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America is taxing for all but the very rich

By ROBYN BLUMNER
Published August 5, 2007


This is a column about taxes, and how, unless you are one of the nation's top dogs, you are getting rooked.

Some of the biggest stories of the last few weeks have been about the great tax dodges by the financial kings of the hedge fund and private equity world. Investment managers making upward of a $1-billion a year are paying lower tax rates than the people who teach their children or deliver their mail.

Warren Buffett, the world's third-richest man, blasted the U.S. tax system earlier this summer because he pays a lower rate of taxes than his secretary. Buffett said, without trying to avoid taxes, he paid 17.7 percent on the $46-million he made in 2006 while his secretary who made $60,000 was taxed at 30 percent.

Unseemly? Immoral? Outrageous? You bet! This imbalance is a consequence of decades of tax reforms that have benefited those at the top, with a marked acceleration under President Bush.

Buffett could not have been clearer about the pernicious consequences. He said the tax disparities have expanded income inequality in a way that has hurt the economy, by constricting opportunity and stifling motivation.

This country has simply got to get back to a progressive tax structure if we are to fund our future liabilities and bring fairness to the system. The Democrats in Congress need to understand that their party's future depends not on collecting money from the rich for campaign contributions, but in collecting money from the rich for taxes. If they lose focus, as Democratic Sen. Charles Schumer has in opposing a fix for the equity firm loophole, they will soon be dismissed as lackeys of the loaded.

The worst thing the Democrats can do now is reinforce the view that it doesn't matter which party is in power, since they are all beholden to the haves.

Progressivity used to be a basic principle of the U.S. income tax structure. The idea is simple: Those at the top of the income pyramid, for whom the economy and governmental policies regulating the economy have benefited nicely, pay a greater proportion of their incomes in taxes.

The most well-adjusted and decent societies are those where the government provides basic social services (good schools, health care, police and fire protection), invests in infrastructure including human capital, and promotes a thriving middle class. A progressive tax code contributes to this model by having society's most advantaged citizens provide the necessary resources for a more beneficent society. It also tamps down income inequality, and since people tend to view their lot in life in relative terms, this increases general well-being.

But America has been moving in precisely the opposite direction. Since the 1960s, the widening of income inequality has been cheered on by a tax code that takes proportionately less from acquired wealth while keeping the burden on workaday paychecks.

We are at a point now, according a recent analysis by economists Thomas Piketty, of the Paris School of Economics, and Emmanuel Saez, at the University of California at Berkeley, that in a matter of a few years we could see essentially a flat tax system for middle-income earners and above. The progressivity will have been erased, due to increasing payroll taxes and the impact of the alternative minimum tax on the middle class coupled with decreasing estate and corporate taxes that are paid by the wealthy.

Piketty and Saez looked across all major forms of wealth and income taxes, including payroll, estate, income and corporate taxes. In 1960, they say that the top 0.01 percent of earners paid 71 percent of their income in federal taxes. In 2005, the same 0.01 percent, or those making more than $18-million annually, paid only about 35 percent.

Taxes for America's wealthiest are at historic lows, according to the economists. Meanwhile, the average federal tax rate for the middle class has remained roughly constant or ticked up a few percentages, depending on where in the middle one falls.

Flattening the income tax, reducing if not eliminating capital gains, estate and corporate taxes - all in the service of the rich - have been long-standing Republican priorities. Bush purposely allowed his tax cuts to exacerbate the alternative minimum tax problem for the middle class in order to give bigger breaks to those at the very top.

According to Citizens for Tax Justice, Vice President Dick Cheney and his wife saved $111,000 in taxes last year thanks to the breaks he and the president stewarded through Congress. The Cheneys paid an effective tax rate of 23.4 percent on $1.8-million in income in 2006 - also less than Warren Buffett's secretary.

In 1983, Leona Helmsley famously told her housekeeper that only the little people pay taxes. Bush and the Republican Congress have made that truer than ever.