Fiscal Cliff Notes: The Truth About Taxes

5 Dec
Warren Buffett: A Sensible BIllionaire

Warren Buffett: A Sensible BIllionaire

Almost as soon as the 2012 Presidential election was called for Barack Obama, the media and collective punditry turned their attention to another issue, the so-called “Fiscal Cliff.” (Sounds scary, doesn’t it? Picture Harry Reid and John Boehner driving a convertible armored car, Thelma and Louise style….) It’s important to dial back the drama and look at what’s really going on with the Federal budget. The current situation is called a cliff because of the steep reductions in the deficit that will be triggered if no other action is taken before December 31. Am I the only experiencing déjà vu here caused by obstructionist Republicans? Many automatic spending cuts will begin; various safety net and stimulus funds will diminish or end (such as unemployment benefits); tax rates for all Americans will go up.

Taxation is the issue which will matter the soonest and has become the sticking point in the current debate. The other issues ease in over the year with plenty of time for Congress to (re)consider them. Tax rates will go up on January paychecks.

President Obama campaigned — and WON — on a promise to keep taxes low for poor and middle class Americans and to restore slightly higher rates for the wealthiest 2% (albeit we still do not address those living in poverty the way we should, but I shall save that for another soap box opportunity). Under his plan, nearly $1 TRILLION in additional revenue would be realized by increasing the top rate by about 4% and the dividends rate by 5%. This will happen automatically when the Bush tax cuts end at the close of the year. Unfortunately, so will tax cuts for the other 98%, resulting in a relatively more painful income reduction for most families.

Sadly, because of the way the tax code is structured, the overall impact of the change is much worse the less you make. The New York Times has some wonderfully detailed charts that explain how this happens. It boils down to three things:

  • In general, higher earners rely less on wages and more on investments which are taxed at a lower level, so raising income taxes hits lower earners harder.
  • Payroll taxes are capped at about $100,000 of income, so earning more than that does not result in higher levels of these taxes, making the overall rate lower.
  • Corporate taxes, which are disproportionately borne by higher bracket payers (and then passed along to their customers…) are also historically low and are not even on the bargaining

Teapublicans and Weeper In Chief Boehner whine that taxes are too high as it is and that raising them will hurt small businesses and job creation. The facts — and a little history — call them liars. Independent analysts note that less than 8% of small businesses would pay the higher tax rates. Even more significantly, a majority of small business owners in a recent poll expressed little concern over the tax rates. They are much more worried about changes in Medicare, which is a central element in the Republican plan.

The Times site mentioned above shows that taxes are lower than they’ve been in 30 years. In fact, as this handy chart demonstrates, Republican president Eisenhower left office with tax rates significantly higher and a booming economy. Tax reform is important, but it should heed the advice of Warren Buffett: a millionaire should pay a higher rate than should his or her (mostly his, by the way) employees.

Boehner can complain all he likes, but if he does nothing, everyone’s taxes will go up. The Senate passed a fair bill months ago that is languishing in the House. Minority Leader Nancy Pelosi, demonstrating true leadership again, is working on an administrative process to force it to a vote so that 98% of American’s can get the fairness they deserve. President Obama has made it clear that he’ll support the bill. Will the lame duck House allow petulance to trump action? It remains to be seen. One thing they should note: the majority of Americans will hold the GOP accountable if we start heading over the cliff.


21 Responses to “Fiscal Cliff Notes: The Truth About Taxes”

  1. Jani December 5, 2012 at 7:17 am #

    Reblogged this on janiswings and commented:
    Just in case you are misinformed and think Obama is costing you more in taxes than previous presidents.

    • Michael Hulshof-Schmidt December 5, 2012 at 7:20 am #

      Thank you for reblogging my story! I hope you are getting some rest after a strenuous quarter at school.

      • Jani December 5, 2012 at 8:26 am #

        I still have to finish the last 2 pages of my CBP paper. I just can’t do it! I need the time crunch to inspire me!

      • Michael Hulshof-Schmidt December 5, 2012 at 8:35 am #

        You have until midnight tonight!

