Taxes down for the rich, Incomes down for the working class

“Rising tides lift all ships” is a metaphor used by supply side economists, Reagonomic worshippers, and those of wealth who attempt to fraudulently convince the working class electorate that tax breaks for the wealthy are good for all. When billionaires such as Warren Buffett publicly say that taxes for the uber wealthy are too low, then there is great trouble in River City. When international corporations such as General Electric who made $14 billion last year paid no taxes, it is obvious that the great lobbying efforts of the wealthy and major corporations have paid off handsomely for our pimping politicians in Washington. When the Wall Street “Sharks” get special tax treatment on their ordinary earnings on special hedge fund brokerage sales the system is broken for the masses, but not the elites. Earning ability is also a function of purchasing value ability. For example if Warren Buffett is in a much lower tax bracket than his secretary, also he can borrow money at rock bottom rates, and afford to hire the best lawyers for tax avoidance, then Buffet’s purchasing ability is also greater, not only because he has a much greater income, but also that he is receiving more value per dollar of income.
The divide of earning and purchasing ability is greater today than it has been since the Great Depression. Not only have tax breaks been so skewed in favor of the rich, but earning ability in terms of adjusted dollar value for the working class has actually decreased. For example, IKEA the big box discount furniture dealer is opening up a factory in Danville, SC, but not for the ability to get the highest quality workers. The big difference is that the Europeans enjoy a minimum wage of about $19 an hour and a government-mandated five weeks of paid vacation. Full-time employees in Danville start at $8 an hour with 12 vacation days, eight of them on dates determined by the company.
One cannot necessarily fault GE for paying no taxes in the US last year. GE’s income gains in the US for 2010 were offset by previous year’s losses in their financial sector businesses. The US has a high corporate tax rate of 35%, while other developed nations tax their corporations at around 25%. Ireland has a corporate tax rate of 12.5% to encourage corporate investment. This draconian high corporate taxation by the US is mistake number one because multi-national corporations have an incentive to minimize their proration of income low and expenses high for US operations. The tax burden should be higher on the individual investor and not the corporation.
In addition, our capital gains rates are too low at 15% and should be increased to previous rates of 20 to 25%. Taxes on dividends should be taxed at ordinary income rates, with no special deductions. Corporations will just pass their taxes on as a cost of operations, such as insurances, permits, and property taxes.
Even though that I am not the best friend of some large multi-national corporations, I would be in favor of eliminating corporation taxes all together and increasing taxes at the personal capital gain and income level to individuals. The US has invested around $3.2 trillion outside this country. On the other hand foreign companies such as Siemens and ABB have invested $2.2 trillion here. We need to encourage investment in the US. Many European companies located in the US, who are used to a more progressive society, have been known to treat American workers better than their US counter parts.
The alternative minimum tax was setup to catch the incomes of high earners who used tax loopholes to greatly participate in legal tax avoidance. The AMT should be in effect for high income earners without the benefit of tax avoidance loopholes.
The working class employee making less than $106,800 per year are at another disadvantage, they are taxed for FICA and Medicare at 7.65%, or up to $8,170 per year, while the CEO making $2 million per year and still only paying a maximum of $8,170 is effectively paying .04% of his income into government pension and Medicare funds. Unearned income from rents, stocks, bonds, etc, are not subject to FICA/Medicare taxation; more money to go into the investors pockets.
The sales tax falls disproportionately more on low income earners. The average worker is able to save very little money after paying for housing, food, transportation, and medical costs. The person who has a large income is able to travel to other locals many times avoiding sales taxes. One can argue that the wealthy stimulate the economy by buying expensive cars, houses. and boats. I know of a yacht broker who sells multi-million dollars boats to the wealthy. In order to avoid California State sales/use taxes the buyer will take delivery outside the US or in a state with a lower tax rate. If the average person buys a car in California they are in effect paying a use tax on purchase equivalent to the sales tax. A wealthy business investor wishing to but an expensive Ferrari or Mercedes can travel to a foreign land where there is minimal tax, purchase the vehicle for their multi-national corporation as a depreciable asset and bring it back to the US as a used much less valuable asset. As a bonus the investor may chose to expense his world wide jaunt as a business opportunity and marketing cost.
Donating ones art collection and building a museum with ones name above the door is the ultimate legal tax avoidance game. Let’s say my name is Don Fisher the founder of the Gap stores. I love to collect modern art and as a result, I built up a vast art collection that is valued at $1 billion. Over the years my investment in this collection has only been say $200 million, now turned into a 5 fold increase by market appreciation. I donate this collection to MOMA in San Francisco for a $1 billion write off, which will easily offset $400 million in taxes from my estate or earnings from my trusts. So this art collection has given me great pleasure, caused me to be the cultural envy of my peers and community, and lastly has given me a great return on my original investment just on the tax avoidance benefits.
Foundations are other great legal tax avoidance schemes that bring their benefactors great public adulation, still allow control of assets, and create tax sheltering way into the future. I speculate that Warren Buffett and Bill Gates will pay no or very little income taxes or estate taxes due to their use of the tax system. The Rockefellers have given much of their wealth to foundations that own stock in major corporations on which the Rockefellers sit on boards or have proxy agents who still continue to control the enterprises.
At the end of day it is about the ratio of all taxes and living expenses relative to total income. The wealthy are able to move their investments to the locals of best return. Capital creates more capital and has no patriotism or nationality. Increasing the taxes on the wealthy will not materially affect their standard of living, it will only affect their level of more wealthy building. So maybe to encourage wealth building we should give new wealth builders a moratorium on taxing bank interest, dividends, and small capital gains, and tax them at a higher rate when their net worth (excluding their home) exceeds $1 million or their taxable income exceeds $150,000. It would not hurt my feelings to eliminate the $106,800 ceiling on FICA deductions; let’s get the full amount from those fat cat CEO’s and Wall Streeter’s. When the richest nation in the world has a poverty level of 12%, and the working class is barely getting ahead something does not compute.