Let’s explore the misconceptions and realities about who pays taxes.
Republicans love to paint the rich as the minority-victims who pay most of the taxes in this country. Mitt Romney’s recent video gaffe is a perfect example of this view. They will say things like, “86% of all income taxes are paid by the top 25% of income earners” (source). Or in the case of Romney, he claims that 47% of the country does not pay taxes and mooches off the system; these people are therefore entitled and will not take responsibility for their lives. These claims are wildly inaccurate. Their point is to paint the rich as victims and force more of the tax burden on the poor and middle class. They have despised our progressive tax system for decades, favoring a flat tax that would dramatically harm the poor and middle-class to the benefit of the wealthy (go learn about “regressive taxes“).
The Center on Budget and Policy Priorities provides some important insights on this topic.
“The notion that ‘half of Americans don’t pay taxes’ not only overstates the share of households that do not pay federal income taxes in a typical year. It also ignores the other taxes people pay, including federal payroll taxes and state and local taxes. Policymakers, pundits, and others sometimes overlook this point.” Source: bit.ly/iWtaO0
“The reality is that the income tax is one of a number of types of taxes that individuals pay, both over the course of their lifetimes and in a given year, and it makes little sense to treat it as though it were the only tax that matters. Some 82 percent of working households pay more in payroll taxes than in federal income taxes. In fact, low- and moderate-income people pay a much larger share of their incomes in federal payroll taxes than high-income people do: taxpayers in the bottom 20 percent of the income scale paid an average of 8.8 percent of their incomes in payroll taxes in 2007, compared to 1.6 percent of income for those in the top 1 percent of the income distribution.“ Source: bit.ly/iWtaO0
“The liberal Citizens for Tax Justice says the highest overall tax rate (this includes federal, state, and local taxes) is 32.2 percent. The top 1 percent pay even less—30.9 percent. They include employer-paid FICA taxes as income, which seems wrong to me. But the conservative Tax Foundation reports that the top 0.1 percent pay an effective federal tax rate of 21.5 percent. The last total tax rate I see from them is 2004, when it reported that the top quintile of earners paid an average total tax rate of 34.5 percent. They don’t break out the top 1 percent, but their rate would actually be lower than that of the top 20 percent as a whole.” (Source)
There are two fundamental Republican articles of faith with regard to the economy. First, “tax cuts increase tax revenue.” Second, “tax cuts create jobs.” We have already debunked the first of these ideas (see: Do Tax Cuts Increase Revenue?), so let’s look at this second Republican belief.
There is really one fact that significantly challenges this faith-based belief: Profits are at record highs, and the level and lengths of unemployment it at a high. The idea that tax cuts create jobs is based on the idea that letting people keep more of their money will lead them to growth their businesses by hiring more people, and thus decrease unemployment. If profits are up and unemployment is down, this logic does not work.
When politicians talk about tax cuts, they are typically referring to personal income taxes. If I am a highly compensated executive, and I get a tax cut, that means I take home more money. What will I do with this extra money? Will I go out an hire someone? Probably not. Why? Because companies hire people, individuals don’t hire people with their net salary.
“But,” I can hear my Republican friends say, “if that highly-compensated executive decides to invest that extra income in a business, this will create jobs.” Again, probably not. If I own a business, my primary concern is not to create jobs, it is to maximize profits. If there is extra money, and I don’t absolutely have to hire more people to grow the business, I am not going to hire. I am going to pay myself and my shareholders first. And because taxes are paid on profits, not revenue, I am actually inclined to keep my costs (labor) down so I can maximize profit.
There is a reason that the rich don’t suffer in a recession; that middle-class wages have been stagnant for 30 year; that the majority of the nation’s wealth is in the hand of the top 1%. Conservative tax policy has dominated for 30 years. And in this Great Recession, with profits way up, there is not need to hire more people. And in this context, with a skyrocketing national debt, with millions out of work, the Republicans can still talk endlessly of how tax cuts are the answer to creating jobs. No. Tax cuts are the answer to enriching the already-wealthy.
