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The most polarizing economic debate right now is what to do with the Bush tax cuts at year's end.
If Congress doesn't act, all the lower rates will expire, raising taxes across nearly every income group. Despite still blaming Bush for our economic woes, the President now sees it prudent to embrace the Bush tax cuts for everyone but upper-income Americans.
Those supporting the tax hike generally use a few primary verbal barbs to promote it:
First, any single filer or any family over that $200,000/$250,000 per year mark is rich enough to afford paying more.
Second, we need to raise taxes to show the world we are serious about cutting deficits.
That second point has already been thoroughly and easily debunked. Even a 100% tax hike on the richest 2% of the population will make nary a dent in the federal deficit that ballooned under the spending of the last two years.
Let's focus on the first point; the rich should pay because they can afford it.
In Sunday's New York Times, economist and Cornell professor Robert Frank argues that a tax hike on the wealthy won't hurt the economy. He states that those in the upper income tax bracket tend to save more of their income rather than spend it, and thus having Uncle Sam dip into their pockets a little more won't further wound an already damaged economy. Frank highlights that those who are left with more money above their monthly expenses tend to save a greater percentage of their income than those with less. Not exactly a shocking revelation given that the more money one has after expenses also leaves one with more to save.
But while correct with his savings stats, Frank also argues that the tax cuts on the rich should expire because this profilgate group tends to leave "substantial bequeaths" when they die rather than consuming the money in their lifetimes.
Substantial bequeaths? Frank is either confused about who is actually in this group of 'the wealthy' or simply choosing to ignore it. He also may be doing what others who support this tax hike enjoy doing: lumping the +$250,000 per year income crowd into one big, happy group of people burning $20 bills to light their cigars.
Frank and others should dig a little deeper into the IRS data on this "fortunate few," as Tim Geithner recently called the highest income earners.
IRS data show roughly 142 million tax returns filed in 2008 (note: I cannot link to the spreadsheet itself, click on the "all returns 2008" link to access the data). Of those returns, about 4.3 million showed income of more than $200,000 per year, the cut-off for single filers under the planned tax hike. But note that of those 4.3 million returns, 3.4 million report income between $200,000 and $500,000. Put another way, 80% of those considered rich under the Obama tax plan are in the lowest tier of those considered wealthy. This group is also being lumped into the same group as billionaires such as Warren Buffett and Bill Gates. While anyone in this income group is hardly suffering financially, consider that number #399 on the Forbes 400 list is estimated to be worth 1,900 times more than a family making $500,000 per year. The guy making $500,000 makes only 10 times more than the fellow making $50,000 per year. In other words, there is a big difference between most working rich and the uber wealthy.
Keep in mind what the President wants to do is lift income taxes, money made from actually working. Most of the super rich (multi-millionaires and billionaires) tend to pay themselves in capital gains or from low-or-no tax disbursements from fixed income investments such as municipal bond payments. Ever wonder why so many CEOs or those in the "lucky sperm club" (grandpa sold a company, etc) pay themselves a salary of $1 per year? I'm guessing its not because they are particularly altruistic, but rather to avoid the higher income tax rates and instead go for the much lower capital gains rate. In other words, they are acting rationally.
So what about the non-Bill Gates of the world who get hit with higher income taxes. Will it materially impact them or the economy?
Consider the scenario of a married doctor making $500,000 per year. If taxes on all income over $250,000 per year jump by 4.6%, the doctor and his family will pay $11,600 more per year to the IRS, or about $1,000 more per month. If the $250,000 to $373,000 bracket that is currently taxed at 33% goes to 36% and anything above the $373,000 mark goes from 35% to 39.6%, his family will give a slightly less $9,500 per year to the IRS, or about $800 per month. Of course, if the doctor lives in California, New York, New Jersey or any of the other states that has increased state income taxes, he can add a few hundred more per month going to the state.
Can he afford it? Probably.
But remember income can really only go to one of four places: taxes, savings, spending or charity. When one goes up, another must come down. So if Professor Frank is right, and the rich love to save, the doctor will not reduce his savings in the face of these higher taxes. He won't cut back on retirement saving. He won't cut back on paying into his kids college fund. He will simply reduce his monthly spending or charitable donations by the added amount the government is taking.
This doctor, while certainly not struggling, is very different from the few billionaires of the world who don't have to think about their spending. He works for a living and probably lives close to what his means allow him. He doesn't have millions left over after his already high tax burden. So even though he can likely afford the added hit of $1,000 per month, ask his local restaurants, stores, car dealers and charities how they'll feel about his reduced spending. Now multiply that by 3.4 million tax filers just like him.
If the Bush tax cuts are allowed to expire, Uncle Sam will get more money but he is likely to be the only one who does. Higher taxes will be needed on everyone, not just the rich, at some point in the near future to pay for the record spending by Washington, but with an economic recovery as fragile as this one now is not the time.
Brian Sullivan joined FOX Business Network (FBN) in April 2008 as an anchor. He co-anchors the 10am-12pm ET hours of the FOX Business block. Prior to joining FBN, Sullivan served as an anchor for Bloomberg Television where he hosted the programs Morning Call and In Focus.
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