The Class War Rhetoric War on Reality

A common fallacy of the class warfare rhetoric is to focus on the super rich to draw a conclusion that will impact the much less affluent; the working upper middle class sometimes called the 'working rich'.  The drone on corporate jets is such an example.  Few small businesses use private jets.  Corporate jets are rare and already heavily scrutinized.  The only issue is whether they should be depreciated over five years or seven years as required for commercial planes.  The impact on tax revenues and the debt is so minimal it is hard to take such pathetic tactics seriously. 

In an effort to play god with the tax purse strings, the tax code is so complex with credits and exemptions that it is no wonder that some companies and filers have figured out how to reduce their tax burdens to a lower level than most of us pay.  But those corporations who are able to pay little or no taxes are still the exception.  Yet these few winners of the tax lottery are held up by the class warmongers as a basis to increase taxes on the many businesses who are already paying more than their fair share.

Hedge fund managers who have made billions in a single year often pay taxes at a capital gains rate and thus pay a much lower rate than many secretaries and office workers who work at the firm.  Billionaire hedge fund traders are another exception heralded by class warriors, which even includes Warren Buffet.  Again this applies to very few wealthy people and there are much better solutions than to raise taxes on the working wealthy who are often the small business owners.

Stephen Moore writes in the Wall Street Journal (online edition) Warren Buffet is Wrong on Taxes, July 28, 2011:

I don't know the details of Warren Buffet's personal taxes, and he hasn't made them public. But the IRS does provide reliable data on effective tax rates-the overall share of their income that various groups pay in federal income taxes (not including state or local taxes) after accounting for all deductions and exemptions. These are different than marginal tax rates, which are paid on the next dollar of income and now peak at 35% for individuals.

IRS data for 2008, for example, show that households in the top 10% of earners (above about $114,000) paid 19% of their income to the feds. Those in the top 1% (above $380,000) paid 23.3%. The top 0.1% of earners, with incomes of $2 million or more, end up paying a slightly lower tax of 22.7%, because they get more of their income from investments ....

So what about the rest of us? According to IRS data, a median-income household ($35,000) in 2008 paid about 4% of its income in federal income tax.

Understanding the tax issue beyond the class war sound bites requires that you differentiate the statutory rate from the effective rate.  The statutory rate is the stated rate before deductions and credits. The effective rate is the actual dollars you pay as a percent of income.  It is conceivable to increase the statutory rate and reduce the effective rate with special provisions which lobbyists actively pursue.  We could also reduce statutory rates and increase the effective rate by eliminating deductions. Reagan reduced the statutory rate but also eliminated many deductions which reduced the effective rate less.  One must also understand the impact of the specific legislation on the marginal rate, the actual taxes paid on the next or incremental dollar of income. This is the rate that impacts job creation and new business development.

Much of lobbying is an effort to garner tax breaks for specific industries and companies.  Small businesses rarely benefit from such lobbying activities.  The irony is that the more we regulate the more we encourage the proliferation of lobbying activity and the more of an advantage we create for large established businesses, who can afford the administrative overhead engendered by such regulation, over smaller innovative businesses.

 The focus on taxes and fairness also overlooks other friction costs such as regulations, credit availability, and the inconsistency of regulations and the tax code.  Even when positive changes are made, one has to wonder if we can trust that the change will remain long enough to actually be of any benefit.  Radical change in legislation impairs trust; no one knows what to expect next.

The tiresome class warfare analogies share common attributes to other human prejudices:  They are filled with stereotypes, play to the lowest human qualities and are equally intellectually vacuous.  

We are at the point where half of the people contribute little to government revenue yet are pandered to by a dying socialist elite that cries that those who are paying nearly all of the bill are not paying their fair share.  The exceptions themselves are created by the labyrinth tax code designed by the very people who use it to leverage for more taxes  on those taxpayers who are already paying most of the bill.

Henry Oliner blogs at

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