HATS OFF TO THE PATRIOTIC MILLIONAIRES! (PART ONE)

By Jack Jodell, Aug. 19, 2011

In my last post I mentioned that I do NOT hate rich people simply for being rich, and that there were many deserving of commendation due to their sense of civic duty, social responsibility, and basic fairness. Warren Buffett recently exhibited these wonderful attributes by placing an op/ed in the NY Times. Many of this type of millionaire belong to a fabulous group called “THE PATRIOTIC MILLIONAIRES FOR FISCAL STRENGTH.” These incredibly far-sighted and fair-minded people not only know quite a bit about making money, but also have benn CLAMORING for many months to HAVE THEIR TAXES RAISED!

I recently went to their website at http://patrioticmillionaires.org/ and deicovered a BRILLIANT letter they drafted and sent off to John Boehner, Mitch McConnell, Eric Cantor, and other congressional Republicans who have steadfastly refused to even consider raising taxes as a way to relieve the federal deficit. In it, they debunked all the MYTHS Tea Party extremists and conservative Republicans have used for far too long to avoid taxing the super-rich at a fairer, more sensible rate. They have also repudiated  all the lies and abundant contradictions which have been a part of the ridiculous notion of “free market economics.” Due to the letter’s length, I have split it into two parts. The first appears below and I will post the second in a few days.

This is incredible reading, ladies and gentlemewn. NOBODY can dispute its truth or claim that these people don’t understand what it takes to make money or that their prescription for our current economic ills is faulty! Here we go with PART ONE:

July 21, 2011

The Patriotic Millionaires
c/o Erica Payne
18 West 27th St., 11th Fl.
New York, NY 10001

Dear Speaker John Boehner, Senator Mitch McConnell, House Majority Leader Eric Cantor, and all other Republican House and Senate members who refuse to even consider raising taxes on people making more than one million dollars per year:

Since November of last year, we have urged you to put your country ahead of personal political interests and to increase taxes on people with incomes over $1 million per year. We have made this request as responsible and patriotic citizens who now or in the past have earned an income of $1 million or more per year.

Despite our willingness to provide additional support to the country financially to ensure its continued well being, despite the overwhelming support of the idea among the American public, despite the reality that millionaires like us are paying lower taxes now than at any time in the last 60 years, and despite the fact that the Bush tax cuts are the single, largest cause of the current federal deficit, you have repeatedly refused to consider this limited and reasonable step to address our country’s fiscal challenges.

Now, as our country approaches a potentially catastrophic impairment of our financial obligations, we are writing to reiterate our demand.

Moreover, because of the corrosive role misleading – even intentionally dishonest – arguments have played in this critical debate, which you continue to present, we have enclosed a detailed analysis summarizing the reasons supporting our position.

Tax Fairness, Economic Growth and the Truth About Taxes on Millionaires and Billionaires

By

The Patriotic Millionaires

First, to be clear, our position is not for or against taxes or the accumulation and/or distribution of wealth in America in general, and instead and only whether or not the Bush tax cuts of 2001 and 2003 on incomes over one million dollars per year should be discontinued.

Currently, under the Bush tax cuts, the highest marginal federal income tax rate is 35%. The Patriotic Millionaires’ proposal is that the tax rate for incomes above $1 million per year return to the previous level of 39.6%, which applied from 1993-2001. Our proposal will not impose any additional taxes whatsoever on any income below $1 million per year. The implementation of our proposal would technically involve the establishment of a new tax bracket of 39.6% which would apply only to incomes over $1 million per year.

A 13% tax increase on persons making $1 million or more per year can hardly be viewed as “confiscatory” or, in any way, unreasonable. Among other things, due to the current tax structure, statistics reported by the IRS and the CBO indicate that no taxpayer would pay (or currently pays) the rate of the highest tax bracket on all of his or her income. In fact, persons earning $1 million or more pay, on average, 22% of their income in federal income taxes – – far below either the current or the proposed highest marginal rate. In fact, even if they paid the full 13% increase – – which would almost never be the case because of various deductions and other tax loopholes – – the total amount paid would be no more than 25% of taxable income, not 39.6% – – again, hardly unfair.

