Confuse and mislead on progressive taxation

So I was watching Chris Wallace grill Dick Durbin (Obama’s proxy) on Fox News Sunday this morning. This is really about framing an issue in such a way as to achieve your objective by presenting the language in a favorable, or more generally acceptable way.

The frame:

  • An increase in capital gains taxes, which Obama is proposing to increase from 15% to 28%, will impact the middle class, considering that almost 50% of the tax returns that list capital gains taxes make less than $50,000.

I am going to pick on a piece by Larry Kudlow at the National Review Online on this issue, because that way I can quote what he is writing, plus I am certain this is part of the right wing echo machine that I have said I am fighting, the echo ends here!

The Wall Street Journal’s Steve Moore points out that in 2005, almost half of all tax returns reporting capital gains came from households with incomes under $50,000, while more than three-quarters came from households earning less than $100,000.

The first hint that an attempt is being made to confuse us is that we talk about the number of returns, not the percentage of capital gains tax paid. See, I did my taxes earlier this week. I make less than $50,000 and I paid capital gains taxes on my dividends from one stock, that one stock gained me a total of $4.52 in dividends, so at 15% I paid 68 cents and at 28% I would pay $1.27, or a tax increase of 59 cents. So yes, I would be one of these masses that would face a tax increase, but I would be okay with it.

But my point still stands, so I went looking for information on percentages by income of the capital gains tax paid, not just number of returns. I found this from Citizens for Tax Justice (pdf),

Looks like under $46,000 paid 0.4% of all of the capital gains taxes paid, and under $110,00 paid 5.7%. Once again, this an example of conservatives, co-opting the “looking out for the middle class” to protect a reduced tax rate that primarily benefits those at the top of the income scale. You will not see this similar behavior, this concern for middle and low income voters when we talk about preserving (when cuts are proposed) or expanding social programs, just on the revenue end of things.

Now Kudlow has some questionable arguments against other aspects of Obama’s proposed tax policy.

Obama also proposed uncapping the payroll tax, another blunder that will hit people up and down the income ladder. While Obama pledges tax hikes only for folks earning more that $200,000 a year, his tax hike on payrolls would actually slam middle-income earners. The cap on wages subject to the payroll tax is presently $102,000. By eliminating that cap Obama will be soaking veteran firemen, cops, teachers, and health-service workers, along with a variety of other occupations.

In fact, in America’s largest cities, a firefighter married to a school teacher can earn close to $200,000 filing jointly. So not only will each spouse separately pay more for Social Security and health care under Obama’s plan, together they’ll also be slammed by Obama’s cap-gains tax increase.

This is a lot of confusion being thrown about to make Obama look bad.

Who down the ladder will this impact, if you make under $102,000 a year, no tax increase. It is that simple and begins to unravel the lie.

What is middle class, maybe in the Boston to Washington DC supercity, $200,000 is considered middle class in that subset of the US population. But if you look at the raw number in the chart above, $200,000 is clearly in the top 5 percent for the whole US. This increase only effects those that are in the top 20% nationally and mostly those in the top 10%.

Now lets say we breakdown his example of a firefighter married to a school worker making $200,000 a year. Lets say the firefighter makes $130,000 and the school teacher makes $70,000. A big omission, is that the cap is per person, not per family. So the school teacher who makes less than $102,000 will not see any increase to their payroll taxes. So the fire fighter would for the $28,000 income that currently is not subject to the social security pay roll tax. That tax is 6.2% off of the pay check and then another 6.2% from the employer. So $28,000 times 6.2% is an increase of $1,762. That is a real increase, but Kudlow is trying to confuse, because in a scenario where both wage earners earn $100,000, then they would face no increase to the payroll tax. But he wants you to think that the total increase would be $98,000 times 6.2% or $6,076.

