{"id":5422,"date":"2012-06-07T16:22:48","date_gmt":"2012-06-07T20:22:48","guid":{"rendered":"http:\/\/www.tcnjmagazine.com\/?p=5422"},"modified":"2014-01-25T18:10:11","modified_gmt":"2014-01-25T23:10:11","slug":"tax-the-rich","status":"publish","type":"post","link":"https:\/\/www.tcnjmagazine.com\/?p=5422","title":{"rendered":"Tax the rich?"},"content":{"rendered":"

\"\"<\/p>\n

Warren Buffett is a man known for his shrewd stock picks. Yet the biggest dollars he ever moves might not be on investment returns, but on tax returns.<\/p>\n

The billionaire\u2019s dismay expressed in a New York Times<\/em> opinion column that he pays a lower percentage in taxes than many of his salaried employees has been picked up by Democrats and morphed into the so-called \u201cBuffett Rule.\u201d As a result, the rich may soon pay more in taxes.<\/p>\n

President Barack Obama\u2019s version of the Buffett Rule\u2014a key election-year initiative and the centerpiece of his current re-election campaign focus on \u201cfairness\u201d\u2014would require Americans making more than $1 million a year to pay a minimum effective tax rate of 30 percent on their income. Many millionaires and billionaires pay rates that are about half that under a current tax code that favors investment income over wage or earned income.<\/p>\n

In April, a version of the Buffett Rule\u2014the \u201cPaying a Fair Share Act of 2012\u201d\u2014stalled in the Senate after Democrats were unable to get the 60 votes needed to break a filibuster (the vote was 51 to 45). Despite that, the White House doesn\u2019t appear ready to give up on the proposal anytime soon. In an election year, the legislation has emerged as a partisan issue and has met solid \u2028Republican opposition.<\/p>\n

Democrats are quick to point out that former Massachusetts governor Mitt Romney, the presumptive GOP nominee who initially balked at releasing his tax returns, earned $21.7 million in income in 2010 but paid an effective tax rate of 13.9 percent since his income is derived primarily from investments. In the media, Sen. Charles E. Schumer (D-NY) has lobbed accusations that Romney is the \u201cposter child\u201d for why the Buffett Rule is necessary, adding, \u201cit could be called the Romney Rule.\u201d<\/p>\n

Associate Professor of Economics Michele Naples<\/strong> said income fairness has become \u201csuch a hot-button issue\u201d these days in part because of the Occupy Wall Street movement, and the fact that incomes of the top one percent have skyrocketed over the last 30 years while the incomes of the \u201c99 percent\u201d haven\u2019t risen nearly as much.<\/p>\n

But is the Buffett Rule the best way to reduce economic inequality in the United States? Could it help reduce the federal deficit? How likely is it to be passed? And are there better options out there? We asked a group of faculty experts to weigh in on tax fairness, income equality, and the economic, political, and philosophical implications such a tax code change might have.<\/p>\n

Show me the money\u2026 or not<\/h3>\n

If enacted, the Buffett Rule is not expected to have any real effect on the lives of the average American and is only expected to make a small dent in the federal budget deficit. Expected revenues would be about six percent of the current deficit spending, or about $47 billion over 10 years, \u2028according to a congressional committee.<\/p>\n

\u201cI think it\u2019s more of a philosophical issue of fairness than it is one of economic impact,\u201d explained Brian Potter<\/strong>, an associate professor of political science and director of TCNJ\u2019s International Studies Program. \u201cIts practical impact would likely be small. But it would be a symbolic change and one that might resonate with middle-class voters.\u201d<\/p>\n

What will the rich people do?<\/h3>\n

From a macroeconomic ( or \u201cbig picture\u201d) perspective, Obama\u2019s Buffett Rule is a \u201creasonable approach\u201d that would likely cause little damage either to the economy as a whole, or to the Gross Domestic Product or job creation, said Naples. That\u2019s because it doesn\u2019t call for increasing taxes on businesses, which provide real capital formation. Plus, evidence shows that the rich are less likely to spend more money with additional after-tax income than the middle class or poor, she added.<\/p>\n

\u201cThe conversation here is what does it mean that these rich people don\u2019t get as much money?\u201d continued Naples. \u201cWhat are they going to do? Are they not going to make financial investments anymore because they can only make 10 percent instead of 15 percent? Are they going to take their finances and go invest in another country? That\u2019s really the debate.\u201d<\/p>\n

Is it just a Band-Aid?<\/h3>\n

Professor Morton E. Winston<\/strong>, chair of the Department of Philosophy, Religion, and Classical Studies and director of the Alan Dawley Center for the Study of Social Justice<\/a>, called the Buffett Rule \u201ca Band-Aid\u201d that\u2019s not the best way to achieve more fairness. He favors other tax code changes.<\/p>\n

\"\"\u201cCurrently the tax on long-term capital gains is 15 percent\u2014that\u2019s the main reason why people like Mitt Romney, who make most of their income on returns on investments, pay such low taxes,\u201d \u2028Winston said.<\/p>\n

