A Bad Joke in Search of a Punch Line
This post was prompted by an anecdote concerning a meeting top Trump economic adviser Gary Cohn had with a number of high-flying corporate executives. He asked for a show of hands of those who would use benefits from the corporate tax cut to reinvest in their business, or some other business, in the U.S. A few hands went up. Most did not. The administration’s heavy hitter asked (I believe these were his literal words), “Why aren’t there more hands up?”
The answer from execs who failed to raise their hands was, they already had plenty of money, there just weren’t many opportunities to invest in. And that’s because . . . (is this the punch line?) consumers weren’t spending!
Oops! Went a tiny voice in Gary Cohn’s shrinking brain.
Of course, what holds for corporations also goes for rich individuals who can only spend so much money until they are sated. After a certain threshold, they buy things not for use, but for bragging rights. Not avarice, but ego ego ego. My yacht is bigger than your yacht, and everyone knows that Size Matters.
I first heard this anecdote on NPR but unfortunately cannot find the segment where their sharp correspondent identified it (sheesh! – forgot her name too—sorry, sharp reporter!).
Therefore I went to a piece in the Chicago Tribune on this very topic, and other termite-ridden elements of the proposed Republican tax structure:
CEO’s pragmatic about corporate tax cuts
Column on why the administration tax plan is “every bad tax idea, in one place:” Michael Hitzik on badly flawed tax plan
Uh . . . this is the bad joke waiting to be told about the Republican tax plans, and I first heard it on NPR, then read the longer Chicago Tribune piece. .
Now, the reasons for consumers not spending at a rate that excites corporate executives are manifold. Speaking as a non-economist, I mention some possibilities here, all of which pertain to the middle class that does most of the spending:
(1) They are worried about another bad recession on the way;
(2) They are worried that the insane American health care system will force them to use what money they have to go to a country with some version of a One-Payer system in order to get treated without selling their children.
(3) They are looking around at all their Stuff and wondering, “Do I really need more of this?”
(4) They don’t have spending money because their incomes are too low;
(5) They are paying a disproportionate share of taxes.
In the context of the Bad Joke, I am of course speaking of Reason Number Five.
Mitt Romney will tell you that Reason Number Five doesn’t apply because half of Americans don’t pay federal income taxes at all, and that the rich, small in numbers, pay more than a third of all income taxes. And he’s right, according to the New York Post: New York Post on income taxes
So what gives? Are the masses feeding off of the rich at the public trough?
Hidden Pieces of the Tax and Wealth Puzzle: Taxes
[Two notes here at the outset: (1) In the following, I have oversimplified by looking at basic rates without regard to special tax deductibles—which the rich happen to enjoy in greater measure; (2) these are not really “hidden pieces” as my headline implies, but they are pieces that most people don’t think about when they speak of taxes as mere percentages. Bernie Sanders draws attention to them, but speaks with such bombast that eventually people in the political center—the voters who really make the difference—just tune him out. Style getting in the way of substance.]
First off: Talking about percentages, in the way the NY Post does, obfuscates two issues more relevant to tax policy: absolute net take-home, and wealth. I discuss taxes in this post, and wealth in a sequel.
Here’s the New York Post: More than 31% of all federal individual income tax is paid by those who bring in more than $1 million a year, who have a net effective tax rate of 25.3%, the highest of any group. Another 14% of income tax is paid by those who make between $500,000 and $1 million, who have a 20% tax rate, the second highest.
Oh, those put-upon rich people, paying all of 31% of their income to the feds, while the rest of us pay less than 20%, more like 8-10% when you get down to the lower middle classes. Are the rich getting a raw deal?
Let’s do, as Bill Clinton famously proposed at the 2012 Democratic Presidential Convention, some “arithmetic.” (I know you see where this is going, but let’s put up the numbers anyway, just for fun.) If we look at absolute numbers, the person pulling down $1,000,000 a year has to pay $310,,000 in federal income taxes. So that leaves them a paltry $690,000, minus state and local taxes and property taxes that might even pare the original million dollars down to half a million dollars. The unhappy high-rate taxpayer thinks, is it worth even going to work for the so-called “riches?”
Contrast a middle income worker who grosses $70,000 and pays an effective net tax rate of 14%. Federal income taxes in absolute numbers come to $9,800, and the difference is: $60,200 net. Subtract state and local taxes, to include property tax for homeowners, and we’re left with something like $55,000 net for our middle income worke. This is roughly one-tenth what our hypothetical millionaire nets.
Approximate middle class income tax burden per USA Today
But wait! We’ve left out the payroll tax! The $70,000 income person pays 6.2% (if working for someone else; if self-employed, double that), chomping a $4,340 annual bite out of the gross, and that gets us down to about $50,000 real net take-home.
So how about our rich person, what does their payroll tax come to? $7,886! Yes, their gross is fourteen times that of the middle-income person, but their payroll tax is less than twice what the middle-income person pays.
That’s because of another millionaire-friendly wrinkle in the tax code: income subject to payroll tax is capped at $127,200. (This cap is one of the main reasons that Social Security, if things don’t change, is headed for the cellar in 15-20 years . . . and it’s something I believe the Democratic Party should be hammering on loudly, but I still don’t hear much hammering—another consequence of media focusing on short-term outrages rather than long term disasters-in-the-making). In any case, our tax-embattled rich person is down another eight thousand, and his/her net may have fallen a bit below half a million. Sad.
So, in absolute numbers, even the person grossing a million bucks who fails to have the tax dodges most rich people find, still ends up with about ten times the net the middle-class wage earner gets. It really doesn’t sound like so much of a raw deal for the rich—does it?
In the days of an economy tilted toward trickle-down tax policy (soon to get even tricklier if the Republicans have their way), we seldom hear word of it, but back in the 1950s—the halcyon days of the American labor movement—the net effective tax rate for upper incomes was about 42% (btw, claims that it hit 90% are misleading; the 90% was the marginal rate at some level I’m unsure about, but the average net effective rate on all income for the rich was about 42%. Still a whopping one-third higher than what the rich are paying now). That was a time some of us remember when much of the middle class—at least the white middle class—got to feeling pretty comfortable, while at the same time working hard because they believed that overall the system was economically fair.
Then came Reagan and the Republicans’ Holy Tax Grail of Trickle-Down Economics, followed up by more of the same under George W. Bush, and we are now seeing the long-term consequences.