Member Voices: Straight Talk About TaxesPosted December 10th, 2012 by Kelly Singleton Dalton
Well, you can’t swing a toothpaste-squeezing Elf-on-the-Shelf (Seriously? Making extra messes in my house is now a holiday tradition? Sigh.) around anywhere nowadays without hitting a politician who has something vehement to say about the rapidly approaching edge of the fiscal cliff, a fearsome collection of tax increases and spending cuts set to take effect soon after the new year. Unless Congress can come up with some kind of compromise to prevent it, we will all fall off the fiscal cliff, and not in a fun, “Cross ‘parachuting in the Alps’ off my Bucket List!” kind of way. It would be more of a significantly-higher-tax-bill kind of way, to the tune of $2,000 per year for a family making between $40,000 and $60,000 per year (median income), and an average of $3,500 per family across all income brackets.
Last week, MomsRising members met with their congressional representatives in Washington, as well as in their district offices across the country, to urge them to protect America’s investment in the middle class. We believe that Congress should raise income tax rates for the wealthiest Americans in order to extend tax cuts for families making less than $250,000 per year, and to preserve the social safety nets–Social Security, Medicare, and Medicaid–many families depend on for survival. (If you haven’t read any of the stories submitted by MomsRising members about the economic hardships their families would face if we fall off the cliff, they are worth checking out. I bet you’ll find them rather moving, unless you are The Grinch, pre-Cindy-Lou-Who.)
This is also the approach President Obama has advocated, but Republicans in Congress take issue with the idea of raising tax rates. Their concerns are based on the notion that raising taxes on the wealthiest Americans would necessarily hurt economic growth and overall financial health for everyone. (There might also be an element of “rich people are rich because they worked hard and deserve their money,” but that’s so obviously not necessarily true it’s kind of laughable, in my opinion. There are enlisted Marines carrying hundreds of pounds of gear and weapons up and down mountains in Afghanistan who make less than $20,000 a year, and meanwhile, Joe Francis, the founder of Girls Gone Wild, is a millionaire many times over. Clearly, hard, noble, and valuable work does not always lead to exceptional financial success (and vice versa), so please, let’s stop pretending that it does.) At any rate, the thinking goes: if rich people have less disposable income, they will do less spending, investing, job creating, and economy-stimulating.
The problem with this thinking is that hard data shows otherwise. In September, the Congressional Research Service (part of the Library of Congress) published a study that looked at the relationship between tax rates, economic growth, and income inequality from 1945 to 2010. The results of the study demonstrate that “changes over the past 65 years in the top marginal tax rate and the top capital gains tax rate do not appear correlated with economic growth. The reduction in the top tax rates appears to be uncorrelated with saving, investment, and productivity growth. The top tax rates appear to have little or no relation to the size of the economic pie. However, the top tax rate reductions appear to be associated with the increasing concentration of income at the top of the income distribution.” (Emphasis decidedly mine.) So, lower tax rates on the wealthy seem to make the rich richer and the poor poorer–and they do nothing obviously beneficial for economic growth in general.
In a recent op-ed piece he wrote for the New York Times, Warren Buffett also argued that higher taxes would not cause the rich to stop investing in the American economy. He pointed out that he made his fortune in investing, and even when tax rates on investment returns were wildly high (91 percent on dividends in some cases, for example), “[n]ever did anyone mention taxes as a reason to forgo an investment opportunity that I offered.” So let Republicans in Congress be reassured: “The ultrarich,” Buffett wrote, “including me, will forever pursue investment opportunities.” Convincing words, coming from a guy who makes enough money to give literally billions of dollars to charity each year.
And let’s be clear here about how, exactly, tax increases for the wealthiest taxpayers would work. (Don’t feel bad if this is news to you–it was to some New York Times reporters, too.) It’s a bit misleading to say that people making over $250,000 would pay a higher tax rate; this makes it sound as though making $250,001 would suddenly mean you owe the government a bigger chunk of your entire paycheck. This is simply not how marginal tax rates work. It paints a more accurate picture to say that people will owe a higher percentage of any money they make over $250,000. So if the top tax rate goes from 35% to 39% (in accordance with President Obama’s plan) on family income over $250,000, and you were to make $250,001 next year, you would pay the same taxes everyone else pays on the first $250,000 of your paycheck, and it would only be that last dollar that would be taxed at 39% instead of 36%. This is why no one would–or at least, should–turn down a pay raise solely because it bumps them up into the next tax bracket. You’d still end up with more take-home pay than you had before your raise, although admittedly less than it would be in some imaginary, build-your-own bridges, hire-your-own-military, approve-and-regulate-your-own-cancer-treatments, air-traffic-control-your-own-cross-country-airline-flights, tax-free America.