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Taxing the rich, the Obama way

Robert Reich, professor of public policy | September 19, 2011

Warren Buffett is a tough negotiator, which is one reason why he’s the second-wealthiest person in America.

So when the President refers to his new initiative to raise taxes on millionaires as the “Buffett rule” we might expect he’d start the bargaining from a tough position.

But this is Barack Obama, whose idea of negotiating is to give away half the house before he’s even asked the other side for the bathroom sink.

Apparently Obama will propose that people earning more than $1 million a year pay at least the same tax rate as middle-class earners. That’s aiming mighty low.

America’s median income is about $50,000. The typical taxpayer at that level pays approximately 20 percent in taxes.

Granted, that’s a higher rate than most of today’s super rich pay because of countless deductions, credits, and loopholes – including, especially, their ability to take their incomes in the form of capital gains, taxed at 15 percent. That’s a big reason Buffett’s hundreds of millions a year are taxed at just over 17 percent — a lower rate than his secretary faces, as Buffett often says.

But a 20 percent rate is still ridiculously low compared to what millionaires and billionaires ought to be paying. Officially, income over $379,150 is supposed to be taxed at 35%.

And even 35 percent is a pittance compared to the first three decades after World War II. Before Ronald Reagan slashed taxes on the rich in 1981, the highest marginal tax rate was over 70 percent. Under Dwight Eisenhower it was 91 percent. Even if you include deductions and credits, the rich are now paying a far lower share of their incomes in taxes than at any time since World War II.

The estate tax (which only hits the top 2 percent) has also been slashed. In 2000 it was 55 percent and kicked in after $1 million. Today it’s 35 percent and kicks in at $5 million. Capital gains – comprising most of the income of the super-rich – were taxed at 35 percent in the late 1980s. They’re now taxed at 15 percent.

Meanwhile, the top 1 percent’s share of national income has doubled over the past three decades (from 10 percent in 1981 to well over 20 percent now). The richest one-tenth of 1 percent’s share has tripled. And they’re doing better than ever. The last time the top 1 percent got that much was in the roaring 1920s.

So much money is now concentrated at the top that what we really need are more tax brackets at the high end, higher marginal rates in each bracket, and a tax code that treats all sources of income – whether ordinary or capital gains – the same.

The marginal tax rate ought to be raised to 50 percent on income between $500,000 and $5 million, 60 percent on income between $5 million and $15 million, and 70 percent on income over $15 million.

In light of our history, and in the face of future budget deficits that will otherwise cause taxes to be raised on the middle class and government services to be sliced, this is the least we should expect from the richest among us.

Why shouldn’t the President be calling for this, instead of asking that millionaires and billionaires pay at a rate average earners pay?

At least begin from a tough negotiating position, Mr. President. You might as well. Congressional Republicans will oppose any tax increases on the wealthy, whom they call “job creators” — even though big companies are sitting on more than $2 trillion in cash and aren’t creating any jobs at all, while 99 percent small-business owners, who account for most new jobs, make under a million dollars a year. (GOP Budget chief Paul Ryan has already accused the President of waging “class warfare” with his millionaire tax plan.)

And you can also bet Republicans, as well as their allies on the editorial page of the Wall Street Journal, will continue to harp about the large portion of low-wage earners who pay no income taxes — without mentioning that they pay a higher portion of their incomes than anyone else in payroll and sales taxes.

Besides, the public supports raising taxes on the rich. (In an August CBS News/New York Times survey, 63% of respondents favored increasing taxes on households earning more than $250,000 a year to help close the budget deficit.)

We don’t yet know the details of the President’s proposal. The White House hasn’t said what the minimum rate on millionaires will be, or how they’ll define a “middle class” income. Maybe he’ll surprise us by starting out much higher and tougher.

I hope so. But as he’s proven time and time again, when it comes to negotiating Barack Obama is no Warren Buffett.

Cross-posted from Robert Reich’s blog.