      • Jani December 5, 2012 at 9:31 am #

        I FINALLY finished it. Luckily, the last part was where we critically examine and disparage ourselves. I am good at that 😉

      • Michael Hulshof-Schmidt December 5, 2012 at 1:19 pm #

        Perhaps too good at that. 🙂

      • Jani December 5, 2012 at 6:51 pm #


  2. Rich McIntyre December 5, 2012 at 11:55 am #

    Hi Michael,

    I hope you are doing well. I read this post with interest and have a few items I’d like you to also consider in this discussion on taxes. In the house bill you mentioned an item not discussed enough in my opinion is the issue of the so called “Death Tax”.

    In the bill the Senate passed the current estate tax of 35% on inheritances worth more than $5 million, or $10 million per couple will increase back to the rates under President Clinton, 55% for estates over $1 million, or $2 million per couple.

    Many people think of Paris Hilton when the estate tax is discussed and say “so what let her pay whatever, she didn’t earn it”. However there are many more people who will be affected by this then you may think. Family owned farms are ones that deeply concern me. If a farm that based on the size of its acreage is valued in the millions taxed at such a high rate it will destroy many families. I am not an expert on this by any stretch but if a farm raises cattle it needs, depending on where in the US it is located, conservatively 10 acres per animal of grazing land. Do the math, a family farm with a herd of 500 cattle, which is not a large enterprise, needs over 5,000 acres.

    I also think that people like me are being penalized. During my career I paid income tax rates of up to 70%. If you go back and look at the historical tax rates in the 70’s it was 70% for top earners and in the 80’s 50%. The tax rate for top earners did not go below 38% until 1988.

    If despite the huge tax rate paid I was able to invest some of my after tax income and leave my family an estate of more than $5m how could anyone justify taxing that at 55%. Remember I already paid 50-70% on my earnings and invested a portion of the 30-50% left over AFTER paying all my family expenses. It is unfair to say the least. And who does it hurt…my kids, people just like you!

    Our tax code today is a mess!! The code is as thick as a phone book and is growing. It is time to scrap the whole damn thing and go to something simple like a flat tax or a graduated tax with a maximum rate of say 25% and zero exemptions. You earn you pay and a portion of the percentage paid or withheld can go to fund Social Security. Start the income tax at $31k per year. That would mean a married couple each earning $30k or $60k total would pay nothing. In Canada there is no joint return, everyone earning an income files a return. I would also like the estate tax scrapped since the income that generated that estate was already taxed.

    The system we have today has too many exemptions, credits, loop holes or whatever you choose to call them. Dump the IRS and print the code on a 3×5 card. We would generate more revenue and save money on headcount in the process. During my career I assumed headcount costs to be twice the salary paid.

    One last thing. This “tax the rich” rant that the far left is pushing and the “rich already pay too much” the right is pushing is, in my opinion, destructive and taking our attention away from the important things we need to address, like the fact that of every dollar the government spends 40 cents is borrowed!!

    I wish our President would stop playing to this and seize the opportunity to lead by proposing a new tax plan that is simple and clearly understood by all. It would make it very clear to all what we are expected to pay and it would reduce the bickering and snipping we have today. We have too many important things to address and this constant fighting over who has what and who is paying what is as I said destructive behavior and I believe we as a people are better than that.

