The District of Plutocracy: Grand old Lie Part II

Last time I spoke about the election and the deficit lie. There is another lie that threads through our politics constantly. It’s the lie that says we all suffer the same burdens. It’s the lie that falsely unites us; make us all victims of “over reaching government.” It’s the taxes lie. Everyone knows taxes are bad. The only thing worse than taxes is death. To quote Marvin Gaye: “There are only three things for sure Taxes, Death and Trouble.” Yup there is no doubt about it taxes suck. The thing is taxes suck a lot more for you and me then they ever do for the rich and wealthy. Pop quiz what do Bill Gates, Warren Buffet, and Abigail Disney (the niece of Walt), all have in common? They all want to increase their tax burden. That’s right some of the richest people in the world actually want to pay more in taxes. Wait, what? That’s right Bill Gates campaigned on a measure to establish a high-earners income tax in his state, Abigail Disney penned a passionate plea to restore the estate tax, and time and time again Warren Buffet has spoken out against the injustices within our tax code.

Congress has come back and the debate over taxes is raging. The Democrats want to give a tax cut to everyone, and the Republicans want to give a special extra tax cut to the very rich. Most people don't know this mostly because the Democratic messaging machine is a dilapidated mess, but I digress. People also people don't really pay attention to how the tax code works. Our tax system is what is known as a progressive tax system. In a progressive tax system there are two things you need to know your tax bracket and your effective tax rate. These are often thought of interchangeable when nothing could be further from the truth. When you hear the rich have had tax brackets higher than 50% in the past this does not mean they were taxed at a rate of 50% of their income. Below in my crudely created chart is the 2010 US tax bracket system. On the left is the tax rate for a given portion of income while the right shows the limits of each bracket.

What the tax brackets indicate is the tax percentage you pay on the income falling within a given tax bracket. Let us say income 1 is the national average income $39,509 this puts them solidly in the 25% tax bracket, but when you add up the total taxes they pay their effective tax rate is barely above 15%. Similarly from simply math one would say that a person earning $85,000 dollars would have an effective tax rate of 20.6%, while someone earning $400,000 dollars would have an effective tax rate would be slightly below 29.5%. Except this is often not the case. Long term capital gains tax is set at 15%. If, as is often the case, a person earning $400,000 received half of their income in the form of a long term capital gains they would effectively reduce their effective tax rate to 20.3%. This is what warren Buffet means when he says because of the tax code his effective tax rate is lower than that of his own secretary. In other words, while the rich do pay a lot in taxes, proportionally they do not actually pay their fair share. Yet what allows this situation to continue is what truly creates the grand old lie. Somehow over the years business was able to convince people that pensions were bad for society, because they were bad for business. As a result we moved to a retirement system that consisted of 401ks and IRAs. What this has done is turn us all into “investors”. This allows people to rail against capital gains tax increases as a tax increase on middle class 401ks.

The thing is this all plays into the false meritocracy America perpetuates. I recently read an article in The Harvard Crimson by Dylan Mathews discussing reform of the Harvard admission process. Mathews points out that people who were accepted to Harvard, or another elite college, and decided not to attend perform just as well as those who did attend. The implication is that while elite schools have elite students, the schools themselves are not responsible for those students becoming elite. It’s not uncommon to hear Wall Street executives referred to as captains of industry. We are told they are indispensable an as a result they deserve the salaries and bonuses. We also hear that corporations need their tax breaks, tax shelters, and tax loop holes. We are told without these particular men, and these particular corporations, society would cease to progress. Without this particular tax structure these people and corporations would not have the motivation propel society forward. Buried in this notion is subtle divinity. It is an idea that these people are blessed in a somewhat royal sense. To paraphrase Fight Club:

These men and these corporations are not beautiful and unique snowflakes.  They are the same decaying organic matter as everyone else, and we are all part of the same compost pile.

I’m not saying the people and corporations can be replaced by any yokel or mom and pop store. They are very special people, but special is not the same as unique. If they are not motivated by 70% of $400,000 our country is literally teeming with people willing to leap into their vacated positions while they pout in the corner. In other words if Atlas did in fact shrug his brothers and sisters who never get any recognition would be willing and waiting to pick up where he left off.