That is how it would effect his middle class in his example. But what about a person that earns $1 million. Well that additional $898,000 of their income that would be subjected to the 6.2% social security tax would increase their tax by $55,676. That is a big amount, clearly more than I make in a year, but why should only lower income, those of us under $102,000 in income pay 6.2% on ALL of our income. Currently anyone that makes $102,000 or more pays at total of $6,324 in payroll taxes for social security. So for that person making a cool million, they are paying an effective tax rate to social security of 0.63% or one tenth the tax rate we middle and lower class people are making.

Now after this, if you are confused, you may now question the thinking that Larry Kudlow is looking out of the middle class, and this reinforces that doubt. He has been a staunch defender of preserving the capital gains rate of 15% for the hedge funder managers,

The latest assault comes courtesy of House Democrat Sander Levin. Late last week, he introduced a bill that essentially would abolish the 15 percent capital-gains tax preference for risk investing, and raise it by 20 percentage points to the 35 percent corporate and personal rate. This goes beyond an earlier tax attack on a public offering by the Blackstone Group, and would slam into all private partnerships, including buyout funds, hedge funds, venture-capital firms, real estate partnerships, and oil-and-gas deals.

Taxing income at 35% versus the 15%, what does that mean to tax revenue for the country? Well for one manager in 2007,

One manager — John Paulson of Paulson & Co. — earned $3.7 billion last year, which management consultant Peter Cohan pointed out means Paulson in 2007 made 30 times in one hour what the median family made all year.

So what would John Paulson pay in taxes on that $3.7 billion.

  • 15% equals $555 million
  • 28% equals $1.036 billion
  • 35% equals $1.295 billion

Even at 35% he would have $2.4 billion in take home income, I know that must be a hardship, after all he could (and probably did) taken home $3.1 billion.

Ironically, that June 27, 2007 post where he argues against raising the tax rate for hedge fund managers, he mentions this,

But plain ol’ income this is not. The recent crack up of two Bear Stearns sub-prime-mortgage hedge funds shows just how risky these ventures can be.

Well they aren’t THAT risky if the government is going to bail you out, and what was his take on that bailout for Bear Stearns?

But speaking for himself, Kudlow, a contributor to Buckley’s National Review who worked for Bear Stearns for eight years, defended the bailout. He said that Treasury Secretary Henry Paulson and Fed chairman Ben Bernanke “have done exactly the right thing.” But it wasn’t the conservative thing to do. It wasn’t consistent with the conservative and free market principles in the Sharon Statement.

Well I have gotten a bit off topic here, so I will summarize.

  • Conservative pundits are trying to co-opt the progressive message of protecting middle class from tax increases. They do this by using numbers of people who file capital gains in their returns, not the amount of the capital gains they claim as a percentage of all capital gains claimed to inflate the impact on the middle class.
  • Conservatives worry about the lifting the cap on income subjected to the payroll tax for social security, while clearly this only would impact those in the top 20% nationally.
  • When talking about the capital gains taxes and how they must be kept low, they have defended the right for people like John Paulson to only pay 15% on his $3.7 billion income in 2007, not a higher 28% (proposed increase to capital gains tax rate) or 35% rate (top income tax rate).
  • Larry Kudlow justified this lower rate because of the associated risk that hedge fund managers have, but did not have an issue when the government bailed out Bear Stearns, in other words government taking on the risk that hedge managers were apparently being rewarded for taking with a lower tax rate.

So when the right wing pundits carry the water for the investor class to punch holes in Obama’s plan for more equitable taxation, they are only crying crocodile’s tears for the middle class.