    • Michael Hulshof-Schmidt December 5, 2012 at 3:13 pm #

      Thank you so much for your thoughtful comments. I always enjoy a good dialogue about the issues. It seems we agree that the current tax code is too complex; sadly, that complexity usually works to the advantage of those who have the means to employ accountants, attorneys, and other professionals to help them manage the many options. As to your other comments, I’ll try to take them in order.
      I find the term “death tax” to be sensationalistic and prefer to discuss the estate tax or inheritance tax, whichever is relevant to the discussion at hand. Your Paris Hilton example made me smile, but if someone wants to pay her for whatever it is she does, she earned it as much as Mitt Romney earned millions by socking money away in an account.
      The estate/inheritance “penalty” for small businesses and farms is often cited as a problem with the tax code. Based on my research, these arguments are red herrings at best. Fundamentally, only a small percentage of these businesses would fall into the bracket that puts their heirs at risk. There are also many legal and financial structures available to protect the transfer upon death. I found this excellent overview for family farms and this one for small businesses. For personal funds, similar vehicles, such as trusts, exist, again readily available to those who have assets significant enough to raise concern.
      I don’t know enough to comment about your personal situation. I appreciate your frustration regarding the many changes in rates and reiterate my support for a streamlined, FAIR, tax code.
      You avoid using the term, but clearly imply concerns about “double taxation” throughout your comment. There is a myth – especially on the right – that nothing should ever be taxed more than once. It is important to remember that we don’t tax wealth; we tax the transfer of wealth. Every time money, goods, or services change hands, it is a legitimate opportunity to impose a tax or fee. Those fees should be sensible and fair, but the “don’t tax it again” argument runs counter to the fundamentals of U.S. taxation.
      President Obama isn’t playing. He campaigned on raising taxes on the top 2% and protecting the tax rates for the rest of the country. He won, decisively. Now he’s following through on that promise and asking Congress to help. Sadly, the legislative mess that Congress created makes this too urgent to wait for a thorough tax overhaul, however laudable that long-term goal might be.
      Thanks again for your thought-provoking comment.

  3. nevercontrary December 5, 2012 at 6:10 pm #

    Next thing you are going to want me to believe is that people living off food stamps aren’t actually living the dream life at my expense.

    • Michael Hulshof-Schmidt December 5, 2012 at 6:43 pm #

      Sadly, I know far too many people that barely survive on food stamps.

      • nevercontrary December 6, 2012 at 5:11 pm #

        I am loving following Cory Booker on his snap challenge. I wish all of congress would do a snap challenge.

      • Michael Hulshof-Schmidt December 6, 2012 at 9:40 pm #

        I’m not quite sure what to think of our Booker yet. I would not call him a progressive.

      • nevercontrary December 7, 2012 at 7:53 pm #

        He is a newbie in the scene relative to others in politics. But, there a good number of things I like about his style that I would like to see transfered to other politicians.

      • Michael Hulshof-Schmidt December 7, 2012 at 7:56 pm #

        I love learning from you! I will have to do some investigating now and see who the real Booker is.

      • nevercontrary December 7, 2012 at 7:58 pm #

        If you can keep up with twitter, follow his twitter feed. It is truly eye opening

      • Michael Hulshof-Schmidt December 8, 2012 at 8:34 am #

        Dear heart, I fear I am too old to try and keep up with the twitter.

      • nevercontrary December 8, 2012 at 4:20 pm #

        Oh you are young at heart.

      • Michael Hulshof-Schmidt December 8, 2012 at 4:37 pm #

        LOL! Thank you, Bonnie.

  4. Jay December 5, 2012 at 6:30 pm #

    I’ve come to think that going over the cliff might be not such a bad thing. It would eliminate a bunch of sweetheart oddities in the tax code (if they’re genuinely good policy, then reinstate them in open session, not surreptitiously), it would raise tax rates, and it would impose a bunch of politically difficult spending cuts, spread equally between Defense and domestic discretionary spending.

    It isn’t as though going over the cliff would mean the resulting spending and taxing rates would be fixed in stone. Fixes could be negotiated in smaller increments, with the advantage of the starting point for negotiations being Clinton-era tax rates rather than Bush-era tax rates.

    And while most of the fixes would properly lean toward the Democratic side of the ledger, it isn’t as though the well-off wouldn’t get anything at all. To address Rich McIntyre’s estate tax worries, I think the Democrats would like to exclude something like the first $3 million of an estate, and to tax what’s in excess of that at 35% or so. So Mr. McIntyre should feel free to get wealthy, in confidence that most Democrats agree with Republicans that taxing estates in excess of $1 million at 55% is excessive.

    • Michael Hulshof-Schmidt December 5, 2012 at 6:48 pm #

      I actually do feel that going “over the cliff” would be a good thing. I like how you reference starting with Clinton-era tax rates rather than the BUsh-era tax rates. Of course, I have to get on my soap box for just a minute and express my deep desire that we have some courageous conversations about poverty and what would it look like to put policies into place that help distribute wealth in ways that help all of humanity.

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