Taxing The Rich-- For Real

Earlier this morning we saw far right zealot Brent Bozell asking why shouldn't Obama demand $1.6 trillion in tax hikes on wealthy Americans. "The Republican Party has now surrendered its principles," he insists, "and is in full retreat, the Democrats taste blood, and they're going for it all. I would too." Astute progressives are wondering the same thing-- more or less. Chris Weigant, over at HuffPo, is wondering why we don't get serious about making the richest Americans pay their fair share of taxes. Is everything really on the table? Well, sure-- for working families... their very existence is being bargained away. But the rich? Even Obama always emphasizes "just a little bit more." And he means it-- just a very little bit more.

Weigant points out what we can all see, that "the 'tax the rich' policies so far being discussed (at least the ones that leak out to the public) are laughably timid and tame, when you really examine the big picture. So far, what is making Republicans howl is President Obama's plan to end the Bush tax cuts on the top two marginal income tax rates, which would raise them from 33 percent to 36 percent, and from 35 to 39.6 percent. Seen one way, that's impressive, since tax rates haven't gone up in such a fashion since President Clinton's first year in office. But seen another, it's not all that radical at all." And, if Congress does nothing at all, these temporary rates disappear anyway.

Consider the fact that nothing Obama is doing is going to "fix" the problem of Warren Buffett paying a lower tax rate than his secretary-- a problem Obama has repeatedly said he'd like to tackle. On "entitlements reform," only a few lonely voices crying in the wilderness are suggesting ending the most regressive federal tax around, by scrapping the cap on income for Social Security payroll taxes. Also seemingly forgotten in this debate is the proposal for a "millionaires' tax" or a "transactions tax." The real measure of whether Democrats and Republicans are both selling smoke and mirrors is whether they permanently fix the Alternative Minimum Tax-- again, a subject which has barely been mentioned.

If we're really going to get serious about taxing the rich, why not... well... tax the rich? Chances for changing the tax code for upper-income folks don't come around all that often (it's been 20 years since the last one, remember), so why not push not only for higher rates, but to fix some of the most glaring ways our tax code favors those with monstrous incomes. Let's take a look at a few of these ideas, one by one.

Scrap the Cap

This one is pathetically easy to understand, and pathetically easy to fix. Many Americans aren't even aware of how the lower 90 percent of paycheck-earning Americans pay higher taxes than the upper ranks.

Social Security taxes are supposed to be a "flat tax"-- everyone pays the same rate. It's so simple that Social Security taxes ("FICA," on your paystub) don't even appear on a normal person's income tax form. It's a straight 6.2 percent of your income that gets taken out, every single paycheck. Except for the wealthiest, of course-- they pay less.

Because only (currently) the first $110,100 you make in income is taxed. Every dollar you earn up to this limit is taxed at a flat 6.2 percent rate. Every dollar you make over this limit is taxed at a zero percent rate. Meaning most Americans don't make it over the cap, and thus pay a full 6.2 percent on their entire income.

...At $5 million a year in income, the tax falls to one-tenth of 1 percent. A firefighter pays 6.2 percent, but if you clear $5 million you pay 0.1 percent. At $75 million a year in income, the figure falls below one one-hundredth of 1 percent-- only 0.009 percent.

Want to "save" Social Security? Scrap the cap. Make everyone pay the same flat percentage rate. Flat taxes are bad enough, but regressive taxes-- defined as "those who have more pay less"-- should be an outrage. Scrap the cap. Social Security could be saved for decades by this one simple step. Make every one of those charts a flat line.

Solve the Buffett Problem

Warren Buffett, as everyone should know by now, pays a lower income tax rate than his secretary, despite the fact that Buffett makes one whale of a lot more income than his secretary does. This, despite the supposed-progressive nature of the income tax system. The reason is the biggest loophole of them all. This mother of all loopholes? Treating income rich people make differently than income normal people make. You see, the way Mitt Romney makes most of his money is taxed at a much lower rate than the way a nurse or teacher makes money. Which is why Romney is able to pay less than 14 percent income tax on an income of $20 million. Astonishingly, if the Paul Ryan budget had been made law, Romney would have paid less than one percent on the same $20 million income. I speak, of course, of "capital gains" (and "dividends" as well, but I'm just going to lump them all together for the sake of conversation).

