Wednesday, March 30, 2011

Tax Breaks for the 'Rich' Revisited

While reading through a message board today, someone posted a link on 'the evidence' that the 'game is rigged for the wealthy.'

Here was my reply:

So in the article,
"...most federal subsidies aimed at building wealth, such as certain tax deductions (officially called "expenditures"), credits, and preferential rates, go to the richest taxpayers."

It does not elaborate on what breaks we are supposedly talking about, but for starters, the terms for a subsidy and a tax 'expenditure' are quite misleading. This implies that the government just hands over a check for being rich. One actually has to do something, the activity that the tax deduction is trying to encourage the populous to do, in order to take it. If the deduction is being doled out, then the intended policy is working.

Also, to take advantage of most tax breaks, you actually have to be making income to be able to deduct something. Since the size of the break will be proportionate with the investment or activity, which will be proportionate to income, obviously wealthier people will be able to use more of a break than a poor guy. As an example, if a poor guy and a rich guy both buy houses of 50% of their net worth, and the poor guy spends 50k, but the rich guy spends 5M, clearly the rich guy is going to get a bigger deduction than the poor guy. This should not be a news flash to anyone. But suddenly, when the raw numbers are compared people scream and shout that it is unfair because the breaks are larger for the rich guy. They suddenly forget about the other side of his tax burden and that most of the tax burden in this country is shouldered by people making more than 100k a year. For example, if he got a tax break of 5k, that shouldn't be the end of the story as it usually is, but instead put in context to the 50k he paid in taxes that year. Populist media loves to focus on only one part of the story that attempts to anger the masses.

"This money helps the more prosperous buy homes, save money, start businesses, pay for college, and retire comfortably."

Once again it would be nice if instead of being aloof with the details that they would actually name some of the breaks. Many breaks apply to everyone, but many are phased out under certain income limits. While a 'rich' guy with a big house can get more deduction than a middle class guy with a small house, many breaks like IRA contribution, Pell Grants, and student loan interest are only available to those making less than 60k a year (approx.). So what breaks for the rich this sentence is supposedly referring to is quite intentionally vague.

In referring to the "preferential rates" for the rich, this is also misleading. Ordinary income rates are not preferential. In fact, they are quite the opposite with an exponential punishing marginal curve for higher levels of income. So I suspect that once again the author is using sleight-of-hand and referring to long term capital gains rates, which the 'rich' are likely to have more of. But this rate applies to everybody, not just the wealthy as the article is implying. Should it be policy to punish a rich guy if he happens to have more investments that qualify for these rates than a middle class guy? And as discussed in another article, the long term capital gains rate exists for a reason. Investments involve an aspect of risk - you can lose money. It's not like just showing up for work and collecting a paycheck. And generally long-term capital gains come from investing in a venture that creates jobs for other people, which should be encouraged.

If you didn't catch it from the front, well, the article leaves you with a biased tone towards the end. You should note that this is an opinion article (See 'Commentary' at the top), and given his previous writings it is clear he is just another populist.

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