Tax System Favors Wealth Over Work

Tea Partiers rage against taxes and say they’re too high. Wrong, says billionaire,Warren Buffett, on the rich they’re too low.

The Tax Code holds the answer to this standoff, and the Code backs Buffett. Taxes may be the bane of the Tea Party, but they’re a relative boon for the wealthy. Let’s look at some of the ways America’s tax system keeps Warren Buffett’s fortune in Warren Buffett’s hands.

The major vehicle is George W. Bush’s 15 percent levy on long-term capital gains — the lowest since FDR’s first term — and on corporate dividends. The top 1 percent of U.S. households owns nearly 40 percent of all privately-held stock, from which the dividends flow. Similarly, the super rich get more than half their income from capital gains. In the meantime, for the working middle-class, the tax rate on wages is 25 percent.

Taxing income from wealth at little more than half the rate of income from work: it’s the perfect recipe to make sure that Warren Buffett (and all the Buffett wannabes) pay effective tax rates far below what their incomes suggest.

How far below? In 2006, Buffett told an interviewer that his tax bill was “far, far less as a fraction of his income than the secretaries or the clerks or anyone else in his office” (and he repeated the statement only recently). His shame in 2006 hits home still: “How can this by fair? How can this be right?”

The Tax Code sets marginal rates too, and these were gutted by President Reagan in 1981 and again in 1986. He slashed the top rate from 70 to 28 percent, and made the Code even less progressive by cutting the number of brackets from 15 to four. The hunger for tax simplification (fewer brackets) trumped the case for progressivity (more brackets).

There are six today, with the top four at 25, 28, 33 and 35 percent— a narrow spread, easily offset by provisions like the capital gains rate. The top rate kicks in at about $400,000 of taxable income, which author and tax expert, David Cay Johnston, calls “bizarre.” It’s a long way, he argues, from $400,000 to $1 million, $5 million, $100 million and hedge-fund billions: “Why don’t we have higher rates for those incomes?”

Even the bottom marginal rates help top earners. A millionaire, filing singly, pays the same 10 percent on the first $8,375 of taxable income as the working poor — and so on, up the income scale. As the Center on Budget and Policy Priorities notes, the real winners from extending Bush’s middle-class tax cuts wouldn’t be middle class: “In fact, a family making more than $1 million will receive more than five times the tax cut benefit, in dollar terms, as a middle-class family making $50,000 to $75,000…”  (Italics in original.)

The Tax Code is also loaded with deductions that effectively rain dollars down on the rich. The Code doesn’t overtly discriminate, but it’s hardwired to make every tax break worth more at the top. All deductions get written off at 35 percent, starting with personal exemptions and standard deductions. This alone trims $7,315 off the tax bill of a post-65 couple. The serious money goes to itemizers, with Uncle Sam handing out five-figure amounts to help pay mortgages on pricy real estate. (Step limits on personal exemptions and itemized deductions are set to return in 2011. The limits expired in 2010 as the last phase of Bush’s 2001 tax cuts.)

President Obama once proposed capping the mortgage interest deduction at 25 percent, the middle class rate. His idea quickly died, attacked as class warfare. This summer, in a piece titled “The Class War We Need,” conservative columnist, Ross Douthat, was aghast to learn that the owners of McMansions were defaulting at twice the usual rate. “The rich are different from you and me,” he wrote. “They know how to game the system.”

They also know that Congress always stands ready to tilt the tax laws their way. When the market crashed in 2008, lawmakers rushed to pass a one-year suspension of required distributions from retirement accounts. Only the haves stood to gain.  Those who actually needed the distributions had to take them and pay taxes. The haves took a pass and saved thousands. Back to Douthat: “In case after case, Washington’s web of subsidies and tax breaks effectively takes money from the middle class and hands it out to speculators and have-mores.”

It’s taken a fortune in lobbying and campaign contributions, but America’s tax system is bearing golden fruit. As even a conservative can see, it’s shifting income to the wealthy.

Gerald E. Scorse helped pass a bill that tightens the rules for reporting capital gains. He usually writes on taxes. Gerald can be reached at: Read other articles by Gerald.

4 comments on this article so far ...

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  1. Don Hawkins said on November 10th, 2010 at 12:48pm #

    A presidential commission’s leaders proposed a $3.8 trillion deficit-cutting plan that would cut Social Security and Medicare, reduce income-tax rates and eliminate tax breaks including the mortgage-interest deduction.

    The co-chairmen of the panel appointed by President Barack Obama suggested reducing Social Security spending by raising the retirement age to 68 in about 2050 and 69 in about 2075. The plan also would slow the rate at which benefits grow. The savings would come between 2012 and 2020. Bloomberg

    What’s wrong with above statement from our leaders? First of all it’s looney tunes deceit on a grand scale and I guess people still believe this kind of stuff. First of all there may be a few things coming between 2012 and 2020 and I don’t think savings has much to do with it. I really love on our present path 2050 and then 2075 like much will be the same as now. I mean these people this presidential commission and then the findings go to who do they really take themselves seriously. These people seem to have no problem throwing around years like they are nothing just the data from this year and now what we see in the Amazon the Arctic and Yemen probably being the first place to run out of water and not just Yemen that general area and could keep witting for an hour or so and just on the off chance we get lucky and make it to 2020 there may be a presidential commission all right and not on reduce income-tax rates but how to save our ass. This was written at the end of the article in Bloomberg.

    Some members of Obama’s financial team have seen the plan and they liked some things and not others, he said.

    They liked some things and not others well la de da, la de da. So far not one thing has been done or even proposed that comes close to reason, reality and they so far get away with it.

  2. Don Hawkins said on November 10th, 2010 at 1:24pm #

    I know maybe what we see is somewhat to keep us all tranquilized while a few other plans we don’t hear about are made as if we did hear about them that of course will never happen as I guess the media is part of the other plan we all might say they want to do what? Again the they who might that be maybe Beck knows he seems to do a lot of research. Hay Beck look up Council of seven then see if any ties to the Bilderberg group? Here’s a clue Beck go to Global Research. ca and read what they wrote and remember not all conspiracy theory’s are theory’s.

    Recently, there has been much discussion about Barack Obama having possibly attended the recent Bilderberg conference in Virginia. This speculation arose when Barack Obama and Hillary Clinton sneaked off for a secretive meeting while in Virginia. As the AP reported, “Reporters traveling with Obama sensed something might be happening between the pair when they arrived at Dulles International Airport after an event in Northern Virginia and Obama was not aboard the airplane. Asked at the time about the Illinois senator’s whereabouts, [Obama spokesman Robert] Gibbs smiled and declined to comment.”

  3. Don Hawkins said on November 10th, 2010 at 1:51pm #

    Then again just maybe the plan is there is no plan kind of what we see now. Whatever is the easiest way out at first noise generators then possibly the military crowd control and all that as few float off in the land of Oz in there balloons to a secure location. Read between the lines just a little and make a great book nonfiction.

  4. Don Hawkins said on November 10th, 2010 at 2:27pm #

    You have to admit those who know on this present path just here in the States it’s made to seem all so important health care, tax’s, debt and climate change is now out of site out of mind billions spent on elections so called fighting when in reality a mere illusion all made to seem in control and gives them something to do for the day when the real fight might just be who get’s the best balloon and or the secure location in the land of Oz. Sometimes the part I don’t get is the few who play this game are older.