Thus, given the fiscal emergency we purportedly face, the PM proposal is eminently reasonable. This conclusion is supported by two basic arguments:

This proposal offers a fair allocation of the burden borne by taxpayers of the federal income tax.

This proposal is sound on policy grounds and will reduce the deficit without adversely affecting economic growth.

We support each of these conclusions at length below:

Fair Allocation of Tax Burden

An assessment of the basic fairness of the PM proposal involves an analysis of the incidence of the federal income tax. The soundest way to assess the fairness of the federal income tax system is to compare the tax burden imposed on average taxpayers earning $1 million a year or more to the burden of average taxpayers in other income classes, taking into account both tax rates and differences in income. This comparison reflects what is known as the “relative burden” of the federal income tax. In other words, it takes into account the tax burden carried by average taxpayers in one income class compared to average taxpayers in other classes, considering both their incomes and differences between tax rates and income.  

 Relative Burden Analysis

Taxpayers with incomes of $1 million or above correspond roughly to the top 1% of income earners in the U.S. As a group, persons with $1 million or more in income per year pay, as noted, approximately 22% of income in federal income taxes. This compares to other groups based on income as follows:
After the top 1%, the next 4% of taxpayers, who earn on average $245,000, pays (on average) 21%;
The next 5%, who earn on average $141,000, pays 20%; and
Rounding out the top 10%, the next 5%, who earn $100,000, pays 19%.

This compares to taxpayers at the lower end of the income scale as follows:
The lowest 20% of taxpayers, who have an average income of $12,400, pays (on average) 3.6% in federal income taxes;
The second 20%, who have an average income of $29,000, pays 8.7%;
The middle 20%, who have an average income of $40,400, pays 13.9%; and
The fourth 20%, who have an average income of $66,000, pays 17.2%.

First, these statistics reflect a sharp degree of income concentration in the top 10% of income earners who account for 45% of all income earned; the remaining 90% of the country accounts for a little more than half of all income earned in the U.S. (55%). Second, they reveal that persons in the top 10% pay higher rates than average taxpayers in the remaining 90%. However, while the top 10% pay 70% more in federal income tax than the average of the remaining 90%, they earn, on average, 1,200% more. Accordingly, a comparison of the tax rates and income of the top 10% and the remaining 90% significantly favors the top 10%. This is a clear indication that the relative tax burden on the affluent is actually less than on the remaining 90%.

The disparity is even more pronounced for the top 1% – – corresponding to persons earning $1 million or more per year – – and the focus of the PM proposal. The average taxpayer in the top 1% makes 30 times the average of the first 90%, and 15 times that of the average of the remaining 99% – that is 3,000% and 1,500% more respectively. More startling still is the disparity between the top 1/10 of 1% who earn on average $38 million per year, which is almost 543 times the average of the remaining 99%; or between the 400 highest income tax payers in the U.S. (approximately the top 1/1,000 of 1%) with an average income of $270 million per year who make almost 1,100 times the average of the remaining 99%, (including the millionaires up to 1.3 million!).

Thus, while it is true that tax rates on the wealthiest Americans are higher, this difference is offset entirely by the corresponding income disparities. A wealthy lifestyle in the U.S. may be expensive, but it is not 500-1,000 times more expensive than the cost of living for the other 99% of the U.S. population.

In conclusion, assessment of the fairness of the relative tax burden of affluent taxpayers must take into account not only the differences in the tax rate which they pay compared to the rest of the country, but also the differences in their income vis-à-vis the rest. Because of staggering disparities in income
between the top 1% and the rest of income earners, the top 1% earns far more in income than it pays in taxes compared to other income groups, even when taking into account that it pays proportionately more taxes. In other words, income differences that favor the top 1% far outweigh the differences in tax rates even though the top 1% pays proportionately more than other classes of income earners.