A Forbes blogger asks the question, “do tax cuts create ‘real’ jobs?” The answer in this pro-business publication is rather surprising: “Do tax cuts create jobs? No, just deficits.” This article goes on to say,
U.S. public companies pay well-below the official 35% tax rate while 13.5 million American workers search unsuccessfully for jobs And start ups tell me that tax cuts don’t affect whether they’ll create new jobs. In short, the tax cut rhetoric, while effective politics, is lousy economics.
George H. W. Bush wisely pointed out in his 1980 debate with Ronald Reagan that expecting to balance the budget with tax cuts and defense spending increases was “voodoo economics.” But along with Reagan’s ascendancy came the rise of huge budget deficits — that Bush wisely helped end when he agreed to raise taxes in 1990.
Despite $858 billion in December 2010 tax cuts, companies still complain that they pay too much in tax. General Electric (GE) has become famous for paying no taxes on its $5.1 billion in 2010 U.S. profits while keeping a big staff of lawyers on hand to make sure it pays as few of them as possible. Meanwhile, the New York Times reports that GE is not alone and that the prevailing estimate for the actual U.S. corporate tax rate is 25% — costing the U.S. about $100 billion in lost revenue.
And companies are achieving that record profitability by squeezing workers. After all, 2010 productivity rose 3.9% while unit labor costs fell 1.5%. To get more work out of the same number of workers while paying them less, it helps to have 13.5 million people out of work and the easy ability to hire part-time labor and outsource to countries that pay much lower wages.
So tax cuts have not spurred big companies to create jobs. But what about start ups? Based on my October 2010 interviews with 17 start up CEOs, my conclusion is that not a single one of them would create a job based on tax cuts. All of them told me that their decision to create a new job would be based on whether the long-term cost of that new job would be offset by higher revenues and profits.
If Washington was serious about creating new jobs, it would make companies pay the 35% rate — yielding $600 billion in tax revenue on their 2010 profits. That and the peace dividend that should flow in the wake of Bin Laden’s execution, would go a long way towards balancing the budget and creating a climate that would spur a boost in capital flows to new ventures.
As always, Rachel Maddow brings up some excellent issues on this topic:
Another astute blogger pointed out:
“Rush Limbaugh famously said, “Ive never been employed by a poor person” which is true, if irrelevant
. I’ve never been employed by a rich person myself… I’ve been employed by a lot of companies though. An increase in taxation on millionaires would mean nothing, let me repeat, NOTHING in the way of jobs.
Corporations employ large numbers of people, not individual billionaires. If a billionaire got a tax break, he wouldn’t immediately invest it into his company for the purpose of hiring new employees. There is a salient difference between taxing an individual CEO’s paycheck, and taxing the corporation itself.
Rather he would most likely save it (along with his other excess funds); which again does NOTHING to stimulate the economy or jobs. A Poor person with excess funds, on the other hand, would be prepared to spend it, which WOULD stimulate the economy.
If you really wanted a fairer system, I’d eliminate the tax on the first 20k of EVERYONE’s income. Then leave all the loopholes and tax cuts that the rich enjoy in the dust, and raise taxes on everyone making over 250k a year. If everyone is sacrificing, those poised to benefit societal rewards should pay most of the costs.” (source)
Republicans say they know how to create jobs but they never produce the results. Take Mitt Romney. According to the Huffington Post: “[A]s Massachusetts governor from January 2003 to January 2007, Romney presided over one of the puniest rates of employment growth among the 50 U.S. states, at a time the nation’s economy was booming.” (Huffington Post, 5/31/11). According to MarketWatch:
While he was Governor, “according to the U.S. Labor Department,the state ranked 47th in the entire country in jobs growth. Fourth from last. The only ones that did worse? Ohio, Michigan and Louisiana. In other words, two rustbelt states and another that lost its biggest city to a hurricane. The Massachusetts jobs growth over that period, a pitiful 0.9%, badly lagged other high-skill, high-wage, knowledge economy states like New York (2.7%), California (4.7%) and North Carolina (7.6%). The national average: More than 5% (MarketWatch, 2/23/11).
