the estate tax is a form of class warfare against all those ordinary taxpayers who don't have the accumulated wealth, the benefits, the status, the prestige and the power and whose taxes will go up if the estate tax isn't collected from these enormous estates.

Yes, I'd also let most of the Bush tax cuts expire.  Many are merely welfare entitlements for big business--such as allowing a credit, in the name of a stimulus, for research and development that would be done anyway and that should be expensed, not credited against the tax liability; or allowing deferral of taxation on active financing income in foreign subsidiaries.   The individual  rate cuts for capital gains and dividends resulted in too low a rate of taxation on those types of income flows that are predominantly enjoyed, again, by those at the top of the income distribution.  That preference has come when economic growth has benefited those at the top while those at the bottom have suffered stagnating wages and real increases in prices for essentials.  So I'd reinstate higher rates on capital gains and dividends.  And I'd leave in place the other rate cuts for the lower brackets, but add a higher bracket surcharge.  Ideally, that surcharge would be graduated, so those in the top 20% would pay the surcharge, those in the top 10% would pay more, those in the top 5% more, and those in the top 1% even more.

That's not class warfare.  That is setting the tax burden in a way that appropriately allocates it to those who have the ability to pay.

We need to do this, because we need to ensure that the society can continue to provide public goods that are needed to underlay a sound, stable economic, social, and cultural system. (And as long as the war in Iraq continues, we are spending huge sums on the military that can't be diverted to these other important needs.  If Stiglitz and Bilmes are correct in their assessment, that is $3 trillion to $6 trillion that is not able to be spent on infrastructure and other needs.)  We need to spend considerably more money than we have been spending on roads and bridges, and we should spend much more on public transportation--intercity and intracity light rail lines in particular.  We should also be spending much more on education.  Every young person in this country should be able to attend college and receive a good education that prepares that person for a productive position in the modern economy.  Lately, that American dream is becoming less of a reality for many.  And we should be spending more to fund both basic research and research in health, agining and other areas of particular importance to our population.

Comments

[Glen]

Unfortunately, I have found in my many years of life that people who disagree with others tend to attack the messenger rather face the problem and be a part of the solution. It is a convenient way of ignoring the truth. If one is really interested in problem solving rather grandstanding, they have no problem with hearing and actually listening to facts, even though those facts may go against their beliefs.

There are so many things that the average person does not know about our tax system and how our lawmakers are continually passing tax laws that benefit only those at the top. I am certainly a long way from understanding them, but I have done a lot of research on this. As you pointed out, a lot of inheritance is never taxed at all under the current tax cuts. And there is one other thing that most middle class do not know when it comes to inheritance; even when the current tax cuts expire, the first $1 million will not be taxed upon inheritance, and if you are married, it will be the first $2 million that is not taxed. So I leave these two questions with those who disagree with you; how many of you are going to inherent more than $2 million, and who do you propose pays for the nearly $10 trillion (and growing) debt that our country has?

[joebedk]

It is worth considering that the more the wealthy pay for the government the more they will own the government. This is one of the reasons why democracry implies limited government.

[Susan]

It is also worth considering that the more the wealthy own the government, the less taxes they pay.

[J]

I don't think you "own" the government by paying taxes. The reason people pay taxes is because the government has a gun. Moreover, the reason for the creation of the estate tax and generation skipping tax was to avoid a caste system. We didn't want another Britain and the bourgeoise. However, no one really remembers this.

Congress has been raising an *excessive* amount of money with their back and forth indecisiveness. I doubt a resolution will be reached before the election, and could totally just see them extending it at the 3.5 million dollar exemption figure for another year. I think having the complete repeal in 2010 would just be an accounting nightmare.

[John Freeland]

Class warfare? On the contrary, progressive tax advocates are trying to prevent one. If you look at past violent revolutions or insurections involving gross inequality, its not just the lack of money that motivates citizens to desparate action, but the bullying they take from the powerful.

[LindaMBeale]

Several good points in the comment. John's point that an inequitable distribution of a society's resources can easily lead to deep unrest is an important one. And Glen's point is also a good one--the $2 million exemption for the estate tax already is way above what the vast majority of Americans own. The only reason, I think, that Congress is considering raising it effectively to $7 million is because Congress people tend to be members of the very elite that they are ineffectively governing. It's hard for the wealthy to imagine the lives of the vast majority of us. And hard for them not to think of themselves as typical Americans, even though they are not.

Susan's point is also a good one--when the wealthy don't have to pay their fair share of taxes, we could characterize that as a result of their having captured the government for their own purposes. I think Joebedk misses that significant point about democratic governments--requiring the wealthy to pay taxes is a way to PREVENT them from "owning" the government by creating a more sustainable democracy that permits a continuing voice in government for the little guys.