Disparities in income between the top 1% and 1/10 of 1% and the rest of the public accelerated significantly during the Bush years – – in considerable part because of the Bush tax cuts – – and as previously demonstrated, as income levels rise, the relative burden of taxes decline. As such, fairness would require that those who benefited the most from the Bush tax cuts and whose income grew the most during those periods – – a combination of circumstances that reduced their relative tax burden substantially in comparison to their fellow citizens – – pay a little more during a fiscal emergency.

Reducing the Deficit and Supporting Economic Growth

The fate of the Bush tax cuts and the issues of increased taxes on the top 1% of income earners in the U.S. raise two basic policy considerations:

The first involves the fiscal effects of eliminating the Bush tax cuts for the top 1%; and the second involves the macroeconomic effects of taxing the rich on economic growth, jobs, interest rates, capital formation, and inflation.

The Fiscal Impact

The fiscal impact of eliminating the Bush tax cuts on the top 1% is considerable. Reliable estimates indicate that allowing the Bush tax cuts on the top 1% to expire will REDUCE THE DEFICIT (AND RESULTING DEBT) BY $500-600 BILLION OVER 10 YEARS CONSISTING OF $400 BILLION IN INCREASED REVENUES AND $100-200 IN SAVED INTEREST PAYMENTS ON THE DEBT. THIS REPRESENTS A SIGNIFICANT CONTRIBUTION TO DEFICIT REDUCTION. 

Macroeconomic Effects

In standard, accepted modern macroeconomic analysis, tax cuts are generally regarded as a temporary counter-cyclical policy tool which can stimulate economic growth in the short-run business cycle – – IF THE ECONOMY IS CONTRACTING AND/OR OPERATING AT BELOW-FULL EMPLOYMENT LEVELS. BOTH THE PURPOSE AND EFFECT OF BELOW-FULL EMPLOYMENT TAX CUTS ARE VIEWED AS “DEMAND SIDE,” THAT IS, HAVING EFFECTS ON AGGREGATE DEMAND. (As we will see, accepted macroeconomic analysis conflicts with conservative dogma which views tax cuts as having primarily “supply-side” or aggregate supply effects.)

In general, tax cuts bolster aggregate demand by stimulating consumer spending. Bolstered consumer spending then dampens or reverses the effects of a cyclical downturn (including job losses) resulting from an unexpected contraction in private sector demand which cannot effectively recover in the short-run and which leaves a gap in aggregate demand (known as an “output” gap) as an impediment to reaching higher or full employment levels of economic activity.

Tax cuts of this nature are designed specifically to stimulate personal consumption. Their effectiveness can be judged on the degree to which the money from the tax cuts are put back into the economy through increased consumer spending and vary according to the income of the recipients. Studies have shown that tax cuts on wealthy people are not effective in stimulating the economy, because tax savings of the affluent taxpayers are saved, not spent. Thus, the stimulative effect of tax cuts is greater when they are directed at the less affluent – – not at the wealthy. The differences are dramatic. Tax cuts to the top 1% of income earners – – the specific target of the Bush tax cuts – – are particularly ineffective as economic stimulus. Sixty percent of the income of the top 1% is concentrated in the top 1/10 of 1%. With an average annual income of $38 million/year, the savings rates of these individuals dwarf their personal consumption rates.

Once the economy has recovered to or near full employment levels, standard macroeconomic policy requires the cessation of tax cuts to avoid creating imbalances in the federal budget and/or to prevent the economy from over-heating through a build-up of inflationary pressures. Tax cuts should never be utilized or permitted to persist when the economy is at or near full employment (or has recovered cyclically to full employment) without being paid for.

