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Is it FAIR to Tax the Rich out of Business?

Politics / Taxes Nov 28, 2012 - 04:09 AM GMT



In a caustic political environment that marks the rich to pay higher taxes because of their inordinate incomes, the outlook for a growing economy diminishes. The argument that well capitalized commercial enterprise owners provide the bulk of the small business jobs is well established. Certainly, not every proprietor is wealthy. On the contrary, many if not most employers struggle to meet their payroll. Even so, the political hysteria to raise the top rates stares directly into the eyes of every wageworker with the prospects of joining the unemployment lines.

What are the actual taxes paid by the small business owners that file under individual tax rates? Robert Frank in CNBC report, The Millionaires Who Pay the Highest Tax Rate, provides some interesting facts.

"According to new data from the IRS, people who make $1 million or more had an average tax rate of 20.4 percent in 2010. Tax filers who earned $30,000 to $50,000 paid an average rate of 4.8 percent, while those who made between $50,000 and $100,000 paid 7.7 percent. Those making under $30,000 had a negative effective rate, meaning they paid no federal income taxes after deductions and credits.

Put another way, millionaires pay a rate that’s more than four times that of the middle class."

Lost in the debate on taxes is the distinction between the real producing economy and the investment return on capital speculation. The former is the genesis of all affluence, while the later is the manipulative abuse of Main Street prosperity. Wall Street finance is based upon fabricated fees, invented spreads, manufactured values and phantom riches. The notion that income from venture speculation is equated with the sweat equity of actual business endeavors is a root cause of the huge disparity that separates the leisure moneychanger cabal from the merchant class.

Still the Washington Examiner makes the following points in their editorial, If top 5% paid 40% of taxes, what is their 'fair' share?

"But income taxes, taken in isolation, do not tell the whole story, because lower-income Americans do pay payroll taxes. But even taking into account all forms of taxation, the top 1 percent still paid 22 percent of federal taxes while earning just 13.4 percent of household income. The top 5 percent paid 40 percent of all federal taxes, despite earning only 26 percent of all income. No matter how you slice the numbers, it's hard to understand why anyone would think the wealthy aren't already shouldering a burden commensurate with their blessings."

What they miss is that not all income is equal. Money often begets more money. However, business income requires hard work to earn a minimum return. The question that is absent from the tax debate is whether the source of the profit, example passive vs. active income, should have much different tax treatment.

The quid essential crony capitalism corporatist, Warren E. Buffett, announces his remedy in the New York Times opinion page, Stop Coddling the Super-Rich. He admonishes Congress to hike rates on the top level of the wealthiest.

"Job one for the 12 is to pare down some future promises that even a rich America can’t fulfill. Big money must be saved here. The 12 should then turn to the issue of revenues. I would leave rates for 99.7 percent of taxpayers unchanged and continue the current 2-percentage-point reduction in the employee contribution to the payroll tax. This cut helps the poor and the middle class, who need every break they can get.

But for those making more than $1 million — there were 236,883 such households in 2009 — I would raise rates immediately on taxable income in excess of $1 million, including, of course, dividends and capital gains. And for those who make $10 million or more — there were 8,274 in 2009 — I would suggest an additional increase in rate."

The idea that all capital gains are similar has dire consequences. Treating the sale of a family home in the same way as taxing derivative profits or algorithmic trading allows the systematic pillaging of unproductive financial instruments at the cost of Middle America. The Buffett plutocrats of privilege plunder, play the fairness card, while practicing the gaming of the buddy arrangement of State Capitalism.

As long as the small business owner is lumped into the identical tax category that enriches Bernie Madoff disciples, the dynamic and industrious elements of enterprise will suffer.

Since the banking community has shut off the loan faucet to small business, the erroneous argument that capital formation must be protected for a sound banking system, does not wash. As long as the banksters are using their capital to speculate and forego their stated function of providing constructive loans, the industry has lost what little honorable respect a vulture mercenary might claim.

The entrepreneur employing risk capital in the formation of a useful product or service is not focused on evading taxes. Such ventures employ the unemployed and provide the consumer with innovative and useful choices.

The "Oracle of Omaha" fails to disclose a significant point that the WSJ clarifies.

"What he doesn't say is that much of his income was already taxed once as corporate income, which is assessed at a 35% rate (less deductions). The 15% levy on capital gains and dividends to individuals is thus a double tax that takes the overall tax rate on that corporate income closer to 45%."

Taxing the predatory speculator that buys political favors and deals on inside information is quite different from penalizing the employer that earns a company profit on the efforts of a dedicated staff and prudential risk management.

The way to unlock the capital to expand the economy is to require commercial banks to conduct their function as lenders. Restoring that elusive fairness has never been more obvious then reenacting Glass–Steagall. However, the Wall Street Wizards hide behind the curtain of special tax treatment. Differentiate capital gains taxation much like the separation of investment and commercial banking.

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