With the Senate passing the new tax bill today and the House soon to follow, many liberals are up in arms about not increasing the income tax rates for higher income individuals. According to Democrats, these are the wealthy... the rich... the millionaires and billionaires. And it is only fair that people who earn more should pay more in taxes, right?
The call for increasing tax rates on the highest income individuals is repeated over and over. "I think the people that benefit most should pay most. That's always been my position -- not for class warfare reasons; for reasons of fairness in rebuilding the middle class in America," former President Clinton told the White House press corps last Friday.
Senator Bernie Sanders from Vermont called it "a moral outrage" that income tax rates weren't being raised on individuals making more than $200,000 per year. -- Senators Mary Landrieu (D-LA) and Sherrod Brown (D-OH) joined Sanders in his filibuster last week.
President Obama has spent the last couple of years attacking those who oppose raising taxes on higher income individuals, and he has continued the attacks this week. "Now I think that [not increasing taxes on the rich] is a mistake," Obama told Channel 9 News in Denver. And he continually promises to increase those taxes in two years when the tax agreement ends.
Obviously the current tax rates as well as any changes being discussed by either Democrats or Republicans ensure that higher income individuals pay much more in taxes. Much of the confusion seems to arise simply from people not understanding what percentages really mean. The implicit claim made by Obama and the Democrats seems to be that the wealthy will only pay more taxes if they face higher income tax rates.
If someone makes 5 times as much income as someone else, should they pay 5 times more in taxes? That surely meets Clinton's definition of fairness. Higher income individuals make more and they would then pay much more in taxes (indeed, 5 times more). It is doubtful that the higher income individual gets 5 times the benefits, but his higher taxes make it possible to provide government benefits to lower income individuals.
The wealthy would pay much more in taxes if everyone paid the exact same percentage of their income in taxes. You don't need higher tax rates on those who earn more money. Even marginal tax rates that declined with income would still ensure that higher-income individuals paid more taxes.
Possibly Democrats are relying on people not realizing how quickly Federal income taxes rise with income. Suppose that you have two married couples with two children and no other deductions. The only difference between these two couples is that one makes $60,000 per year and the other makes five times more, $300,000. The $60,000-a-year couple would face a federal income tax bill of $1,466 this next year if the tax rates remain unchanged (the calculations using TurboTax are available here). The $300,000 a year couple faces a tax bill of $71,134. That isn't five times more in taxes to match their 5 times greater income. It isn't 10 or even 20 times more in taxes. It is 49 times more in taxes.
If you think that this is unusual, try adding on education and childcare expenses or other credits and deductions that are only available to lower income individuals. The Alternative Minimum Tax also makes if much harder for higher income individuals to benefit from taking deductions.
Why should a couple that makes 5 times more money pay 49 times more in federal income taxes?
Democrats though feel that still isn't enough and that these high income, rich, wealthy individuals should pay even more. But the point is that simply saying that those who earn more money should pay more taxes doesn't justify the current tax rates, let alone explain why we need even higher tax rates on high-income individuals.
When politicians justify higher taxes on the wealthy, they sometimes talk about "winning the lottery." The phrasing makes it seem as if people's income is undeserved, that it hasn't come about from hard work, from giving up weeknights and weekends to get ahead. Yet, few people get their money from winning lotteries, and if lotteries were really the concern, they could have a higher tax rate on just lottery winnings. It doesn't justify taxing all income the same way.
Inheritances are also an example of unearned income. True, in the technical sense it is unearned by the recipient. But often forgotten is that the very reason many people work hard is to improve the lives of their children and grandchildren -- the people they love the most. In that case, if you take away their ability to give their loved ones what they have earned, you discourage work just as surely as increasing income taxes.
Class warfare may make good politics, but if it does, Democrats should try to sell it a little more honestly.
Higher income individuals pay a lot more in taxes and it isn't simply because they earn more money. Their tax burden rises much, much faster than the additional income they earn.