Obama is right to take on the very rich
They're paying far less of their incomes in taxes than average Americans.
Boston and Washington — We've seen, in recent weeks, an outpouring of public outrage over the mega millions that keep flowing – despite the escalating economic meltdown – into the pockets of America's top bankers and corporate executives.
"I'm angry," Sen. Claire McCaskill (D) of Missouri told her Senate colleagues late last month, as she introduced a bill to cap pay for bailed-out CEOs at $400,000 a year. "Wall Street [is] kicking sand in the face of the American taxpayer."
"I will not tolerate it," President Obama added a few days later, as he announced a $500,000 executive pay cap at firms getting substantial bailout dollars.
The amount of money that goes into executive pockets is staggering. So is the amount that comes out of those pockets in taxes: precious little. America's super-rich are paying far less of their incomes in taxes than average Americans who punch time clocks. This is grossly unfair. The good news: Under Mr. Obama's new plan to cut the deficit in half, the very richest Americans will start paying something closer to their fair tax share.
It's been a while since they've done that. As recent IRS data show, these elites are paying less in taxes – much less – than their deep-pocket counterparts used to pay. In 2006, the 400 highest-income Americans together reported $105 billion in income, an average of $263 million each.
Having trouble visualizing that? To pocket $263 million a year, you would have to take home over $60,000 an hour – and work 12 hours a day, seven days a week, for an entire 12 months. Sounds tiring, doesn't it? But most of the top 400 make their fortunes buying and selling assets, everything from stocks and bonds to the exotic paper that helped inflate the housing bubble.
Uncle Sam taxes income from those assets – whether that income be capital gains or dividends – at a much lower rate than income from work.
The current top tax rate on "ordinary" work income sits at 35 percent. But dividends and capital gains from the buying and selling of most assets face only a 15 percent top rate. That's why in 2006, America's top 400 paid just 17.2 percent of their $263 million average incomes in federal tax.
Millions of middle-class American families, once you tally income and payroll taxes, pay far more of their incomes in tax. One particularly striking example from billionaire investor Warren Buffett: In 2006, he paid 17.7 percent of his income in total taxes. His secretary, who made $60,000, paid 30 percent of hers.
How did we end up with this sorry state of affairs? Lawmakers in Congress have spent the past several decades systematically slicing the tax rates on America's top income brackets. Their rationale? Lower taxes on the top, free up capital for investment, and boost productivity.
In actual economic practice, those lower taxes have served instead to fuel speculation and increase budget deficits. For the ultrarich themselves, the tax savings have been nothing short of breathtaking. Back in 1955, America's top 400 paid more than 50 percent of their incomes in federal tax, almost triple the rate of today's top 400.
We can fix this. Obama just announced his plan to end the Bush administration's high-income tax cuts. This is an important step. We can insist, also, that lawmakers end the preferential treatment of dividends and capital gains. And we can raise the tax rate that kicks in when taxpayers start collecting more than $10 million and $20 million a year.
Steps like these would help get our future in order. But what about the past – and all those windfalls the super-rich have been pocketing as our economy veered into the ditch? Are we going to have to watch these billions multiply, generation after generation, into a new American aristocracy of wealth?
Not if we save the estate tax, the only federal levy on grand accumulations of private wealth. The rich and their retainers have been trying to repeal the estate tax for 20 years now. They haven't succeeded, but they have slashed the tax rate on the fortunes the ultrawealthy leave their heirs.
Congress is about to begin debating legislation that would freeze the estate tax at the current bargain-basement rate set by President Bush. We can't let that happen. More than ever, America needs its ultrarich to chip in more.
Chuck Collins directs the program on inequality and the common good at the Institute for Policy Studies. Sam Pizzigati, an Institute associate fellow, edits Too Much, on online weekly on excess and inequality. They are coauthors of the annual Institute for Policy Studies "Executive Excess" report on CEO pay.