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Why Americans should be furious about Obama, the deficit & income taxes

Tax time is here and with it a sense of awe: While the bank accounts of American families are being depleted, paying taxes is less and less a burden for the richest among us.

Income taxes come largely from you and me. They especially come from you and me if we are not among the top wage earners. A look at the chart from the Congressional Budget Office plainly shows that income taxes and Social Security taxes provide the bulk of federal tax revenues.

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The reality is that the conversation in Washington largely concerns a reduction of spending, getting rid of such things as healthcare for children and winter heat for the poor. Virtually no attention is given to the obvious need to raise taxes, especially among those who benefit most from our government. Sadly, for his part, President Obama has largely failed to use the power of his office to enlighten the public, to explain that insufficient tax revenues are at the center of our financial meltdown.

“There’s class warfare, all right,” Warren Buffett told the New York Times, “but it’s my class, the rich class, that’s making war, and we’re winning.”

Buffett, like Bill Gates and JP Morgan Chase CEO James Dimon, favors higher taxes for the rich.

Why would the enlightened rich favor higher taxes? One reason is that higher taxes are cheaper than social anarchy. A second reason is that this country was founded on shared sacrifice rather than bottomless greed. As the Founders wrote in the Declaration of Independence, “we mutually pledge to each other our Lives, our Fortunes and our sacred Honor.”

The Upper Crust

To understand how the tax burden has shifted it’s useful to look at the figures from the world’s best accounting organization, the IRS. The IRS tells us that the 400 highest taxpayers recorded the following results.

In 1992 the fabulous 400 taxpayers earned 0.52 percent of all taxable income. By 2000 their percentage had risen to 1.09 percent. That’s more than double in eight years.

But that’s nothing.

The top 400 taxpayers earned 36 percent of all capital gains in 1992 — and almost 72 percent in 2000. In cash terms, net capital gains rose from $6.2 billion in 1992 to $37.9 billion in 2000 — a six-fold increase. That’s an average of $97,450,000 per household.

Capital gains, of course, are not taxable for purposes of Social Security or Medicare. The current maximum tax rate on capital gains is just 15 percent.

Under the just-announced “deficit reduction” program proposed by Rep. Paul Ryan (R-WI), the rich would win again. The top income tax rate would be reduced from 35 percent to 25 percent and government revenues would decline by $4.2 trillion during the next decade. Meanwhile, programs to help the poor and middle class would be reduced, cut and gutted; there were would fewer dollars to fix our roads, bridges and dams; America’s leadership position in science, medicine, education, telecommunications and computing would inevitably decline — and with that decline we would become a poorer country, a place of less opportunity and a nation with fewer opportunities to own homes and businesses.

The Bush Tax Cuts

The George W. Bush Administration, supported by a Republican Senate and a Republican House, passed the Economic Growth and Tax Relief Reconciliation Act of 2001 and the Jobs and Growth Tax Relief Reconciliation Act of 2003. Set to expire in 2010 these tax reductions for the rich were continued at a time when there was a Democratic President, a Democratic Senate and a Democratic House. A golden opportunity to bring some semblance of fairness to the tax system was lost.

How much do they cost? The Bush tax cuts represent two costs.

First, they contributed enormously to the $4.35 trillion in new deficit rung up under the Bush Administration. The accuracy of this figure is unclear given that the Iraq and Afghanistan wars were largely funded with continuing resolutions and not included in the deficit totals.

Second, if left untouched the Bush tax cuts will add another $678 billion to the deficit in the coming decade.


The Fake Argument

There is much debate now regarding where we should return to the pre-Bush maximum tax rate for individuals of 39.6 percent or stick with today’s top rate, 35 percent. In fact, the real argument should be different — should we go back to the tax rates in place since the end of World War !!, tax rates which produced a national road system, a space program, exceptional schools, medical research, secure borders, and on and on.

Top marginal tax rates for past years include 92 percent (Roosevelt, 1944), 90 percent (Eisenhower, 1952), 75 percent (Kennedy, 1960), 70 percent (Johnson, 1966), 50 percent (Reagan, 1983), 31 percent (Bush, 1991), 39.6 (Clinton, 1997), 35 percent (Bush, 2007) and 35 percent (Obama, 2011) .

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The real debate is very simple: Will we raise taxes to cover the costs of running a modern government or will we not?

A percentage of the population believes, in fact, that tax levels should be lowered as a way to limit the size and scale of government (except for agricultural subsidies) and to reduce federal regulation (except for gay marriage and abortion). Also, many want to get rid of regulations which might curtail excesses on Wall Street because, after all, big banks and brokerages had nothing to do with our national financial mess. These folks also think it’s perfectly fine for the government to loan money to banks at near zero percent, money which can be re-loaned in the form of credit card debt — often at 29.9 percent.

Of course, the major point is this: There would be NO budget deficit and no need to reduce federal programs if everyone simply paid their fair share of taxes — you know, as if they benefited from the safety and security of American citizenship and enjoyed our vast markets.

There would be NO budget deficit and no need to reduce federal programs if everyone simply paid their fair share of taxes — you know, as if they benefited from the safety and security of American citizenship and enjoyed our vast markets.

What About Jobs?

The argument is made that taxes for the rich and for companies should be reduced so that capital can be amassed and used for the creation of new businesses and thus new jobs. The obvious flaw in this view is reality: We have provided massive tax breaks to the rich and to corporations and the result is that unemployment remains high, benefits are declining, real household income has declined and companies are moving — or are threatening to move — overseas.

As George Buckley, the Chairman, President and CEO of 3M, told the Financial Times, “there is a sense among companies that this is a difficult place to do business. It is about regulation, taxation, seemingly anti-business policies in Washington, attitudes towards science.”