Comments to “Taxing the rich, the Obama way

  1. Dear Professor Reich,
    Thank you for posting your blog, Taxing the rich, the Obama way. It was very helpful to me, for it enabled me to understand the way Americans have and are being taxed on their incomes. It will aid me in writing my research paper which debates the topic of raising income taxes on people who make $250,000 or more a year.
    Florence Bowman

  2. just brainstorming, tripping a little, .. how about a birthright tax, call it a blessing tax just to make it even more Orwellian, of $45k man/woman and child born in the USA , with options just like paying fines in court on the installment plan. jobs went overseas? get your passport and work in the factory making cheap export schlock to sell to the chumps who haven’t left home yet to work in a chinese firecracker factory or a Mexican hot water heater plant or, instead of wishing to turn back the hands of time to a rosier scenario, lets look ahead at living 23 to a house with seventeen cars per household making $2 hr painting house and mowing the lawn like normal teenagers except middle-aged men will perform these maintainance chores to support their growing families. Bless The Lord- Its a New Day In America under the Red White And Blue! We Win!We Win!i can’t wait til all gosh breaks out, can’t you ?

  3. Class warfare? Is asking all classes to stand shoulder to shoulder to reduce the deficit called “class warfare”? I call it manning up and becoming someone who supports the system under which their wealth exists. It is a unifying position, not a dividing one. Terms like class warfare are created to divide our nation and further polarize. I just wish that Obama would stress that it’s patriotic, sensible and responsible for the wealthy to carry their fair share.

  4. Having just finished reading John Judis’ article “Doom” in the New Republic, I have to disagree with many of the comments above. Hoover cut government spending and taxes in response to the crash of 1929. Unemployment skyrocketed from 3.2% in 1929 to 24.9% when FDR took office. In Great Britan, Labour and the Tories passed spending cuts and tax increases. Unemployment soared from 10.4 to 22.1%. In Germany, the government cut spending, raised taxes and unemployment rose to 33% and Hilter’s National Socialist Party rose in power.

    We got into the current financial crisis by abandoning the laws put into effect to not have another Depression. Guess what? A huge financial crisis took place.

    Obama’s stimulus plan was simply not large enough to help. To make matters worse, for the past 30 years the American public has learned to chant: Government is BAD! Government is BAD! (Sorry, I grew up hearing about FDR and the Depression and do not consider government bad.)

    What I did after the financial downturn was read as much as I could about economics. Fortunately I have a PhD from Berkeley in a subject that is quantitative so numbers do not scare me. I had heard Reich on NPR in the 90’s speaking of how men’s wages were not keeping up with the cost of living and how women working kept families afloat, then later how families had to use their homes as piggy banks and borrow from the equity.

    I wish I were earning enough to pay AMT. I earn no where near enough. As it is, the 9% interest on my school loans have made it quite clear that a good chunk of my Social Security benefits will go towards paying the school loan I took out for my second advanced degree. These payments will last until I die.

    But one more comment: In Federal taxes one finds the TRUE policy of the Federal Government – Help the Rich and screw everyone else. I doubt Obama can change the tax policies given the way the GOP operates.

  5. Quote from Professor Reich: “The estate tax (which only hits the top 2 percent) has also been slashed. In 2000 it was 55 percent and kicked in after $1 million. Today it’s 35 percent and kicks in at $5 million.”

    Professor, I’m all for the estate tax exemption having been raised from $1M. $5M is more reasonable in this day and age. You know, you don’t have to be the super rich to amass over $1M by the time you die, especially in the SF Bay Area where you might have bought your house at $150,000 but it has appreciated to be $500,000 to $750,000 over the years. Add the money you’ve had to save for retirement and voila you end up over $1M. Setting the estate tax exemption at $1M is too low and discriminates against those in the middle class that work hard and save. $1M may sound like a lot but a young worker without a pension had better aim at saving closer to $2M in a 401K or IRA by retirement. $2M parsed out over 30 years of retirement (not counting dividends) is only $70k per year! Why should the government take 55% of what’s left over $1M? People work hard for their salaries and wages and hope to pass some of that on to their kids to ease their lives. Don’t you?
    Respectfully, Persimmon

    • Clarification: actually under the 2009 estate tax exemption of $1M, the amount OVER $1M was taxed on a sliding scale: under $5M, $5-$10M, etc. And under the new law, there is also a sliding scale. So not all estates over $1M (or now $5M) would have been taxed at 55% as I implied.

      Nevertheless, as I said above, a middle class person with a modest salary who saves and buys a house, lives below his/her means, and saves toward retirement, is frugal during retirement and invests wisely (and is fortunate not to have high medical costs) can end up with over $1M in their estate. A low estate tax exemption of $1M rewards those who make sure to spend down their money before dying. (You can’t take it with you.) But that goes against the grain of the savers, and those who want to help their offspring, knowing what the young people face — a country where there are fewer jobs with guaranteed pensions.

