Class warfare or class welfare?

It is remarkable the mileage that GOP and conservative talkers have gotten out of using the phrase “class warfare” to stigmatize raising taxes on high income earners.

Sure, if the goal of tax reformers was to return to the punishingly high marginal rates of the 1960s (over 80% on the highest levels of income), they might have a point.  But today the term is applied simply to efforts to restore very mild progressivity or even parity to the tax rates of high income and middle-income earners.

Last night, President Obama called on those earning $1 million or more per year to pay at least 30% in taxes on that income.  This at a time when the marginal tax rate for a single individual earning over $179,000 is 33%.  In other words, Obama’s plea was for extremely wealthy people to pay almost as much in taxes on their income as is already required of people who are make 80% less.

This is “class warfare?”

Hardly.  Actually, the 15% rate on capital gains and other privileged income (carried interest, earned by hedge fund managers, and a few other special category investments) is better identified as “class welfare” for the extremely wealthy, allowing them to multiply their wealth over time at rates more advantageous than rates paid by salaried workers.

The normal justification for a lower rate on capital gains is that capital accumulation drives the economy, and thus is good for economic growth; naturally we want tax policy to favor processes good for growth!

Yet the falsity of this is easily shown.  The vast majority of the capital gains benefit goes to the top 1%, mainly financial industry and professional top earners, celebrities, and non-financial executives.

Yet these are precisely the individuals that are most capable of choosing whether to take income gains as salary or capital gains.  Let us say a corporation earns $1,000,000 on sales over the costs of production excluding executive compensation.  If the corporation pays out the $1,000,000 in salaries to its executives, they have to pay the marginal tax rates of over 30% on most of that.  However, if the corporation instead gives the executives stock options at a favorable price, then uses the $1,000,000 to purchase company shares, driving up the price of the stock, when the executives sell the stock, they pay only 15% on those gains.

How does diverting money from salary payments to stock price manipulation help the real economy?  The answer — it doesn’t; it is just a tax dodge that benefits the wealthy and forces the rest of us to pay more to cover the costs of government.

15% tax rates for gains on already accumulated wealth?   That’s clearly “class welfare” and should be labeled as such — and ended!

By the way, when Mitt Romney was making his millions at Bain, in the 1980s, Ronald Reagan had seen the light and for a brief period set capital gains and ordinary income taxes at the same level.  It didn’t discourage Romney from using his entrepreneurial energies then, and it won’t stop any from doing so now or in the future.

About jackgoldstone

Hazel Professor of Public Policy at George Mason University
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