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Posted: December 01, 2011

The Economist: Let’s soak the rich

Tucker Hart Adams

In our never-ending search for someone to blame for the world's economic mess, the newest target is the wealthy. If we just tax their "ill gotten" gains, deficits will disappear, jobs will be created and household incomes will rise. If only it were that simple.

No one is worth tens of millions of dollars annually to any organization. Not the best CEO or hedge fund manager. Not the best professional athlete. Not the most talented performer. Not even brilliant economists.

That said, punitive taxes on the rich aren't going to solve the deficit problem. They aren't going to put average household income on an upward trajectory. If they are set high enough, they might even have the opposite effect.

Is it true that a few of the very rich are getting richer while the rest of us are getting poorer? Let's start out with a few facts. Over the last 20 years, per capita income in Colorado has more than doubled, from $19,377 in 1990 to $42,226 last year. Even after adjusting for inflation, income has risen 24 percent. Most of that occurred in the go-go decade of the 1990s. It's fallen in nominal terms since 2008 and is up only 1.3 percent in inflation-adjusted terms since 2000.

Median household income (the level that half of the households are above and half below) has risen even faster. It peaked in 2008 at $44,164 and has declined 1.1 percent since then. But over any reasonable time span we aren't getting poorer. It is a dangerous mistake to take a few years of data and project them far into the future.

But, you may argue, all of the gain is because the super rich got richer. Median pay of CEOs of large U.S. corporations rose 27 percent in 2010 to a median salary of $9 million (including bonuses), while pay increases for all workers in private industry averaged only 2.1 percent. Let's tax it all away and get rid of the deficit problem.

But wait. Although it is true that the top 1 percent earned 18.3 percent of national income last year, they paid 32 percent of all income taxes. The top 10 percent paid about 70 percent of the total. The bottom half paid only 2.7 percent. If we imposed a 100 percent tax rate on the top 10 percent, it would raise about $1 trillion. We can't get there by simply taxing the rich.

This country is not about everyone having the same income level. That was the Soviet Union. Most of us are glad Bill Gates and Steve Jobs were well rewarded for technologies that changed our lives. Great fortunes were created that enabled an unprecedented level of philanthropy - building libraries, supporting the arts and education, battling disease and poverty around the world. Who knows, we might be the one who has the next great multimillion dollar idea.

This is all fine as long as in a time of economic growth both rich and poor benefit. The problem is when we believe the wealthy have rigged the game rather than won in honest competition. And fairness demands that in a time of economic pain, both rich and poor feel it. The perception, perhaps the reality, is that this no longer occurs.

I've argued before that we should get rid of all tax deductions and have a flat income tax of, say, 20 percent. Social security taxes should be imposed on all income, not just the first $106,000 of wages and salaries. Warren Buffet will no longer enjoy a tax rate lower than his employees.

This should provide plenty of revenue to pay for the appropriate government services (those that cannot better be provided by the private sector), eliminate the deficit over the business cycle (there really are times when deficits are appropriate), help the truly needy and provide the education and job training that will allow most of us to earn a decent living, even all of those newly unemployed CPAs and IRS employees.

That and a little cooperation on the part of our elected officials in D.C. would solve most of our fiscal problems.
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Tucker Hart Adams, president of the Adams Group, monitored and analyzed the Colorado economy for 30 years. She can be reached via her website, coloradoeconomy.com.

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Readers Respond

There is some good stuff here, but the message, to me atleast, seems muddled. Allowing the Bush-era tax cuts to expire would not be a punitive tax hike. And you are correct when you say no one is worth $10 million annually, but how does that get reversed? A flat-tax would further shift the wealth away from the lower and middle classes and move it towards the wealthy. By Paul on 2011 12 30
The idea that the 'average Joe' would be harmed by flat taxes does not make sense - those so many seek to tax harder have to employee good people and pay a market rate. There is no cartel of rich controlling the wages "the other 99%' get - there is a market which determines what needs to be paid to get a job done. With offshore opportunities in Asia being much more lucrative than employing staff in the US, it would be a truly myopic government which made it less appealing to build businesses here by heavier corporate taxation or targeting those who build those businesses. However, western short-term economics is why we are being handed our hats by Asia - so who knows, perhaps we are stupid enough to pursue this avenue. By Nigel on 2011 12 09
Tucker -- while I agree that putting the SS tax on ALL income is a great idea, a flat tax is a terrible one. It is a truly regressive tax, which results in a lower amount of taxes paid for the wealthy and soaks the poor and middle classes. This is simply the latest Conservative talking point --- that the poor don't pay any taxes. In fact, everyone in America, including undocumented workers, pays taxes. There are sales taxes, Social Security Taxes, Medicare taxes, excise taxes, and a variety of other taxes. The fact that 47% of our country is not making enough money to pay FEDERAL INCOME TAX should be shaming our country, not seen as an argument to make the already-difficult lives of these people even worse by taxing the little they make. The game IS rigged. Nationally, the rich are getting richer, the poor are getting poorer and the middle class is disappearing. There IS class warfare....and the wealthy class, the bankers and the corporations are winning it hands down. And while few people want everyone to make the same amount of money, the severe income inequality in America is both scandalous and dangerous. Read history and see the causes of revolution. The wealthy, corporations and bankers need to wake up and stop their pillaging of America before it is too late for them. By John Heckers, MA, CPC, BCPC on 2011 12 08
Thanks for the insightful article, Tucker. It's a message people need to hear and think about. However, I would not conflate policy proposals to increase taxes on the wealthiest Americans with the much less prevalent sentiment to "blame" the rich or impose "punitive" taxes. Many who favor taxing the rich more (including the Buffets of the world) merely feel the wealthy are in a better position right now to make a major contribution to the solution of the deficit and debt problems than are the so-called "other 99%." You are right to point out that we can't solve the whole problem that way, but politically there is little hope of asking the other 99% to tighten their belts (or to consider a flat tax such as you propose) when our elected leaders demagogue the issue and use false arguments to (e.g.,) defend the Bush tax cuts and protect the wealthy from commensurate sacrifice. By Brad Brockbank on 2011 12 08
Tucker, I have two questions for you. You propose a flat tax and removal of all deductions. This, obviously, would include the removal of the mortgage interest deduction that many of us claim. A) How would you propose removing that deduction so as to not harm the housing sector? B) I believe there is a thought that home ownership (vs renting) fosters better communities and, as a result, is something that should be encouraged... do you believe this thought to be accurate and if so, how do you think the removal of the tax deduction will impact our communities? By Nathan Jansch on 2011 12 08

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