Serious Implications

Heiress and pop-culture icon Paris Hilton. Photo source here and Google Images.

Lottery winnings are considered taxable income. Nobody seems to get too upset abut taxing lottery windfalls and winnings from the casino. Yes, inherited wealth is a private “gift” from deceased loved-ones, and worthy of more respect than a big lottery payout. But does it make more sense to tax earned income from those who spend their time and effort working? Don’t we as a society want to send the message that work is a dignified, valued, essential part of life and not just for “chumps,” who, for example, can’t figure out how to get rich flipping real estate by cell-phone while getting a massage at some spa in Sedona?

When I was a teenager, thirty-five years ago, I worked for a dairy farmer who’s economic philosophy was simple and went like this: “people who work should live better than people who don’t.”

Seemed straight-forward enough at the time. In fact, wasn’t that the system? No? What do you mean? Who you talking about? Welfare cheats? Investor class? Trust-fund kids? Soft-handed, air-conditioned, white-collar stiffs in big leather chairs?

My farmer-boss worked sixteen hours a day and payed out everything he earned, starting with the bank. He had to actually buy or rent his land, and work like crazy to make the payments. Compared to those who inherited their farms, he was, like a runner wearing leg irons, at a huge disadvantage. Eventually, he had to give it up.

Should the tax man go easier on those who benefit from inherited and investment income compared to somebody breaking their back at a job every day? The Institute for Policy Studies proposes the following:

We recommend that lawmakers:

Tax income from capital gains and dividends at the same rates as wage income. Under current law, income from investments gets taxed at 15 percent. Income from work gets taxed at up to 35 percent. No coherent moral justification exists for such an enormous tax preference for income from wealth. According to Citizens for Tax Justice, taxing all forms of income the same would generate $80 billion a year.

Create a new top tax rate for incomes over $2 million. Presently, a person with an income of $300,000 faces the same tax rates as a person with an income of $3 million. Instituting a top tax rate of 50 percent on incomes over $2 million would generate more than $60 billion a year.

Levy a progressive estate tax on large fortunes. The federal estate tax, our nation’s only levy on grand accumulations of private wealth, will expire in 2010 and revert to the 2000 status quo. Lawmakers aren’t going to let that happen — if, for no other reason, to take inflation into account — and that reality creates an opportunity to make the estate tax more progressive.

Isn’t it about time to show the “working stiffs” of the world some respect and make a fairer tax code? Don’t worry, folks like Ms. Hilton will be just fine.

With the American Middle Class in dire straights, President Obama has appointed Vice President Joe Biden to lead a Middle Class Task Force. The opening meeting featured creation of “green jobs.” Biden might have decided to start with a fairly non-controversial topic. However those jobs are created and promoted, it’s a sure bet that tax legislation will be part of the “equation.” The same is true of initiatives in health care reform, energy, and education, the three top priorities of Obama’s agenda to build an America strong enough to compete and lead in the 21st Century.

Tax reform legislation will be a huge part of the agenda and fights over altering the status quo will be spectacular. Therefore, we need to educate ourselves and prepare for blizzards of tax policy rhetoric.

Tax Rascal has a list of Top Ten Tax Blogs. At the top of the list is Wayne State University Professor Linda Beale’s ataxingmatter, which is also one of the better economics blogs linked in my sidebar. Congratulations Dr. Beale!

Tax policy has rightly emerged as a major issue in the presidential debate. When I want to catch up on the important pending legislation and latest talking points, I go to Professor Linda Beale’s website, ataxingmatter.

What I like about her approach is that it considers not only the economic, but social aspects of tax policies:

…how we tax says a great deal about what our values are and how we think a nation should treat the wealthiest and the poorest of its citizens.

Professor Beale has a brief contrast/comparison of the Obama vs. McCain tax proposals here.

Here’s what the New York Times said today about the Tax Policy Center’s recent comparative study of the two parties’ presumptive candidates for the highest office.

“[U]nder Mr. Obama’s plan, the middle of the middle class, or those earning $37,595 to $66,354, would see taxes cut by $1,042 a year. Under Mr. McCain’s plan, taxes for people in that category would also fall, but by $319; the largest chunk of the benefits would go to those making $2.8 million a year or more. Larry Rohter, Will the Real Tax-and-Spender Please ‘Fess Up, NY Times, Jun. 13, 2008.”

Now, folks, $2.8 million is a lot of moolah and anybody with that annual income can live a comfortable lifestyle even in hard times like these. But the middle of the middle class, while making enough to get by, has to make lots of hard choices and doesn’t have much room for error or bad luck–a catastrophic illness or major education expenses for children can put a significant crimp in lifestyle or send a family into bankruptcy. Rising gas and food prices hit hard, when a family is living on wages that have stagnated for years. A decent tax break for that group makes a lot of sense, whereas more tax breaks for the multimillionaires is simply wrong.

I’ll buy that.