Monday, November 27, 2006

Taxes and Ben Stein

Ben Stein’s latest tax the rich article in yesterday’s New York Times is so tragic because Ben is such a good guy, such a smart guy, that it pains me to say he has the story totally wrong.

Warren Buffett’s secretary may have a higher tax rate than Mr. Buffett himself, but that’s because Buffett made all his money from the 15 percent marginal tax rate on dividends and capital gains. Very few Americans live and work like this.

And anyway, jacking up taxes on capital investment is a completely dumb idea. What the American middle class needs is more investment to create new companies, new jobs and new technologies—all of which raise our standard of living.

Alan Reynolds, who has a new book out called “Income and Wealth,” reminds me of a key reason why the top 1 percent saw their income share double to 16 percent from 8 percent. (By the way, the top 1 percent’s tax share burden over the past 20 some odd years has gone from about 17 percent to 35 percent.) That is, that until recently, S-corps and LLC small businesses exploded to capture a personal tax rate that was lower than the corporate rate.

S-corp type income was only 7.8 percent in 1982, but was up to 28.4 percent in 2004, according to IRS reports. So it’s just a tax shift, that’s all it really is—a tax shift that is mistaken for outsized income gains.

What’s more, transfer payments like the earned income tax credit, FSA and other welfare payments, as well as social security income, are not counted as low income resources.

Additionally, at lower income tax rates over the past twenty some odd years, there’s been a lot less income tax evasion and a lot more income declaration—all of which shows how sensitive folks are to lower marginal tax rates.

Ben Stein says we can’t cut spending. But in fact, as a share of GDP, Ronald Reagan cut spending from about 23 percent down to 20 percent; Clinton and the Gingrich Congress lowered spending to 18 percent.

Only recently, under the Bush Republicans, has spending jumped back to slightly over 20 percent. So it can be done. This is why I recommend a spending cap-spending limitation approach for Republicans. (And by the way, while many believe that CEO pay is just a continuous vertical line upward, the reality is CEO pay actually fell three straight years in the early 2000s.)

In the end, class warfare and higher tax rates will make the U.S. more like France. I don’t want to be like France. Neither does Ben Stein—if he would think things through.