FactCheck.org noted, “By the end of his four years in office, Massachusetts had squeezed out a net gain in payroll jobs of just 1 percent, compared with job growth of 5.3 percent for the nation as a whole.”
If you look at how Romney made his millions, you get a sense for how important jobs really are to his class. In 2007, the Los Angeles Timesreported:
From 1984 until 1999, Romney led Bain Capital, a Boston-based private equity group that earned jaw-dropping profits through leveraged buyouts, debt hedge funds, offshore tax havens and other financial strategies. In some cases, Romney’s team closed U.S. factories, causing hundreds of layoffs, or pocketed huge fees shortly before companies collapsed.
To says that tax cuts do not necessarily create jobs does not mean that all tax cuts/breaks are without value. There are certainly ways to offer tax breaks as incentives to businesses to invest in areas that stimulate the economy. But these incentives should be offered to businesses to encourage investment, not gifted to individuals who already make great money.
In conclusion, Republicans hold fast to their two faith-based economic axioms: (1) tax cuts generate more revenue; (2) tax cuts create job. Both of these idea are false. But it is worth exploring why Republicans push these ideas so forcefully. Why is it so important to Republicans to make sure the rich continue to have low taxes, even at the expense of many social programs that they happily cut? What is it in the system that allows they to get away with this? Why do the American people tolerate this? We’ll have to tackle these questions in another post. But I think we already know the answer: Follow the money.
On Sunday Treasury Secretary Tim Geithner made the case for letting Bush-era tax cuts for the wealthiest Americans expire later this year. He dismissed concerns that the move could push a teetering economy back into recession and argued that it would demonstrate America’s commitment to addressing its trillion-dollar budget deficit.
Republicans have countered with predictable fearmongering. In a USA Today op-ed, on July 22, Utah Republican Senator Orrin Hatch, wrote that letting the tax cuts expire could potentially “trigger another recession, the last thing out-of-work Americans need…Dr. Christina Romer, chair of the president’s Council of Economic Advisers, found…that there’s ‘a powerful negative effect of tax increases on investment.’ Her analysis showed that $1 in tax cuts results in a $3 increase in GDP, demonstrating why lower taxes are key to investment and an economic recovery.” (OK, Sentator Hatch, then you should be thrilled that Obama gave tax cuts to 95% of Americans…where’s your op-ed about that?)
So we have Treasury Secretary Geithner saying raising taxes back to Clinton-era level is a good thing, but the senior member of the Senate Finance Committee (Hatch) saying it will be devastating to the economy. This illustrates the fundamental differences between Republicans and Democrats is their view of taxes. Democrats believe in progressive taxation–that is, taxing the rich at a higher percentage because a flat tax would take a larger percentage of income from those with lower income; and the past 30 years tells us that it is the Democrats who are the fiscal conservatives when it comes to managing the deficit. On the other side of the aisle, Republicans believe that reducing taxes for high-income earners is better for the economy because it will “trickle down” to the lower income workers in the form of jobs; and they believe that lowering taxes for the rich increases government tax revenues. Repeat: Republicans believe that taking less money from the rich will give the government more money. Yes, they believe this like an article of faith. And they repeat it ad nauseum.
President George W. Bush: “You cut taxes, and the tax revenues increase” (2006)
Vice President Dick Cheney: Keeping taxes low, “does produce more revenue for the Federal Government.” (2007)
Senator John McCain: ”Tax cuts … as we all know, increase revenues.” (2007)
Rudy Giuliani: “I know that reducing taxes produces more revenues.” (2007)
Rep. Lynn Westmoreland, Georgia-R: “This Congress must recognize that tax cuts spur economic growth.” (2005)
Carly Fiorina, U.S. Senate Candidate: Let me propose something that may seem crazy to you. You don’t need to pay for tax cuts. They pay for themselves. (2010)
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