-Josh

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4 Comments

  1. Joe Dem said,

    April 20, 2008 at 9:42 pm

    I agree that the payroll tax should be uncapped, but like Kudlow, you are misrepresenting the actual gain which this will provide. You mention a person earning a million dollars a year increasing their payroll tax by $55,676. This is only true if the million is actually W2 earnings which it probably is not.
    You also misrepresent the effect on capital gains increases. You state you make $50,000 a year. However, the table you show and your indication that your gain in dividends was $4.52 is very misleading as well. Qualified dividends are not capital gains, but are taxed as capital gains, so you are talking apples and oranges here. The chart you have reflects only form 1040 line 13 capital gains, not qualified dividends.
    If your dividends were qualified dividends, you overpaid, you should have paid 23 cents and you wouldn’t pay at a 28% rate if the capital gains rate rules were change, you would pay 15% on your dividend.
    What would this change mean to a retired senior depending on these dividends to survive? My income is about the same as yours with $25,000 coming from qualified dividends, and the rest from social security. The capital gains change would mean an increase of $2,500 in income tax, not a small amount for me or any senior.
    Kudlow may have misrepresented, but you aren’t doing much better.

  2. Josh said,

    April 20, 2008 at 10:02 pm

    I stated I make under (less than) $50,000 a year, $50,000 will happen, but not there yet.

    I will concede the dividend point, to get the free e-file, I let the software work it out, and yes it was a qualified dividend, so I didn’t pay much attention.

    One the issue of a someone earning a million dollars, while there may be other forms of compensation, which may not be subjected to the payroll tax, you will have to acknowledge that someone may earn a million on their W2.

    I will also acknowledge that those that are retired may get a good portion of their income from investments, so maybe impacted by this change in capital gain rates.

    Yet the whole point remains the same, the attack on Obama’s plan comes not out some great desire to mitigate the cost to you, but to help those at the top of the economic ladder like John Paulson.

  3. Joe Dem said,

    April 22, 2008 at 3:42 pm

    Social security –
    I found a table on the IRS site (1998 figures only available) which listed the total earned income (w2 and schedule se).
    By adding the totals of all earned incomes over 100,000 and then subtracting the total returns times $90,000 to cover the fica already paid, removing the fica cap would bring in an additional 48 billion into the fund each year. (24B from employee and 24B from employer). The total contributions to OASI (FICA) in 2003 were 533.5 Billion and total benefits paid were 479 Billion. Although every little bit helps, and I agree that the cap should be removed, removing it would only increase contributions by 9%, no where near enough to cover the baby boomers.

    A few points on capital gains.
    The rich can pretty much choose when they want to sell their long term assets. In general, only a small percentage of their assets are actually sold. The remainder is passed to their heirs who end up paying inheritance tax, not capital gains tax.
    An interesting statistic for 1998 is that 6.2 million tax returns of taxpayers with a gross of $100,000 to $200,000 were filed, but only 2.2 million had earned income of this amount. There are no statistics indicating how many of the 4 million not having earned income over $100,000 were one time taxpayers in this group due to selling a summer home they no longer used and selling stocks to help pay their kids college costs. Maybe some were selling their small business when they retired. These are the people I feel will be hurt by an increase in capital gains. These people cannot put off selling assets or passing it on to their heirs.

  4. Josh said,

    April 22, 2008 at 5:27 pm

    On social security, the boomers have been pre-paying.

    The Social Security Trust fund (OASDI); will stop adding to the trust in 2018, will still be able to cover expense on interest only (not drawing down the trust) until 2028, and the trust will be exhausted in 2041, although some estimate 2046. So an extra $48 billion a year would push those numbers much further out.

    You can read my de-bunk of the social security issues here.

    Capital gains, I will defer to your knowledge base. I don’t pay much, if any, so I am not as versed in it. You make much more compelling arguments than “almost half of the returns that claim capital gains on their returns have incomes less than $50,000.” That is still a frame to protect the upper income folks. Just like calling the estate tax and death tax makes it seem like it will impact more people.

    I have talked with a family planning to adopt that cashed some of a 401(k) and it was going to push them past the upper income, for that year, limit to be eligible for the adoption tax credit (about $200,000-$210,000). So the family wanted to delay the adoption (foster care system) to the next year, when they could utilize the full adoption tax credit.

    I appreciate you very thoughtful comments and wish I had the time to do as thorough research as you have. Those lags in data ( 1998 ) can be so troublesome, of just finding them (happy with finding 10 year old data).


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