Supply-side Economics: Decades of Experience with a Discredited Theory

For much of the last 30 years, the Republican Party has believed in a theory called “supply-side economics.” Supply-side economics holds that tax cuts stimulate extra economic growth which, in turn, generates additional tax revenues which will exceed the size and cost of the tax cuts and, in so doing, pay for themselves. Importantly, there are currently no reputable economists in the country who support the central premise of supply-side tax cuts. In fact, even the chairmen of Reagan’s and George W. Bush’s Councils of Economic Advisors, Martin Feldstein and Gregory Mankiw (both dyed in-the-wool political conservatives), have both repudiated its central premise.

Evidence shows that not only do such tax cuts NOT pay for themselves, they also produce serious deficits proportionate to the size of the tax cuts.

In the last 30 years, there have been two extended experiments in supply-side tax cuts, both of which were initiated in the wake of economic downturns and then continued even after the economy had recovered to at or near full employment: 1) the Reagan tax cuts in the period after 1983, and 2) the Bush tax cuts in the period after 2003. Both experiments failed ignominiously and provoked difficult and painful fiscal crises. The first crisis was not resolved until 10 years after it had begun in 1993 and after a second business cycle produced the recession of 1989-91. The resolution did not occur naturally but only after the budget compromise of 1990 in which then President George H.W. Bush and Congress agreed to cut both domestic and military spending equally and to raise taxes and President Clinton and Congress raised federal income taxes, eliminating the Reagan tax cut of 1981.

The second crisis is ongoing and has not as yet been resolved. The fiscal and budgetary mismanagement associated with the Bush tax cuts was even more egregious than during the Reagan years. From a macroeconomic policy standpoint, because the recession of 2001-03 was much milder than the counterpart of 1980-81, and because monetary policy was effective in supplying the necessary economic stimulus to restore full employment levels, the theory of the Bush tax cuts was even more questionable than that of the Reagan tax cuts. Moreover, they were intentionally geared to the top 1% and, for reasons previously stated, were particularly ineffective as an economic stimulus. Indeed, under the circumstances, they could be considered as little more than a gift to the wealthy.

Additionally, the Bush tax cuts produced substantial deficits and were principally responsible for converting a projected $5.3 trillion surplus when Clinton left office into $4 trillion of current public sector debt. Moreover, by running full employment deficits from 2003-2008, Bush deprived policy makers of a multi-trillion dollar surplus which could have been used to contain the economic collapse and job losses caused by the financial crisis of 2008. It is worth noting that China paid for its stimulus package out of its existing fiscal surplus. Additionally, despite the Chinese economy being only 2/3rds the size of the U.S. economy, the successful Chinese stimulus package was substantially larger than the U.S. stimulus package. Within 18 months of implementing its fiscal stimulus, China had restored employment to pre-collapse levels. Using the China package as a rough benchmark, the U.S. stimulus should have been $1.2 trillion instead of the $750 billion.

Given the disastrous aftermaths of both the Reagan and Bush experiments in supply-side tax cuts, it is now beyond argument that continuing large, unpaid-for tax cuts after the U.S. economy has recovered from recession – – as Bush did from 2003-2008 – – will result in either significant fiscal imbalances or inflation or both. The effects of the full-employment tax cuts in the Reagan and Bush years were disastrous. The Reagan tax cuts produced structural deficits of $250-$350 billion per year for 10 years and the buildup of $3 trillion in public sector debt. The Bush tax cuts produced even larger structural deficits and are responsible for adding $4 trillion to the national debt. Notably, this contribution to public sector debt is more than the cost of the bank bail-outs (“TARP”), and more than the cost of the federal stimulus that dealt with the 2008 financial crisis and the ensuing economic emergency. Indeed, 2/3 of the deficit and subsequent public sector debt are attributable to the Bush tax cuts (1/3) and to the unpaid-for wars in Afghanistan and Iraq (1/3), another example of gross economic mismanagement. By creating structural deficits of this magnitude and by depriving policy makers of a budget surplus to contain the financial crisis and reflate the economy after the economic downturn, the Bush tax cuts represent the greatest single instance of economic mismanagement in the history of the country.
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END OF PART ONE