7 Myths about Taxes

Stephen Moore, Senior Economics Writer, for the Wall Street Journal, published an extremely interesting report on Tax Myths on the Manhattan Institute for Policy Research’s website.  I highly recommend reading it but it is a bit in-depth.

By no means do I wish to plagiarise his wonderful work but I would like to condense it.  I’m only going to list the ones I think are pervasive and make my own conclusions.

(The charts are taken directly from the referenced work – again I recommend reading it.)

Myth 1: The wealthy are not taxed enough in the United States. This is a lie being loudly trumpeted by well-intentioned as well as political opportunists.  My income doesn’t even come close to Obama’s magic $250,000 per year “rich” measure, so I have no dog in the fight.  But facts are facts and no matter your political leaning you should at least acknowledge the statistics.  See figure 2.

Yes, your eyes are not lying, the United States actually taxes the “rich” more than any other nation in the world. Furthermore, if the President is given another four years the percentage of that confiscated wealth will grow and the number of wealthy will decrease.  Then it is only logical that the measure of what constitutes the wealthy will, by necessity, need to be revised downward.

Myth 2: The wealthy pay less in taxes than they did 50 years ago.  How many times have we heard this one?  In fact the “rich” are paying more than at anytime since 1960. See figure 1.

Myth 3: Tax cuts take money from the poor and give it to the wealthy.   Personally I don’t even understand the statement but Mr. Moore seems to think the implication is that if the rich pays less the burden shifts downward.  In fact, incentive to create jobs increases and with more people working more taxes are paid to the government and less benefits are paid out by the government.  Call me old-fashioned but more people working is good for everyone!

Myth 4: Tax cuts raise the deficit. Patently false but it seems to make logical sense if you ignore the job creation aspect of lower taxes.  If the economy grows and more people are paying into the system tax revenues grow.  If you raise taxes it de-incentivizes job creation through expansion and new businesses.

So what should we expect under a second Obama term with significantly higher taxes on the “rich”?

Myth 5: The rest of us pay more than our fair share.  As I’ve written before, everyone thinks they pay too much and others pay too little.  In fact, every year fewer and fewer American pay ANY income tax.  In 2008 about 36% paid no income tax while in 2009 42% paid nothing.

I believe this is largely due to the huge increase in unemployment that occurred during that time.  So do we want high unemployment so more people will vote for the candidate offering the most compensation or do we want to raise employment and create more tax revenue? I guess that depends on which political bias you espouse.

Myth 6: 15% Dividend tax is far below the taxes of middle-income Americans.  54% of Americans invest, many don’t even realize they own investments.  My conclusion is that this is because so much is wrapped up in retirement accounts managed by others.  So increasing taxes on investment income really is an attack on retirement and by association on the elderly.

Moore’s reasoning is different as he concentrates on the risk factors of investing and how higher taxes on investments negatively impact new business.

Myth 7: Changing the tax code helps people climb the economic ladder.  Mr. Moore’s conclusions here are detailed and worth a look, but I take a simpler looks at this.  To someone at the lower end of the ladder it seems unfair that those at the top are living so comfortably while they struggle to get and keep jobs.  They want someone to force those people to pass down some of that money.

I get that.  It’s simple common human greed.  Yeah greed.  There is no acknowledgement from those at the bottom that those at the top did anything to earn that money, only that they have and I don’t.  Those pandering to the bottom have loudly declared that those at the top haven’t earned their money.

Somehow they got their money though dumb-luck or through government largess.  Perhaps this is how GM and AIG executives did it, but the vast majority of business people stayed up late, took risks, and worked hard to get whatever they have.

If redistribution is fair in economics shouldn’t it be fair everywhere?

Let’s simplify this even further.  Let’s take a typical college student body.  Let’s say 10% of the class is maintaining a 3.8 or higher GPA.  Let’s also say 45% are struggling with a GPA under 1.5.  Would it be fair to take 1.5 points (40% of their grade) from the top 10% and divide those points among those in the bottom 45%?  Sure it would!

Questions:  Would those at the top continue to stay up late studying?  Would those at the bottom try harder or assume a natural bump from those at the top?  Now if human nature holds in the classroom, why would it not hold true in economics.

It’s easy to go along with redistribution rhetoric when it doesn’t seem like it affects you.  But it does affect you, unless you are a rich member of the media, a union boss, or a Hollywood celebrity.

Your job is at stake.

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