      Maybe $5M estate tax exemption is excessive, but I’d say at least Warren Buffett’s $3.5M is fairer to the middle class.

  6. I think we need to reflect on Robert’s words as some historical data that he is providing and not be so harsh here. It is rather unproductive to be so hard on this concept.

    These words make sense “So much money is now concentrated at the top that what we really need are more tax brackets at the high end, higher marginal rates in each bracket, and a tax code that treats all sources of income – whether ordinary or capital gains – the same.

    The marginal tax rate ought to be raised to 50 percent on income between $500,000 and $5 million, 60 percent on income between $5 million and $15 million, and 70 percent on income over $15 million.”

    Now, let’s see some action out there regarding Taxing the super rich.

  7. Disgusted:
    Did you read the same article I just did? Where in the world did you get this statement out of his article: “and now i make $200K — according to you living in acadamia – i am the ‘rich’ you need to soak more’.”
    The only text remotely close, (and not Academia but a CBS/NWT survey), says “63% of respondents favored increasing taxes on households earning more than $250,000 a year to help close the budget deficit.)”

    So read articles critically before you jump off on some personal rant about how poor you are, and FYI 120k does not make you a ward of the state.
    Credibility in statements will make or break you on the web….

    BTW, great article Mr. Reich, spot on, let’s hope Obama reaches back for a 98 mph fastball…..

  8. I am so sick about hearing how the ‘rich’ are screwing the rest of America. I worked hard in highschool (not a flake dho failed out or merely passed – what is that worth to me?), I went to Cal in Engineering – got out in 4 years – got an MBA (while owrking full time) and now i make $200K — according to you living in acadamia – i am the ‘rich’ you need to soak more’.

    Now, the reality is – i don’t get a single writeoff except my mortgage and that is destroyed due to the bullshit AMT (yes, i am hit with it every god damn year for one 15 year old mortage of $350K). I have to pay FULL costs for my kids’ UC tuition, room and board – etc. I am too god damn rich for any grants or scholarship. we drive cars with 180,000 miles because of my ‘wealth’ – and I haven’t had a vacation in years. and generally, we live month-to-month because i have to pay full rate on EVERY GOD DAMN thing – i have never received a penny in return for my taxes (noe the EPA is not a ‘return’ its an impediment to my firm doing business in the real worked.

    I woudl be better off making $120K because then i can be a ward of the state. Yes, there are a lot of people that are worse off than me – but i worked for every bit of it – what little i can keep from the tax man.

    So tell me Mr. Reich, why are you singling me out to pay for the sins of those whole flaked during high school and college (when i worked my ass off)? i am not wealthy – not in your already socialist state.

    Tax what you want less of – and you ‘ll get less of it!! i propose taxing acadamia more – then lets see how much more we have to listen to your decades old useless socialist trivia. Do some real research and come up with some new ideas for the 21st century. Living by the lowest common denominator has never worked – why should it start now?

      • That’s your response? Because I feel the EXACT same way as this person. I watch countless entitled people with their hands out while I work my ASS off, and then I am taxed to death at the end of the year to pay for the same jackasses who did nothing, all the while pointing their greasy fingers at me for being the reason they aren’t driving a Corvette. Everything that ‘disgusted’ said is absolutely true. The middle-class is being bumped out by all these rules and regulations. It is not denting the wallets of the super-rich, but it is making me second guess my efforts because the government has a hand in my pocket trying to give it to GENERATIONS of worthless people.

  9. Obama may be no Warren Buffett, but he is infinitely superior to Bill Clinton and GW Bush, who drove us over a cliff into the 21st century.

    You really need to compare Obama to the new republican party V.TP because that’s what he is up against.

    After listening to the ongoing Republican Death Panel debates, they make Obama look more like an American Patriot from the 18th century when they really knew how important compromise was to the future of the United States.

    Obama has to deal with a combination Oligarchy/Ochlocracy that no president has had to deal with before.

  10. This plan is ANTI-GROWTH and ANTI-JOBS. Raising taxes on ANYONE with a WEAK ECONOMY is RECKLESS. This plan will send more investment and jobs out of the country. The only thing this plan will accomplish is extending the government’s intrusion into the economy and it is the AVERAGE AMERICAN who will SUFFER.

    More CLASS WARFARE from Obama. Obama will continue his SOCIALIST AGENDA until the AVERAGE AMERICAN votes him out of office.

    We must continue to VOTE THEM OUT!!!

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