Taxes: Upper Class Cuts Leave Middle Class Bleeding

Middle class taxesOn the surface, the national deficit doesn't seem all that complicated: In May, America's debt slammed against its officially set limit of $14.3 trillion, and almost everyone agrees that the federal government needs to come up with a lot more money. But when it comes to the question of how to raise that money, things get a lot more complicated -- and political.

Generally speaking, Republicans want to cut taxes and slash expenses, while Democrats want to raise taxes on the upper income brackets and preserve social programs. The Republican approach certainly has its attractions: Nobody likes paying the tax man, and there's something remarkably grown-up and responsible-sounding about phrases like "protecting future generations" and "tightening our belts." But under scrutiny, it starts to look like these lofty goals may conceal another agenda, as the proposed cuts in taxes and spending are likely to benefit the wealthy, while placing an out-sized burden on the country's poor and middle class.

Historically Low Taxes

The current top tax rate is 35%, a level that infuriates some Republicans -- notably U.S. Rep. Paul Ryan (R-Wisc.). In his controversial budget proposal, Ryan suggested dropping the top rate to 25%, effectively slashing income taxes on the wealthy by 10%. This, of course, would lead to a massive cut in revenue, but Ryan has proposed methods for replacing the money -- namely, a repeal of President Obama's health care plan and drastic cuts in Medicaid and Medicare. While some Republicans have criticized Ryan's plan -- and its out-sized impact on the non-wealthy -- his push for a 10% cut on taxes for the rich is a boilerplate platform plank in Republican budget proposals.

Even apart from the question of whether or not the wealthiest fraction of the country need a 10% tax cut, the loss of health care benefits are likely to brutalize many in the middle class. Perhaps this is why Ryan's proposed cuts to Medicare wouldn't affect people who are currently 55 or older -- a group that would be likely to wage a fierce lobbying battle against any cuts to their benefits. Even so, a recent poll showed that 72% of respondents preferred increased taxes on the rich over cuts to Medicare.

For that matter, it's not clear that repealing the Obama's health care plan would actually save money. According to a recent analysis by the Congressional Budget Office, it is impossible to predict the economic effect of Obamacare: While Republicans insist that the program will be fiscally devastating, some economists argue that it could actually increase federal revenues.

Health care cuts aside, Republican griping about income taxes seems odd, if only because today's top tax rate is close to an all-time low. In fact, since 1917, the highest bracket has only been lower two times: from 1925-1931, it hovered between 24% and 25%, and from 1988-1992 it fell to between 28% and 31%. But for the majority of the 20th century, the top rate was 50% or higher. In fact, during World War II, it hit a high of 94%.

Capital Gains and Dividend Taxes

In addition to a surprisingly low top tax rate, America's wealthiest citizens can take advantage of a variety of loopholes, deductions and incentives that further slash their payments into the public coffers. In fact, according to the IRS, the 400 richest people in America paid -- on average -- only 18.11% of their income in taxes in 2008. By comparison, people who make $34,500 pay a comparatively hefty 25% of their income in taxes before deductions.

One way that the ultra-wealthy can cut their tax burden is by taking advantage of incredibly low capital gains and dividend taxes, which enable them to pay a mere 15% of their profits from stock holdings. A look at the finances of Ralph Lauren, CEO of Polo Ralph Lauren (RL), offer a good example of how this works: Listed as the sixth-highest paid CEO by Forbes, Lauren made $43 million in base pay in 2010. Before deductions, this would be taxed at 35%, the same rate paid by someone who brought home a comparatively paltry $374,000. In other words, Lauren probably paid the same tax rate as his dermatologist.

But base pay is only a fraction of Lauren's income. He also owns about $3.42 billion worth of stock in his company. In 2003, President Bush lowered the top capital gains rate to 15%, meaning that, if Lauren were to sell shares that he had held for at least a year, he would pay taxes on his profits at the same rate as someone who makes $8,400 per year. In 2010, he did just that, selling $850 million in shares -- and paying just 15% on the proceeds.