Meanwhile, the highest tax on earned income or income from salary is 35 percent. Winston said there\u2019s \u201ca huge discrepancy\u201d in the current code between earned and unearned income. \u201cI just think that that\u2019s completely backwards.\u201d<\/p>\n

A better answer? Winston said the tax rate on unearned income should be increased to 28 or 30 percent: \u201cIt\u2019s not fundamentally fair for people who work for a living to pay a greater percentage of their income in taxes than those who have made investments or have inherited investments that enable them to live off the income of those investments,\u201d he said.<\/p>\n

You want class warfare?<\/h3>\n

This certainly isn\u2019t the only time in history where great disparities have arisen between the \u201cwealthy few and the poor masses,\u201d Winston noted. \u201cBut when people throw around the term \u2018class \u2028warfare,\u2019 I get really annoyed.\u201d<\/p>\n

Real class warfare happened in 14thcentury France when peasants and serfs revolted in what became known as the Jacquerie against lords, with violent results. In one case recorded by the late historian Barbara W. Tuchman in her book titled A Distant Mirror<\/em>, Winston said a group of serfs attacked a manor house, killed the knight, and \u201croasted him on a spit in front of his wife and children.\u201d<\/p>\n

\u201cThat\u2019s class warfare\u2026what we have in this country is class struggle,\u201d Winston said.<\/p>\n

An October 2011 Congressional Budget Office report showed that the income of the top one percent grew by 275 percent from 1979 to 2007, while the income of those in the bottom 20 percent grew by only 18 percent during that same period. Meanwhile, the top 10 percent of Americans now control two-thirds of the nation\u2019s wealth, and the richest 400 Americans control as much wealth as the bottom 50 percent of all households \u2028combined, Winston said.<\/p>\n

\u201cThis is pretty extreme income and wealth inequality, and that\u2019s what\u2019s driving a lot of the discontent,\u201d Winston said.<\/p>\n

He added that some politicians have argued that lower taxes on the wealthy help stimulate economic growth.<\/p>\n

\u201cThat\u2019s sort of been the mantra of the Republican party, but in fact it\u2019s just not true,\u201d Winston said. He cited the work of Rutgers University professor and economic historian James Livingston, who gave \u2028The 2012 Alan Dawley Memorial Lecture at TCNJ in February 2012 and wrote about the topic in a book titled Against Thrift: Why Consumer Culture is Good for the Economy, Environment, and Your Soul<\/em>. In it, Winston said, Livingston provides \u201cevidence from economic history that shows that the idea that reducing taxes on the wealthy stimulates prosperity and economic growth is simply not borne out by the facts. What does create economic growth is consumer spending and government spending\u2014those two are the real drivers of economic prosperity.\u201d<\/p>\n

Is some disparity good?<\/h3>\n

When it comes to economic inequality, Potter said there\u2019s some debate about just how much is good or bad.\u00a0 The \u201csupply side\u201d argument is that it\u2019s good to give the wealthy more money because \u201ctheir investments will trickle down to the rest of us,\u201d he said.<\/p>\n

Generally, some inequality is inescapable and might help spark economic growth, but large disparities hurt economic growth, according to Potter. The reason? \u201cLarge disparities in resources limit competition, which in turns lowers economic growth.\u201d<\/p>\n

Potter, who studies Latin America, said research has shown that highly unequal countries such as El Salvador do not grow as quickly as more egalitarian ones, such as Chile. Also, the region\u2019s years of highest growth (the 1960s) came when economic disparities were minimized, while growth slowed after the neo-liberal reforms of \u2028the 1990s and 2000s.<\/p>\n

From a more historical and intuitive perspective, Potter said other countries with large political-economic disparities have grown at a slower rate than more egalitarian ones. Some Caribbean and Latin American countries were wealthier, yet more unequal, than the United States 200 years ago.<\/p>\n

\u201cThey limited education and job opportunities to the elites, neglecting the masses,\u201d Potter explained. In contrast, the United States extended voting, education, and opportunity to a broader percentage of its citizens. That broader participation and widespread economic competition \u201cpropelled the United States economy\u201d while unequal policies elsewhere \u201climited their growth,\u201d Potter explained.<\/p>\n

Are there better options?<\/h3>\n

Andrew Carver<\/strong>, an associate professor of finance and international business, said he thinks the Buffett Rule is politically motivated rather than policy \u201cbased on sound economic reasoning\u201d since it is \u201ceffectively an \u2028increase in taxes on capital gains.\u201d<\/p>\n

Carver said there\u2019s a logical reason why capital gains rates are lower than marginal income tax rates. That\u2019s because increasing capital gains tax rates above the levels where they are now often doesn\u2019t result in higher levels of revenue for the government because earning a capital gain is a discretionary act by a taxpayer.<\/p>\n

