Calling a Spade a Spade

Dr. Spade is wary of using this format, since some Ann Coulter fan is going to quote him as saying "the tax system is unfair." But here we go:

Before an Ann Coulter disciple quotes Dr. Spade saying "the tax system is unfair," imagine this:

On an island of one hundred people, 99 of them earn a dollar a year while one man earns a billion dollars.

At any tax level you set, even a flat tax, that one rich man pays the vast majority of the taxes.

Is that "unfair"? Suppose the tax rate is just 1%, the lightest of burdens. That one rich man will stay pay most of the tax: he has most of the money. His higher taxes reflect his higher wealth, not an unfair tax system.

The top five percent own more than half of all the nation's wealth. The top 1% own nearly 40% of it --- more than the bottom 90%. (1998 survey here. Income distribution and taxes have increased the gap since.)

The top 1% have roughly doubled their share of America's wealth since 1976. The only group to see their net worth decline since then is the bottom 40%.

Our taxes, especially on the top income earners, are lower than they have been at almost any other time in the modern world. Conservatives love to cite the exception of the 1920's (income taxes were about 24% then, but given our extremely low capital gains rate, effective taxes are often lower today), though they don't like to talk about the Crash of 1929.

The Value Added Tax, or a National Sales Tax, is a favorite of conservatives because shifts the burden to the poor and presumably encourages saving.

Except when it isn't. Both George W. and H.W. Bush encouraged consumption to lift the economy (Bush, Sr, implored credit card companies to reduce their interest rates in his first State of the Union address. Bush, Jr. rightfully encouraged Americans visiting New York to spend their money there to help boost the city after 9/11).

Unfortunately, whether or not more saving is really good for the nation (article coming soon on this topic), a V.A.T. is the wrong way to go about it.

Poor people pay a larger portion of their income in sales tax. This is true even when "essential goods", like food and clothing are exempted. A person earning $20,000 a year isn't going to see movies 100 times less often than someone earning $2 million, nor go to a movie theater that charges 100 times less per ticket.

Worse still, the exemptions make the math of a V.A.T. highly suspect. Most estimates place the V.A.T. at about 30 percent before exemptions (as does the conservative Washington Times, which rejects a V.A.T.). After exemptions, the rate would have to be even higher, ranging up to 50% if food and clothing were not included.

Imagine the impact on the economy if prices for most items jumped by 50%. Would people save more? Perhaps. Would it that be "good"? Only if you want companies to sell fewer of their products, reduce their payrolls, and pay less to the employees they keep.

Lower taxes can mean more tax income, but it can also mean the reverse. The outcome depends on the rate being cut.

Conservatives cite the 1920s, when rates dropped from 75%, and the 1960s, when rates fell from 90%. In both cases, tax receipts increased after the rates were cut, and you can see why: those tax rates were so high, people may well have avoided additional work to reduce their tax burden.

But tax cuts from lower rates, such as those beginning in the late 1980's, have reduced tax income. Tax cuts can't increase tax income at all rates.

Small changes have little impact. Few people schedule their work differently at a 33% tax rate than at 31%. The difference is too small for a normal person to decide to work an extra hour. And when taxes are low, tax cuts reduce tax income, not raise it.

Absolute proof: If taxes were at 1%, dropping them to zero would not increase tax income. Q.E.D.

The concept discussed is the Laffer Curve, another conservative favorite, but apparently, Dr. Spade is the only person in America who genuinely believes the Laffer Curve.

It theorizes that reducing taxes from high rates will encourage more work and therefore more tax receipts. It does not say that reducing taxes from any level will do so, since (see the proof above). That's plain wrong.

Discussion should really be about where on the Laffer curve we are now. Conservatives assume that for any rate, we're on the right-hand side, meaning that they think we're always on the half where we should cut taxes. Imagine that.

In 2003, Dick Cheney paid 20% of his income in taxes. George W. Bush paid 28%.

Dick Cheney didn't pay less because he works harder.

He might, but that's not why he paid less.

He paid less because he's wealthier than the president, and like most wealthy people, he has a higher percentage of his income to invest in stocks and bonds.