Lauren's company also pays dividends on its stock: In 2011, they are expected to reach 80¢ per share. For the famed designer's 25.9 million shares, this could come to as much as $20,720,000, which would also be taxed at 15%. The same, incidentally, goes for every other investor -- from Warren Buffett to Bill Gates -- who has held a share of stock for more than 60 days.

The Rich Get Richer and the Middle Class ...

The Bush-era tax cuts are now set to expire in 2013, but -- as the December 2010 budget battle showed -- they could be extended indefinitely. In the meantime, many of the country's richest citizens are paying a smaller tax rate than its poorest, and programs that are designed to keep the middle class from slipping into poverty are coming under withering attack from the right.

With federal finances stretched to the breaking point, belt-tightening sounds like a great idea. The trouble is, Republican proposals basically demand that only the bottom 98.2% of Americans need to cinch their bellies, while letting the top 1.8% -- those who make more than $250,000 -- take a bigger bite from an ever-shrinking pie. Critics of capital gains and dividend taxes argue that these levies force the country's richest citizens to pay taxes twice on the same profits -- once when they earn the money that they invest, and once again when they sell their stock or receive dividends from it.

Then again, with millions struggling to make ends meet, it's hard to find tears for America's wealthiest stockholders.

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"In addition to a surprisingly low top tax rate, America's wealthiest citizens **can take advantage of a variety of loopholes, deductions and incentives that further slash their payments into the public coffers**. In fact, according to the IRS, the 400 richest people in America paid -- on average -- only 18.11% of their income in taxes in 2008. By comparison, people who make $34,500 pay a comparatively hefty 25% of their income in taxes **before deductions**."

Now, read that again and pay careful attention to the text inside the ** characters. Why are you comparing before-deductions numbers for the "not wealthy" and AFTER-deductions numbers for the "wealthy?" This is the kind of crap we have to watch out for in the media. Look at table 1 at this link:

Top 25% of filers:
average AGI $162,000
group's share of total AGI 67%
group's share of total tax revenue 86%
average tax rate 16%

Middle 25-50% of filers:
average AGI $47,800
group's share of total AGI 20%
group's share of total tax revenue 11%
average tax rate 6.75%

Bottom 50% of filers:
average AGI $15,000
group's share of total AGI 12.75%
group's share of total tax revenue 2.7%
average tax rate 2.6%

September 19 2011 at 9:57 PM Report abuse rate up rate down Reply

middleclass mom
Mr. Wason fails to point out that most middle class people who own stock do so in the IRA's and the sale or trade of those stocks don't pay any taxes at all. Poor people don't own stock, they pay nothing in taxes on what they don't own. Selling and buying of stock in wealthy homes is taxed and the profits go to spending for stuff that other people make, investing in more stock, investing in their own businesses and hiring other people. If we tax those people through the roof, who have made money by supplying the country with products they want to buy, they won't sell, they won't buy and they won't hire.

June 21 2011 at 12:21 PM Report abuse rate up rate down Reply

Watson, you are an arrogant twit with no brain. I do not to care if the Polo guy sold 850 million in his stocks. Even so, your statement is inaccurate, his taxes would be 15% of the net gain, not the gross sale. Its idiots like you that have screwed this country. Please do us all a favor and shut up and resign.

June 17 2011 at 9:14 PM Report abuse rate up rate down Reply
Howard Hight

another example of the ultra rich having their bought spokespeople giving us a bunch of nonsense. We have had tax cuts in place for a number of years now. Did the top 2% use this opportunity to create jobs or improve the overall economy? Obvious response is no. In fact they got more and destroyed the economy for the other 98%.

These folks build wealth on the backs of others and show no concern for the welfare of their fellow citizens. They are contemptuous, arrogant and unconcerned about the 98%. There are a few exceptions such as Warren Buffet.

The Government of the People is not protecting us from these parasites on our society as they have the financial ability to buy them all off. The time is now for the people to rise up and demand these folks pay up. First step is to get rid of any politician who puts corporations or the top 2% before the people. Republican or Democrat are irrelevant designations. It is not just through the bums out, but find good people who care about we the people. Put them in place with 2 year term limits.Then we will be governed by a leadership who cares about us.

We the people need representation by those who care about us. Not corporations, nor the 2%.