[Evan]

Linda, you have numerous inaccuracies in your commentary, but let me focus on just one - the capital gains tax. Capital gains tax reductions stimulate economic growth, which benefits the entire country. As President Kennedy noted, "A rising tide lifts all boats."
Capital gains taxes disproportionately hurt the elderly, low and middle-income investors who have less discretion over the timing of their capital gains.
Most people who report capital gains do not have high annual incomes.
People with high incomes are most sensitive to capital gains tax rates, because they possess the most flexibility and means to avoid high tax rates. When capital gains tax rates are high, people with high incomes do not sell their assets and realize their gains.
High-income people pay a greater percentage of capital gains taxes when capital gains tax rates are low than when capital gains tax rates are high.
High capital gains tax rates make capital scarce. When capital is scarce it goes to safe investments. Low capital gains tax rates make capital abundant. When capital is plentiful it goes to "riskier" investments - such as inner cities and disadvantaged areas. I would also point out that the the Bush tax cuts have resulted in a large increase in tax revenues. For the Congress to not extend them will hurt the economy as a whole and will negatively impact the lower income groups disproportionately.

[LindaMBeale]

Evan,
A rising tide only lifts all boats if it isn't confined to a gated community for the wealthy--which is where the economic growth of the last 8 years has been. The wealthy have gotten wealthier--especially those at the very top, and the vast majority of ordinary Americans have more or less stayed the same (or lost ground).
So economic growth is only good if it is broad-based. Read Benjamin Friedman's book on this.

There are almost no "low-income investors" who are hurt by capital gains taxes, because low-income Americans own very very few capital assets. Low-income Americans are generally taxed on a consumption basis. (But of course they bear too heavy a burden in the payroll taxes).

There is no real indication that capital gains tax cuts increase revenues--people who make that argument tend to wait around til some shift happens after a tax cut and then claim the tax cut caused the shift.

Even though stock ownership (either directly or through mutual funds) has increased, it is still the case that the vast majority of ordinary Americans have very little capital gains as part of their income. Instead, the huge bulk of financial assets on which capital gains are realized are held by those in the top 20% (and even more by those in the top 5%, top 1%)--ie, the very wealthy.

The wealthy do tend to time when they realize their capital gains, in connection with what they expect the tax rates to be in the future compared to currently and other contextual information. But that isn't a sufficient reason to fail to tax them fairly.

Investments don't vanish when people aren't realizing lots of capital gains--investments just stay invested for longer periods in what they were already invested in.

Look at the current credit crisis. Everybody said this was a "new age" where the credit default swaps and CDOs were getting rid of risk. HA! They were creating risk, as speculative traders moved in and out of assets. Turns out we might be better off with less quick trades in the markets and longer term holding of assets, bringing the whole "deadweight loss" from "lock-in" of capital assets theory into question--at least suggesting maybe we need to consider the offsetting problem of too free movement of capital.

[Evan]

Linda:

A couple of points. First, President Bush has eliminated capital gains tax for those taxpayers in the lowest income tax brackets for years 2008-2010. For 2008, the top end of the 15% bracket is $65,100 for MFJ. So, a married couple with two children and the standard deduction could earn into the mid $80,000 range and still be in the 15% bracket and have no tax on capital gains through 2010. If they itemize, the amount would be higher. The 10-15% bracket range covers the vast majority of taxpayers.

But, do these people invest? Absolutely! According to IRS, the median income of U.S. households that own mutual funds is right at $70,000, with the median value of mutual fund holdings of these people being just shy of $50,000. And, that's not counting those that hold real estate, the value of which has been booming in recent years.

Linda, its the Dems that want to punish the lower income folks by not extending the Bush Administration's elimination of tax on capital gains for lower income taxpayers.

[LindaMBeale]

Evan

Yes, the 10-15% range covers the vast majority of taxpayers, but it doesn't cover the vast majority of capital gains. Yes, many Americans have mutual funds. BUT the fact is that those are mostly small accounts with not much capital gains there. That's why there is only a 3000 capital loss use against ordinary income--because that's a suitable range for the vast majority of Americans with small capital gains and capital losses.

Your statistic regardin those with $70,000 median income holding mutual funds shy of 50,000 demonstrates exactly what I am saying. That fund won't have much in the way of capital gains, even though a $70,000 income is actually well into the top of the second quintile of income.

Of course, most Americans' major asset is their homes, and as we all know, capital gains on homes for the vast majority of Americans is completely tax free under section 121. Again, most of those real estate investment assets are held by wealthy Americans in the top 40%, with the percentage of the assets held increasing the higher you go in the income distribution.

The fact that many Americans do have some small amount of capital gains isn't the issue. The point is that the predominant benefit from the preferential rate for capital gains is, as I have said, enjoyed by the very very wealthy. (As are the benefits of many other tax expenditures in our system, such as the charitable contribution for fair market value rather than actual cash investment).