Of all the thousands of ways an individual can make money (or "create an income"), only one is taxed at less than half the rate of the others. It happens to be "making money on Wall Street and the stock market." What a surprise! The method the already-wealthy use to increase their wealth is treated separately by the tax code. It is taxed less than half of what you earn in a paycheck. This is the "Buffett problem."

The solution to this problem is easy, too. Tax all income the same. Equality of taxation! It doesn't matter how you make that dollar, the government should tax it exactly the same-- anything else is simply not fair. In fact, this should be made progressive, too-- which will instantly neutralize all the howling from the anti-taxers about how this will hurt the middle class.

Make all income made through capital gains up to $250,000 each and every year tax-free. No capital gains taxes whatsoever on any money made up to the $250,000 limit-- you can just write off all profits up to that point on your yearly tax form. Then every dollar made above that limit is treated as income. Period. And taxed at the same rate as every other type of income.

This removes the argument that there are small investors who would be harmed. Very few Americans' retirement plans make $250,000 in income each and every year. In fact, it would be a massive tax break for small investors, which would have a positive impact.

But for the Buffetts and the Romneys of the world, they'd be paying the same (or greater) tax rate as their secretaries. And they, too, get to write off a whopping quarter-million of it each and every year, as an incentive. Problem solved.

Tax Wall Street Speculators

Institute a transactions tax of 0.25 percent on all Wall Street transactions over a certain limit per year. Make all the stock trades you want up to, perhaps, $250,000 per year tax-free. But then on trades over this amount, charge a fraction of one percent as a "speculation tax." This idea isn't original (actually, none of these ideas is original), I should mention. Raise money for the Treasury by putting a very gentle brake on the stock market, to the tune of 25 cents on every $100 traded. Wall Street bears a large portion of responsibility for our fiscal problems, so it's time to make them contribute toward fixing them.

Cap Deductions

Right now this is the favorite solution of the Republicans (of course, they want this solution and none of the others, to be clear). Cap what rich people can deduct on their income taxes. The figure I've heard tossed around, however, is way too low. Capping deductions at $50,000 would snare a lot of folks making under $250,000 per year, I would be willing to bet. So raise the limit enormously, but make it a hard cap.

Let upper-income folks have a full quarter-million in deductions each year. They can write off up to $250,000, no matter how they're deducting it and no matter how much their total income (this would be separate from the $250,000 capital gains break described above, I should mention). But that's it. This change could be accomplished by changing a few words on the last box on Schedule A to read "if this amount is over $250,000, then just enter $250,000." That's all it would take. No more writing millions of dollars off each year, sorry. Again, by setting the limit extremely high, this would not ensnare anyone in the middle class at all.

Add Two Tax Brackets

This one's pretty easy, too. One of the things Republicans (stretching back to Ronald Reagan) have been successful at over the years is not just lowering tax rates, but reducing the number of tax brackets that exist. Most of this reduction has happened at the upper end of the scale (which should come as no surprise).

This one is easy to fix, and key Democrats such as Sen. Charles Schumer have been pushing the idea for a while now. Create a millionaires' tax bracket. In fact, I'd go further and create a bracket at $1 million in income, and another one at $10 million in income. This removes the squabbling about the "middle class" versus "the truly wealthy" as anyone pulling down a cool million a year simply cannot be classified as "middle class" by anyone (at least not with a straight face). We had multiple tax brackets for a reason in the past-- to tax the stratosphere of the income levels. Let's get back to this way of targeting the upper ranks once again.

Common sense, right? And he's got more, fixing the Alternative Minimum Tax. Chris blogs at ChrisWeigant.com and you can get the whole picture there. Let's keep it in mind in case we ever wind up electing a progressive president like Elizabeth Warren.