Buckley explained that “politicians forget that business has choice. We’re not indentured servants and we will do business where it’s good and friendly. If it’s hostile, incrementally, things will slip away. We’ve got a real choice between manufacturing in Canada and Mexico — which tend to be pro-business — or America.” (See: 3M chief warns Obama over business regulation, February 27, 2011)

3M, of course, had huge profits in 2010 ($4,085,000,000), 2009 ($3,193,000,000) and 2008 ($3,460,000,000).

Corporations

GE, says the New York Times, “reported worldwide profits of $14.2 billion, and said $5.1 billion of the total came from its operations in the United States. Its American tax bill? None. In fact, G.E. claimed a tax benefit of $3.2 billion.”

Nope, no federal income taxes there to help reduce the deficit.

There’s now a great debate regarding the highest income tax rate for corporations. In fact, it’s a ridiculous discussion, a distraction from the real issue. It doesn’t matter where we set the maximum tax rate, what matters is the effective tax rate, the percentage of profits actually paid.

The Government Accounting Office says about 70 percent of all corporations active in the United States pay no income taxes.

According to Sen. Bernie Sanders (I-Vt.), some of the best-known tax avoiders include:

  1. Exxon Mobil made $19 billion in profits in 2009.  Exxon not only paid no federal income taxes, it actually received a $156 million rebate from the IRS, according to its SEC filings.  (Source: Exxon Mobil’s 2009 shareholder report filed with the SEC here.)
  2. Bank of America received a $1.9 billion tax refund from the IRS last year, although it made $4.4 billion in profits and received a bailout from the Federal Reserve and the Treasury Department of nearly $1 trillion. (Source: Forbes.com here, ProPublica here and Treasury here.)
  3. Over the past five years, while General Electric made $26 billion in profits in the United States, it received a $4.1
  4. billion refund from the IRS. (Source: Citizens for Tax Justice here and The New York Times here.  Note: despite rumors to the contrary, the Times has stood by its story.)
  5. Chevron received a $19 million refund from the IRS last year after it made $10 billion in profits in 2009.  (Source: See 2009 Chevron annual report here.  Note 15 on page FS-46 of this report shows a U.S. federal income tax liability of $128 million, but that it was able to defer $147 million for a U.S. federal income tax liability of $-19 million)
  6. Boeing, which received a $30 billion contract from the Pentagon to build 179 airborne tankers, got a $124 million refund from the IRS last year. .  (Source: Paul Buchheit, professor, DePaul University, here and Citizens for Tax Justice here.)
  7. Valero Energy, the 25th largest company in America with $68 billion in sales last year received a $157 million tax refund check from the IRS and, over the past three years, it received a $134 million tax break from the oil and gas manufacturing tax deduction. (Source: the company’s 2009 annual report, pg. 112, here.)
  8. Goldman Sachs in 2008 only paid 1.1 percent of its income in taxes even though it earned a profit of $2.3 billion and received an almost $800 billion from the Federal Reserve and U.S. Treasury Department.  (Source: Bloomberg News here, ProPublica here, Treasury Department here.)
  9. Citigroup last year made more than $4 billion in profits but paid no federal income taxes. It received a $2.5 trillion bailout from the Federal Reserve and U.S. Treasury. (Source: Paul Buchheit, professor, DePaul University, here, ProPublica here, Treasury Department here.)
  10. ConocoPhillips, the fifth largest oil company in the United States, made $16 billion in profits from 2006 through 2009, but received $451 million in tax breaks through the oil and gas manufacturing deduction.  (Sources: Profits can be found here.  The deduction can be found on the company’s 2010 SEC 10-K report to shareholders on 2009 finances, pg. 127, here)
  11. Over the past five years, Carnival Cruise Lines made more than $11 billion in profits, but its federal income tax rate during those years was just 1.1 percent.  (Source: The New York Times here)

In the end the cries against government are highly selective. People are against government deficits — but they love Medicare. Many want to limit federal programs — except when there’s a road to build in their town. What people really want are lower taxes for themselves and fewer benefits for others, an arrangement which cannot possibly work.

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2 Comments on "Why Americans should be furious about Obama, the deficit & income taxes"

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  1. Peter G. Miller says:

    Bob —

    Published tax “rates” are a distraction. The real issue is the effective tax rate.

    The reason companies move work overseas is so they can hire cheaper workers and then repatriate the profits at little or no cost. See:

    http://www.ourbroker.com/news/how-jobs-at-75-cents-an-hour-are-killing-us-real-estate-062911/#axzz1SjHWmxDk

    Big US corporations reduced 2.9 million jobs inside the US between 1999 and 2009

    They then created 2.4 million jobs overseas during the same period. See:

    http://online.wsj.com/article/SB10001424052748704821704576270783611823972.html

    These companies, of course, are willing to repatriate overseas profits if we will just lower the tax rate from 35 percent to 5 percent. See:

    http://www.accountingtoday.com/news/Corporate-Repatriation-Tax-Holiday-Mirage-58998-1.html

    I notice you have nothing to say about the $4.35 trillion in new deficit rung up by Bush the younger nor do you mention that Reagan raised taxes 11 times and increased the deficit 18 times.

    The current tax rates for the rich were introduced by the younger Bush a decade ago with the argument that they would create jobs for Americans. It’s a failed policy.

  2. Bob says:

    Gee, I don’t know where to start. Some corporations pay no taxes – but that’s because the US corporate tax rate is nearly the highest in the world so they’ve moved their earnings overseas. Tax rates were higher under JFK, but he actually lowered them to stimulate economic growth (and it worked spectalurly well, just like under Reagan and Bush).

    The fact is, Government never spends money as well or as efficiently as corporations or individuals. If you believe otherwise, go visit your local DMV, watch a state road crew at work and check out some c-span video of our congress.

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