Spreading the Wealth and Killing the Goose

Larry King:  Concerning spreading the wealth, isn't the graduated income tax spreading the wealth? ....

Senator McCain: 
Well, that's spreading the wealth in the respect that we do have a graduated income tax.  That's a far cry from taking from one group of Americans and giving to another.  I mean, that's dramatically different.

  - "
Larry King Live," October 29, 2008

John McCain put his finger on an important point:  we currently have an extraordinarily progressive income tax, which requires the wealthy (and the relatively wealthy) to bear virtually the entire burden of the income tax.  Obama wants to spread the wealth not because the wealthy do not currently bear their fair share of supporting the government.  He wants to spread the wealth because he views the wealth itself as unfair.

According to the latest IRS statistics, released this summer, we have an extremely progressive income tax system.  For 2006 (the latest year for which statistics are available), the share of the federal income tax paid by the top 1 percent of tax returns reached an all-time high -- 40% of all federal income taxes.  The top 50% paid 97% of the tax.  The bottom 50% paid only 3% of it.  

In addition, there were 43 million tax returns filed by people who had gross income but who -- after deductions, exemptions and credits -- had no tax liability at all.  Many of these people got free money from the federal government, via "refundable credits" such as the Earned Income Tax Credit.  They got "refunds" even though they did not pay any income tax in the first place.

Even more importantly, the statistics demonstrated that the Bush tax cuts actually increased the share of taxes paid by the "rich" (however they are defined).  In 2000 (the last year of the Clinton administration), the top 1% paid 37% of the federal income tax; by 2006, the figure was 40%.  In 2000, the top 25% paid 84% of the tax -- by 2006 it had increased to 86%.  In 2000, the bottom 50% paid 4% -- in 2006 the percentage had dropped to 3% (a 25% drop in the relative tax burden on the lower half of the country). 

So after the Bush tax cuts the burden the "rich" bear is significantly up and the burden on the rest of society is dramatically down.  That's great news, right? 

Well, no -- not if your goal is "redistributive change" (and if you don't think the courts, shackled as they are by their "interpretation" of the rights in the Constitution, can do it for you).  If the change you believe in is "redistributive change," increasing the burden of government borne by the rich is nice, but it does not get you where you really want to go. 

Robin Hood was not upset at the relative costs among the citizenry of supporting the Sheriff of Nottingham.  He did not think the rich should bear a greater burden in helping the Sheriff create an ordered society.  He wanted the money for his chosen beneficiaries, not for the government.  He didn't want tax increases on the rich; he wanted their income.

For progressives, the above IRS statistics simply prove that, under the Bush tax cuts (which were across the board to all taxpayers), the "rich" made more money (since they were allowed to keep more of it and invest it, which produced even more income for them).  The "rich" thus paid more taxes, and bore a greater burden of financing government, but for progressives, the Bush tax cuts have to be rescinded even if they demonstrably shifted more of the tax burden to the rich.

For progressives, the goal is not ultimately to create more tax revenue for the government, but to equalize the income of the citizenry.  So increased taxes from the rich are not a solution if they mean the rich made more money compared to others.  In fact, even if the tax cuts end up making the tax system more progressive, that simply exacerbates the problem:  the "gap" between rich and poor.

That is why Obama had this exchange earlier this year with Charlie Gibson about increasing the capital gains tax rate:

GIBSON:  . . . [You] said you would favor an increase in the capital gains tax. As a matter of fact, you said on CNBC, and I quote, "I certainly would not go above what existed under Bill Clinton," which was 28 percent.  It's now 15 percent.  That's almost a doubling, if you went to 28 percent.

But actually, Bill Clinton, in 1997, signed legislation that dropped the capital gains tax to 20 percent.

OBAMA:  Right.

GIBSON:  And George Bush has taken it down to 15 percent.

OBAMA:  Right.

GIBSON:  And in each instance, when the rate dropped, revenues from the tax increased; the government took in more money.  And in the 1980s, when the tax was increased to 28 percent, the revenues went down.

So why raise it at all, especially given the fact that 100 million people in this country own stock and would be affected?

OBAMA:  Well, Charlie, what I've said is that I would look at raising the capital gains tax for purposes of fairness. . . .

We saw an article today which showed that the top 50 hedge fund managers made $29 billion last year - $29 billion for 50 individuals.  And part of what has happened is that those who are able to work the stock market and amass huge fortunes on capital gains are paying a lower tax rate than their secretaries. That's not fair.

And what I want is not oppressive taxation.  I want businesses to thrive, and I want people to be rewarded for their success.  But what I also want to make sure is that our tax system is fair and that [blah, blah, blah for another 155 words].

GIBSON:  But history shows that when you drop the capital gains tax, the revenues go up.

OBAMA:  Well, that might happen, or it might not. It depends on what's happening on Wall Street and how business is going. . . .  [Emphasis added].

Obama does not appreciate the fact that tax incentives for investment and business expansion have a direct effect on "what's happening on Wall Street and how business is going."  One does not simply increase the tax on capital gains, and on investors, and assume that the same amount of investment and capital gains will still occur.

Obama believes the main thing is to make the capital gains tax "fair," regardless of what history shows about the relationship between rates and revenue.  He does not appreciate that tax incentives for investing increases the amount of investing, which in turn expands business, creates more jobs and produces more income - and thus more tax. 

The JFK tax cuts proved it; the Reagan tax cuts proved it; the capital gains tax cut that a Republican Congress forced on Bill Clinton proved it; and the Bush tax cuts proved it again.  It is not a theoretical argument.  The latest cold, dry IRS statistics demonstrate it once again.

If Obama is elected next week, we will all be treated to another history lesson about why societies that sought "fairness" by taking massive amounts of money from one part of society to give to another (not simply to fulfill a governmental duty of providing a safety net, but for the affirmative purpose of "redistributive change"), not only did not create "fairness," but in fact made matters significantly worse for everyone.

Gregory V. Helvering is the pseudonym of a tax lawyer who has been practicing for more than 30 years.