Coming Soon: Thermonuclear Class War

By George Noga

Recent Events: OBL Photos – Pawlenty – Patriot Act

President Obama’s reelection campaign is gearing up to wage class warfare in high dudgeon; they understand full well the utter fecklessness of their policies and positions; nevertheless, they choose to unleash internecine war in a fraudulent, cynical appeal to voters’ basest instincts.

Class warfare works only if people are ignorant and envious. Pointing the floodlight of truth on class warfare can alleviate ignorance; without ignorance envy disappears.

Truth begins by understanding there is no way to identify the rich in America. People are considered rich based on their net worth, i.e. assets minus liabilities and not on their income in one particular year. No one reports net worth to the government; we only report income and a highly flawed measure of income at that. Consequently, since the rich cannot be identified by net worth, the only way government can single them out for taxes or other punitive measures is by using AGI. However, AGI is a fine net; although it may capture a few big tuna, it also captures a great many more ordinary fish and it fails to capture most of the tuna.

“Government has absolutely no way of identifying the rich.”

Government doesn’t know a person’s total income; all it knows are data shown on Form 1040. Income cohorts are based on “AGI” or Adjusted Gross Income. AGI has severe limitations; to name but a few: (1) professionals and business owners report business income on Form 1040, not just personal income; (2) many have significant income outside of AGI such as in IRA and 401(k) plans; (3) some returns report income for two people, others for one; and (4) AGI is pretax income and thus greatly overstates disposable income for those with higher AGIs.

Government considers those with high AGI rich; yet, they are not even the same people from one year to the next. Take the case of Mr. and Ms. Sims, who own and work in a small business. Throughout their working years they earn an average income; one year they sell their business and for that year, and that one year only, the government considers them rich. Then the next year they retire and their income again is average until they die. When the government tries to target the rich, it is precisely folks such as the Sims who are caught in the crosshairs.

For more proof look no further than a 2008 Treasury Department study of those over age 25. During a 10-year period over half the people in the top 1% of AGI dropped all the way to a lower quintile. Nearly 60% who were in the bottom quintile moved up; 25% jumped 2 or more quintiles and 5% ascended to the very top. What you see is nothing more than the normal bidirectional progression of people through the income cohorts consistent with the phases of their lives. Most of us begin near the bottom, rise gradually throughout our working lives and then move down after retirement.

“High taxes perpetuate wealth and decrease social mobility.”

Yes, there are Americans who truly are wealthy; thankfully no one knows who the vast majority of them are. More to the point – the truly rich are impervious. They’re shrewd, obtain the best tax and legal advice and go to great lengths to protect what they have. To understand this, all one has to do is look at Europe. Despite many decades of punitive taxation the truly rich remain thus. High taxes perpetuate wealth and decrease social and financial mobility. In Europe, the rich remain rich and everyone else remains in place; there are but few exceptions.

We now know government can’t identify the rich and single them out for tax policies. The second key point is when government engages in class warfare, it harms the economy. There is a third point: falsely pitting one group against another frays the nation’s social fabric. Consider some tax policies the Obama Administration has suggested along with their consequences.

  • If Obama increases marginal income tax and/or capital gains rates, tax revenue will not increase. Hauser’s Law shows tax collections remain fixed at 18% of GDP and individual tax collections at 8%; this is true whether marginal rates are 91% or 28%.
  • Even if a VAT were enacted, it would have little impact on the rich, who spend only a tiny percentage of their income on consumption subject to VAT.
  • Obama has floated tax proposals that raise the marginal rate to nearly 70%; these include: (1) a 12.4% increase lifting the cap on social security taxes; (2) 2.9% by applying the Medicare tax to investment income; (3) a 6.5% increase by repealing the Bush cuts and phasing out deductions; (4) a 3% surtax on income over $1 million; (5) a 0.9% surtax via ObamaCare; (6) a 59% increase in capital gains; and (7) a 300% increase on dividends. Including state taxes, Obama’s marginal rate is 68% – just like Jimmy Carter.
  • Soak-the-rich schemes have at their heart the unstated but explicit goal of leaching into the middle class – toward whom Obama is insouciant. Willie Sutton had it right; you have to go where the money is.
  • Tax increases are death knells for the economy. They affect decisions about work, savings and investment. The only way to increase tax revenue is to grow the economy and that is best accomplished with low, stable tax rates. Obama’s plan will not only fail to collect more taxes, it will shatter the economy and shift jobs abroad where taxes are lower.
  • Claiming the rich have had tax cuts is unalloyed class warfare. In 2009 the US collected a higher percentage of income and payroll taxes from the top 10% of filers than any nation on the planet. Moreover, taxing the rich wouldn’t work even if it were possible. There simply aren’t enough rich people to make a big difference.

Bottom line: Obama’s attacks on the putative rich are counterfactual and constitute out-and-out demagogic class warfare. His proposed tax increases will not collect more tax revenue but will implode the economy and hemorrhage jobs. He is hoping to get reelected by stoking the fires of class envy and setting Americans against each other. In doing so he is appealing to the most ignoble and squalid aspects of human nature.

Recent Events: Pawlenty – Patriot Act – OBL Photos

The focus of this blog is on economic analysis and timeless verities about the blessings of liberty and the dangers of government. There are times when events prove too inviting to pass up; this weeks’ blog is one such time; the news has been pregnant with juicy morsels.

Pawlenty: I do not have a dog in the hunt for the GOP nomination; nevertheless, one cannot help but be impressed by Pawlenty who had the fortitude to go to Iowa and tell voters ethanol subsidies were unaffordable and had to be phased out. This is nothing short of amazing!

Patriot Act: Obama and Holder now assert renewal of the Patriot Act is absolutely essential and want it made permanent. Obama considered it so critical he had the extension bill robo-signed in his absence so it would not expire even for hours. Under Bush, liberals considered the Patriot Act a lawless crusade that would turn America into a police state. Add this to the long list of Bush/Cheney policies that Obama now embraces.

Photos of OBL: This is the piece de resistance. When Obama was a senator he couldn’t wait for the release of photos showing US troops abusing prisoners at Abu Ghraib knowing full well it would stir up the Arab street. Now he won’t release photos of OBL because he claims it would inflame the Muslim world. Such blatant hypocrisy is priceless. Where are the media? Oops – I forgot momentarily that the statist media died in 2008.




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