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American problems: a brief introduction, part one

2011-12-12

There have been innumerable editorials about “what is wrong with America today” and almost as many areas of disagreement about the root problems of the USA.  A recent theme has been income inequality, and we also have weighed in on this issue.

An important contributor to income inequality is the perversity of our tax system.  As Warren Buffet has pointed out, the most wealthy of citizens (who get most of their income from capital gains) actually pay a smaller percentage of their income in overall taxes than do the average wage earner.  This is because capital gains are taxed at a flat rate of 15%, but wages are taxed first for Medicare and Social Security at a flat rate of about 14% (counting both “employer” and employee” portions)  from their first dollar up to $106,000, and then assessed income taxes from about $20,000 of income on up, at a rate that progresses from 15% to about 33%.  (My figures are only approximate, but small errors will not obscure the basic principle.)  This means that the poor pay about the same percentage of their income in taxes as do those who own enough stocks to realize capital gains; however, the middle class pay closer to 1/3 of their income in taxes  than 15%.

Republicans are aware that income inequality is a problem for their party.   I happened to catch a discussion on Fox News in regards to this problem.  They say that they “just want a level playing field” while Obama wants to “take away your hard earned money and give it to those who are too lazy to work.”    If Republicans really want a “level playing field” than they will not mind taxing capital gains at the same rate as ordinary income.  This amounts to a dramatic tax increase, but it really does level the playing field.  Which pledge do you think will get a Republican president elected?  No new taxes, perpetuating the unequal burdens that currently exist, or “a level playing field”?  Equalizing tax rates would also go a long way towards eliminating our current accounts deficit.

To anticipate the complaint, “higher taxes (on the rich) will inhibit the economy,” economists agree that the wealthy do not, as a rule, create jobs.  Very few wealthy people are entrepeneurs, and less than 1% of small business owners are in the top 1% of incomes.  When a little money is taken away from wealthy people,  they do not fire their servants or close their companies (companies only pay taxes on their profits, not their total income); they simply have a little less surplus money to save.  The economy does not depend on how much money people have saved.  Since the wealthy already have surplus income, giving them more with a tax cut is unlikely to result in more spending, and thus will not stimulate the economy.

On the other hand, if you put money into the hands of a poor person, he/she will immediately spend nearly all of it.  When a poor person spends money, it goes into circulation and helps everyone who receives it, amounting to a significant stimulus to the economy.

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