\"\"\u201cIt\u2019s very easy to avoid the capital being taxed just by choosing not to sell an investment, and that\u2019s one of the reasons why it\u2019s so difficult to make estimates of how much revenue this tax would create because it\u2019s difficult to estimate how taxpayers would respond to higher marginal tax rates,\u201d Carver said.<\/p>\n

Carver, who previously worked as an equity research analyst at Morningstar Inc. covering the banking sector, said the Buffett Rule \u201cdoesn\u2019t bring a lot of benefits and has potentially significant costs.\u201d In addition to not raising much revenue, Carver said \u201cbecause this is effectively a tax on wealthy people changing their portfolio, like other taxes on economic transactions, it may reduce the propensity for people to move their investment \u2028dollars toward different opportunities.\u201d<\/p>\n

\u201cThis isn\u2019t a good idea if we want capital to be flowing from unproductive investments to new and better opportunities,\u201d Carver said. \u201cFor example, you want entrepreneurs to have the ability to raise the money they need to start new companies, so increasing capital gains tax rates could inhibit the flow of money to new businesses and have the effect of hurting economic growth in the long run.\u201d<\/p>\n

Winston said the better answer might lie in letting the Bush tax cuts expire at the end of 2012\u2014a move that could bring in $1 trillion over the decade, according to some estimates.<\/p>\n

Carver said such a move had the potential to be \u201creally big\u201d in terms of revenue and economic incentives: \u201cWe\u2019re talking about marginal taxes on income and marginal tax rates on capital gains and dividends.\u201d But he cautioned, \u201cThere are a lot of angles that need to be looked at overall in terms of how we handle tax policy for the next four years.\u201d<\/p>\n

But could it pass?<\/h3>\n

Most Americans, including Romney supporters, favor a higher tax on the rich. A January 2012 survey on spending and tax priorities conducted by the Weidenbaum Center on the Economy, Government, and Public Policy at Washington University in St. Louis found that 93 percent of Obama supporters and 67.8 percent of Romney supporters said taxes should be raised on those earning more than $1 million a year. The survey \u2028included responses from a random sample of about 1,350 eligible voters.<\/p>\n

While the survey didn\u2019t ask in detail about the Buffett Rule, \u201cthe American public clearly favors higher taxes on \u2028high-income taxpayers,\u201d Steven S. Smith, director of the Weidenbaum Center, said.<\/p>\n

So could the Buffett Rule become law anytime soon? Carver said he doubts it \u201cwill ever see the light of day,\u201d particularly because of the Republican-controlled Congress.<\/p>\n

Potter doubts anything will happen until after the November 2012 elections and January 2013 inauguration because \u201cCongress has gotten very dysfunctional and it\u2019s hard to predict what they will do.\u201d If President Obama were re-elected, Potter thinks the Buffett Rule could have a good chance, particularly if there are Democratic gains in the House of Representatives and because members of the Tea Party, who are interested in closing the deficit, \u2028may be swayed.<\/p>\n

Naples remains optimistic.<\/p>\n

\u201cA lot of people are feeling the pinch in the hard times,\u201d Naples said. \u201cAnd the claim that it\u2019s class warfare to make the richest pay the same as everybody else not only is not going to fly, but it\u2019s going to end up turning things upside down.\u201d<\/p>\n

She added that 50 years ago, most U.S. citizens considered themselves middle class, whether working class or \u2028professional, and enjoyed what they believed was a classless society. Now, \u2028that\u2019s all changed.<\/p>\n

In the end, Naples said: \u201cThe presumption of the very well-off that they are exempt from the basic civic \u2028responsibility to pay taxes because they are rich sounds more like aristocracy than democracy.\u201d<\/p>\n

Illustrations (c) Dave Arkle.<\/em><\/p>\n","protected":false},"excerpt":{"rendered":"

Is the Buffett Rule the best way to reduce economic inequality in the United States? We asked a group of faculty experts to weigh in on tax fairness, income equality, and the economic, political, and philosophical implications such a tax code change might have.<\/p>\n","protected":false},"author":83,"featured_media":5426,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[8,53],"tags":[],"class_list":["post-5422","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-features","category-june-2012"],"acf":[],"_links":{"self":[{"href":"https:\/\/www.tcnjmagazine.com\/index.php?rest_route=\/wp\/v2\/posts\/5422","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.tcnjmagazine.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.tcnjmagazine.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.tcnjmagazine.com\/index.php?rest_route=\/wp\/v2\/users\/83"}],"replies":[{"embeddable":true,"href":"https:\/\/www.tcnjmagazine.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=5422"}],"version-history":[{"count":0,"href":"https:\/\/www.tcnjmagazine.com\/index.php?rest_route=\/wp\/v2\/posts\/5422\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.tcnjmagazine.com\/index.php?rest_route=\/wp\/v2\/media\/5426"}],"wp:attachment":[{"href":"https:\/\/www.tcnjmagazine.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=5422"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.tcnjmagazine.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=5422"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.tcnjmagazine.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=5422"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}