The capital gains tax rate is so low, just a fraction of income taxes, that it substantially reduces rates on the wealthiest Americans.

The janitor for your local school is far less likely to invest in the stock market, despite the fact that conservatives say he should. The barrier isn't the high taxes: they now average just 10% for capital gains.

He just doesn't have as much money as Dick Cheney. If his income barely covers his rent and other basic expenses, he'll have little to invest.

the wealthy don't avoid investing because of a horrendous ten percent tax on gains. Now we need to cut it further?

Where else would they put their money? Under a pillow?

Conservatives insist that capital gains taxes should be low because investors are fueling America -- their apparently selfish act of buying hot stocks is simultaneously a virtuous boost for America, and we should encourage it as such.

Even if you believe that such investment is really good for America as a whole (article on that topic soon), is it really better than getting out of bed each morning to go to your job?

Let's be honest, a refreshing change from most discussion about taxes: the estate tax affects only the extremely wealthy.

The "death tax," as conservatives call it, affects only estates worth more than $1.5 million. That's less than two percent of the population.

Conservatives rail about how the estate tax hurts small businesses and farmers, but we're talking about a very select group here. Ads attacking Democrats over this issue portray WWII vets selling the family farm (literally -- such ads were produced by the American Family Business Institute and the Free Enterprise Fund, conservative groups founded for this issue) , but the non-partisan Congressional Budget Office found that fewer than 740 estates lacked the liquid assets to cover estate tax liabilities.

Fewer than 740 lacked the cash to pay for the taxes, though they still had multi-million dollar estates.

Conservatives also call it "double taxation," but surely they know that's not true, either.

A mansion that appreciated from $1 million to $10 million is not subject to any capital gains taxes without being sold, though it adds to the owner's wealth and purchasing power. Under a current Republican proposal (Jon Kyl, AZ), such estates could be exempt from capital gains taxes, too, even when sold, avoiding any taxes whatsoever.

Repeal of the estate tax would cost the Treasury $70 billion a year, but that underestimates its true impact. Assuming we continue to borrow to finance our deficit, the 10-year cost would approach $1 trillion.

How big is that? It's enough to cover the Bush budget deficits (the largest in history) since he became president.

Conservatives used to care about fiscal responsibility and eliminating budget deficits, but now they tell themselves Lie #6.

Republican President, Republican Congress, Republican Senate. Spending has increased even as they cut taxes, and while we started a war -- the only time in history we've sent troops to fight while reducing taxes.

The "starve the beast" argument says if the government lacks money, it will eventually cut back on wasteful programs.

See more Fun Facts in our Fiscal Irresponsibility page, and stop believing the Republicans when they call themselves financially disciplined. Call a spade a spade.

Americans think what you get in your paycheck is yours, then Uncle Sam comes and takes some it away.

Which portion of that income did your government help you get? We can debate the exact percentage, but the answer is, without question: some of it.

It's not just that you can, with confidence, eat safely, drink from our taps, and walk to work without being robbed. It's not just the roads -- you benefit from them, whether or not you drive -- or the schools -- you benefit from an educated populace, even if you went to private school.

It's not just our strong national defense (see Security) that makes it possible for companies to feel safe building billion-dollar factories here. It's not just our contract laws, which help you avoid so much fraud throughout the year.

It's a whole host of services that serve as a foundation for the work we do. The richer you are, the more you take advantage of those services. Our janitor doesn't receive direct benefit from a stable, regulated derivatives market, for instance, but hedge fund investors do.

The vast majority of the world's millionaires (and billionaires) are American. It isn't just because of our inherent ingenuity; many of these same people came from other nations to make their fortunes here. It's because America provides an environment in which you can earn money. Sometimes quite a lot of money.

Uncle Sam isn't taking away from you. You're earning what you do in part -- and a part is all he asks -- because of Uncle Sam.

"Your" money is not what you get in your paycheck, from which Uncle Sam takes away.

"Your" money is what remains in your paycheck after Uncle Sam gets what's needed to help you continue earning money, in this extraordinary system, one offering more opportunity to more people than any other on Earth.

Let's call a spade a spade. Your taxes go toward your income just as much as the other way around. Enjoy the extraordinary benefits of both: you're an American.