Business/Finance

Obama can't do "math"

Speaking in urgent tones from the Rose Garden at the White House, Obama rejected Republican arguments that his proposals amount to “class warfare,” saying it comes down to “math.” “It is wrong that in the United States of America a teacher or a nurse or a construction worker who earns $50,000 should pay higher tax rates than somebody pulling in $50 million,” he said, adding that anyone who opposes that principle “should be called out.” – LA Times

I’ve said this before, but while the wealthy may be paying less than you want them to pay they are still paying higher tax rates.  The loophole Warren Buffet is exploiting is Section 1256 and probably benefits a very small number of people who get their income primarily through non-equity options – hardly the bulk of high earners, who get them through salaries.

Year 2011 income brackets and tax rates

Marginal Tax Rate[6]

Single

Married Filing Jointly or Qualified Widow(er)

Married Filing Separately

Head of Household

10%

$0 – $8,500

$0 – $17,000

$0 – $8,500

$0 – $12,150

15%

$8,501 – $34,500

$17,001 – $69,000

$8,501 – $34,500

$12,150 – $46,250

25%

$34,501 – $83,600

$69,001 – $139,350

$34,501 – $69,675

$46,250 – $119,400

28%

$83,601 – $174,400

$139,351 – $212,300

$69,675 – $106,150

$119,401 – $193,350

33%

$174,401 – $379,150

$212,301 – $379,150

$106,151 – $189,575

$193,350 – $379,150

35%

$379,151+

$379,651+

$189,576+

$379,151+

Closing the loophole should be straightforward and there are hundreds of others he should be going for.  Claiming that high salary earners pay a lower rate of tax – and making such a big deal of it – risks destroying his argument about raising taxes before it even begins. And just about everyone outside of the Republicans agree that no deficit can be balanced without a good mix of cuts AND tax increases.

11 replies »

  1. And just about everyone outside of the Republicans agree that no deficit can be balanced without a good mix of cuts AND tax increases.

    However, NOBODY seems to be asking the REAL question. To wit, where did this rage for balanced budgets come from? We sure as hell never heard a word about them from the people making the most noise now back during the Bush years when these massive deficits were being run up in the first place. And when you do some excavation, it becomes clear that all the noise now is being funded by who?

    If you can answer that last one without using the words “Koch” or “brothers,” go back and try again.

    So the real issue here is that if you’re talking about how to balance budgets, you have already adopted the talking points of the hyper-wealthy. What does this mean?

  2. This post is misleading, too, if Obama’s statement is inaccurate. The FACT is that one should look at actual EFFECTIVE TAX RATES, or what people actually pay. Numerous people, including the real expert David Cay Johnston, have written extensively on this subject. Perhaps you should also look at his book “Free Lunch” and read some of his papers on the subject. The OTHER FACT IS THAT THE TOP MAGINAL RATES HAVE BEEN REDUCED DRAMATICALLY IN THE LAST DECADES FROM AS HIGH AS 90%. That has led to enormous inequities in income/wealth so that we now look like some of the worst third world nations. The Progressive income tax was nearly keeping things stable. until Reagan distorted it.

  3. @Sam It matters when markets panic, businesses and consumers with money stop spending it, borrowers and entrepreneurs with ideas can’t find anyone to lend them any, and unemployment shoots through the roof.

    @Tom You’re talking about the loopholes – those create the distortions – the rates still appear mighty progressive to me.

    • Agreed. The thing is that when all these things happen not in response to any particular change in financial reality, but in response to an ideological and rhetorical campaign funded by the wealthiest players, it’s important for us to make sure we’re not contributing to the problem by getting duped into reinforcing the vocabulary of those creating the manufactroversy in the firs place.

      In other words, while yelling “fire” in a crowded theater and an actual fire in a crowded theater will both cause panic, the causes and solutions for the two cases are radically different.