June 17 2011 at 3:51 PM Report abuse +1 rate up rate down Reply
2 replies to Howard Hight's comment

Howard, the 2003 tax cuts inproportionately went to middle class taxpayers. Did the middle class use this opportunity to create jobs or improve the overall economy? If they didn't, should we raise taxes on the middle class? Tax cuts aren't designed to create jobs, even if economic outcomes such as job creation are improved by less resources being confiscated by the goons. Rather, tax cuts are designed to return the fruits of citizens labor to those citizens to whom they belong. And to lessen the discincentives on labor and investment that incomes taxes institute. And to allocate a greater percentage of economic resources toward the productive prive sector, and away from the counterproductive public sector.

June 17 2011 at 7:25 PM Report abuse +2 rate up rate down Reply
2 replies to Trevor's comment
Mark Glenzek

Trevor said: "tax cuts aren't designed to create jobs" and "... to lessen the discincentives [sic] on labor ..." You contradicted yourself, but that's OK.

Since economics is not a science it is impossible to assign cause and effect to any policy option. But, according to theory the middle class would use their extra money to buy goods which would cause employers to add employees. Of course this happens only is balanced and healthy economies. Our economy is currently liquidating the middle class so much of the new demand was met by workers in China.

June 18 2011 at 6:30 AM Report abuse -1 rate up rate down

Mark, I'm sorry your cognitive incapacity keeps you from following along. "Creating jobs" and "reducing disincentives" are NOT the same. Job creation is based on a whole host of factors. But whatever ELSE might be effecting job creation has nothing to do with the simpler fact that reducing taxes reduces disincentives. Think of it this way. Let's say I offered some mental midget like you $60/week to mow my lawn. Then a month later, I explain that I've instituted a "lawn mowers license fee" of $30.00 week. So I'm going to continue paying you $60.00 week, but you have to give $30.00 of your weekly wage back to me. Do you think I've added a disincentive to your labor? If I removed the $30.00 weekly license fee, would I have reduced your disincentive. Economics isn't as difficult for most as it is for you.

June 19 2011 at 10:12 AM Report abuse -1 rate up rate down

Howard you are must be in the dumb uneducated crowd with your dribble. How exactly does the top 2% make its money? Funny, but the top 2% has been doing exactly what they have always done. Where did the jobs come from during Clintons term? Did the bottom 2% create all those jobs? Grow up and spare the rest of us your idiotic nonsense

June 17 2011 at 9:19 PM Report abuse rate up rate down Reply
Mark Glenzek

Trevor and joeproblemchild:

I have replied to your replies to my post of 17 June at 10:45 PM. A rebuttal would be appreciated.

June 17 2011 at 11:27 AM Report abuse -1 rate up rate down Reply
1 reply to Mark Glenzek's comment

Mark, the absurdity or your reply requires no rebuttal. You already unwittingly supplied that.

June 17 2011 at 3:22 PM Report abuse +1 rate up rate down Reply

I don't think those earning 370k + per year should be taxed at the same level as multi-millionaires/billionaires.

June 17 2011 at 1:02 AM Report abuse rate up rate down Reply
Welcome Vic!

When you consider that originally the federal government was only supposed to operate off of corporate taxes and income tax isn't even supposed to exhist and was an emergency measure that was supposed to be fazed out a hundred years ago and the fact that the United States ranks fourth in economical inequality between richest and pourest, I don't think we're asking to much out of the top two percent

June 16 2011 at 9:30 PM Report abuse rate up rate down Reply

From the posted quotes below, it sounds like JFK may have been the original tea partier.

June 16 2011 at 8:23 PM Report abuse rate up rate down Reply

America should be a fair country. You pay more taxes if you have more money. All those stupid right wingers want a king in their lives.

June 16 2011 at 6:15 PM Report abuse rate up rate down Reply
5 replies to Wei's comment

Cutting tax rates and adding incentives for the people who already pay the vast majority of the country's taxes does not increase any burden on the 50% of the popluation who already pay ZERO federal income taxes. These people enjoy all of the benefits of the American life and should pay at least a nominal amount.

June 16 2011 at 4:57 PM Report abuse rate up rate down Reply