  4. Can you cite that the bulk of high earners get their wealth through salaries and not stock options/capital gains/etc?

    And it doesn’t matter if the loopholes are distortions; they still contribute mightily to reality.

    Markets are, at this point, nothing but distortions and equity mining. US investment banks are sitting on huge piles of money and not lending. Corporate profits are healthy and they’re not hiring or investing.

    I’m not arguing about Obama’s ineptitude, it’s deep … and he’s probably evil at heart too. But if you think that the US already taxes appropriately and continue to perpetuate the false meme that the highest earners are already paying more than their fair share, while simply discarding every inconvenient data point and externalizing all the stuff that doesn’t fit your ideology, then you’re really just like him.

  5. @Gavin – I’m with Tom. The more money you have, the more options available to you to reduce your taxable income. It’s not just about the percentage, it’s about what percentage of your income that percentage is applied to. A poor person who can’t afford to buy a home pays 15% on all of his earnings. A person who makes 10 or 100 times as much can hide a lot of that income in tax shelters.

    And really, the cynical point of Obama’s exercise was just to try to get GOP candidates to provide some ad fodder for the next election. Unfortunately, McConnell and Cantor stuck to good, misleading soundbites like “Buffet can mail us a check” and “class warfare”.

  6. You’re all arguing a point I’m not making. I stated: “while the wealthy may be paying less than you want them to pay they are still paying higher tax rates”.

    I’m not disagreeing that there are loopholes available to those sufficiently ambitious to exploit them which may lower aggregate tax, but then your first problem must be to close loopholes, not raise tax rates.

    Next, once you’ve sorted out those loopholes, if you’re still unable to increase your tax take sufficiently then look at raising aggregate taxes. You can make this all as progressive as you like.

    My argument is not about “fairness” or lack-thereof, it is merely about the mathematics of taxation.

    @Lex “US investment banks are sitting on huge piles of money and not lending. Corporate profits are healthy and they’re not hiring or investing.”

    Which should tell you that none of them see any potential return on their investment less risky than simply sitting on their cash and letting inflation destroy its value.

    Arguing about taxes isn’t the same as reassuring investors or changing market conditions to increase investor confidence.

  7. Missing the point.

    His secretary pays a highter % of her income in TAXES: note that’s taxes, not just iIncome taxes. There are several reasons for that: 1) The source of income. Tax exempt bonds are tax free, in some cases at both the Federal and State level. Warren probably has a binch of income from these sources, his secretary probably less so. Warren surely has a bunch of income that comesfrom Capital Gains, taxed at a max of 15%, taking down his effective tax rate from that shown in your table. 2) TAXES include Sales and Property Taxes. The secretary probably has one house and spends a much greater % of her income on items on which Sales Taxes are collected than does Warren, same on Gas Taxes, etc. 3) Several Taxes are capped at a dollar figure (Soc Sec). All of her income is likely taxed, a miniscule % of Warren’s is taxed.etc.

    Warren said TAXES, not just Income Taxes. She pays higher and so do I.

  8. What’s the news here? The way this argument was presented, at least when and where I read it, was that taxes on wages hit the workers and middle class harder, and reducing capital gains advantages people very little of whose incomes are from wages. That’s the point. Those capital gains tax reductions were class war in the first place: rich raiding the poor.

  9. This is a bit misleading, since it applies to your income after you’ve gone through all your adjustments, deductions, whatever. And as a US taxpayer living overseas in a high bracket, there are a gazllion of those. The tax bracket you end up in says little about what you started with in income that year. There are lots of ways to game the system if you’re at the top–that’s Buffett’s point. As has been mentioned, calling your income something other than “income” will do it. The fact that the tax rate is marginally higher at the top bracket than the one that’s one category lower is true, but basically irrelevant to the issue of tax fairness. The wealthy are paying slightly higher tax rates on “income;” it’s the ability to categorize much of what one earns (or just receives) as something other than income that distorts the picture very badly.