Published Oct. 17, 2011 in the Washington Monthly. ( Link to article)
It is hardly surprising that the super-rich hire press agents to sing their praises. Since time out of mind, the powerful have tossed a few pieces of silver to writers willing to extol them. So it appears to be with John Steele Gordon, a business and financial history writer long associated with Forbes magazine whose work shows a considerable focus on the ascendency of laissez-faire capitalism. Among his treatises are word pictures of some quite extraordinary buccaneers: Gould, Fisk, Vanderbilt, Rockefeller.
Gordon took to The Washington Post last month to cast doubt on Barack Obama’s proposal to raise marginal tax rates on the wealthy, which many—though not the president himself—are calling a “millionaires’ tax.”
Gordon’s piece, entitled “Five Myths about Millionaires,” begins thus:
This past week, President Obama tried to sell his new “millionaires’ tax” to the Rust Belt. But who are the millionaires Obama is talking about? And will a tax on them help the economy? Let’s examine a few presumptions about the man with the monocle on the Monopoly board.
The “Five Myths” format is a regular feature of the Post’s Sunday Outlook Section, and though the section runs mostly opinion pieces and book reviews, the “Five Myths” set-up implies an expert debunking with facts of views that are widely held but inaccurate. Yet Gordon’s piece is such a farrago of inaccuracy and misdirection that it needs its own debunking.
Here are the Five “Myths” he writes about and attempts to deflate:
Myth 1: Millionaires are rich.
This is no longer true, writes Gordon:
Being rich has gotten more expensive. A $1 million fortune was unusual in the early 19th century.
Today, a well-invested $1 million might generate $50,000 in a combination of investment returns and interest income. That isn’t chump change, but it’s roughly equal to the 2010 median household income.
Gordon is, of course, correct that a millionaire in the Gilded Age was super-rich, whereas a millionaire today is not. But this is hardly a secret. Nearly everyone is aware that because of inflation a millionaire in the era of gaslights and buggy whips was different from a millionaire now. A millionaire in the pre-World War I era had more than 20 times today’s purchasing power.
But the far more insidious problem here is that Gordon is conflating assets and income. Obama’s proposed tax is not a levy on assets, it is a tax on adjusted gross annual incomes above $1 million annually- a metric indicative of someone who is orders of magnitude better off than a retiree who has scraped together $1 million in assets he must live off for the rest of his life.
By obfuscating the difference between income and assets, Gordon is engaging in wildly deceptive argumentation.
Moreover, he is dodging the critical debate about how tax policy and the financialization of our economy have combined to funnel a greater and greater share of total national income into the pockets of a tiny minority of Americans who make far in excess of $1 million a year. The explosion of CEO compensation and the establishment of “carried interest” tax rates for hedge fund managers mean America now has a significant class of super-rich with annual incomes of $50 to$100 million or more. Yet the tax rates these super-rich individuals pay are often lower than that of the middle income earner. It is that consequence of government policy that drives the political debate today, not the author’s apparent belief that it is vital we should know that a single-digit millionaire today is not as rich as Cornelius Vanderbilt was in his time.
Myth 2: Millionaires think they’re rich.
This is one of those “myths” that really isn’t a myth; I doubt most people have ever given any thought to the question of whether millionaires think they are rich. Nevertheless, Gordon writes:
“Rich,” like “poor,” is a relative term. A family living on the American median income of $50,000 a year might think that one living on $500,000 is rich. But that second family, which probably knows families far better off than they are, thinks that you need $5 million a year to be truly rich, and so on.
There’s certainly some truth to Gordon’s grass-is-always-greener observation. Yet curiously, the opinion polls he uses to buttress his assertions are laughably bad. One is an online survey by Fox taken during a recent GOP debate. The others are surveys by investment firms of their customers. No statistician would take these sorts of self-selected poll numbers to represent anything meaningful. And while two of the polls asked about assets, the other asked about income, once again blurring the crucial distinction.
The point Gordon seems to be trying to make here is that since the feeling of being rich is relative, it’s therefore arbitrary or somehow unfair to make tax policy based on differences in how much people make. But why should we set tax rates based on how rich people feel about income differences rather than on the reality of those differences? And if people’s feelings are to be taken into account, what about those of Americans at large, the vast majority of whom, according to polls (real, scientific polls) want the rich to pay more in taxes?
Myth 3: Millionaires pay proportionately less income tax than poorer people.
This “myth,” made popular by investor Warren Buffett’s assertion than he pays a lower percentage of his income in taxes than his secretary, is part of the rationale behind Obama’s plan to increase taxes on the super-rich. But Gordon argues that this is simply not true that the rich pay less. To do so he cites IRS statistics showing that the average income earner of more than one million dollars pays 23.3 percent in federal income taxes, which is a higher rate than lesser income earners pay. That statistic is true enough, but his argument is misleading. First, that figure does not account for the total tax burden on individuals. Even those who pay no income tax contribute payroll taxes to the federal government, as well as taxes levied by state and local jurisdictions, many of which are regressive in nature. .
Second, he is using the average income over a million dollars. But the real political debate is about the super-rich. The richer the individual is, the more likely his income is to be derived from capital gains and dividends, which are taxed at less than half the top marginal income tax rate. This inequity in the tax code accounts for the fact that the richest 400 Americans have been paying an average effective Federal income tax rate of 17-18 percent since passage of the Bush tax cuts: little more than half the effective rate they had paid since the early 1990s – even as their combined income quadrupled.
Gordon deals with these inconvenient data by suggesting Americans are confused by the lower tax rate on capital gains and dividends, which he says are “double taxed.” Apologists constantly invoke this red herring to imply that the income stream accruing to investors is somehow taxed at 50 percent. Gordon says that poor, befuddled Warren Buffet would not be advocating raising his own taxes if he were aware that he was being double-taxed: “But dividends are paid out of corporate profits that have already been taxed. So Buffet’s equity earnings are doubly taxed: he pays 35 percent at the corporate level and 15 percent on his own return,” Gordon writes.
No, Buffet does not pay 35 percent at the corporate level. The firm he manages, Berkshire Hathaway, paid an effective 29 percent corporate tax rate in 2010, which is at the upper range of what large companies pay. GE managed to pay no federal income taxes in 2010 on foreign and domestic profits of $14 billion. Ask yourself why American corporations are now sitting on $2 trillion in cash if the American tax system were so punitive and confiscatory?
The American revenue system is about taxing on individual legal entities. Taxes on an individual, be he a wager-earner or sole proprietor of a business, are only levied once; that said, all income from whatever source (unless it is specifically exempt) is taxed in those cases. Corporations, on the other hand, pay rates on profits, a narrower category whose definition is more susceptible to creative bookkeeping. This is how GE could pay zero federal taxes last year; yet that does not preclude its shareholders from realizing capital gains. Those GE shareholders, just like Warren Buffet with respect to Berkshire Hathaway, are individual entities who are legally separate from the corporations whose shares they own. They are taxed once on the investment income they receive.
To argue that investors are double-taxed is like saying that if Warren Buffet were to give you a billion dollars free and clear, you should pay no taxes on that sum, since Buffet had already been taxed on it. Good luck with that argument when you make your not-guilty plea in federal court!
The cry of “double taxation” is a red herring designed to let rich speculators skate.
Myth 4: Millionaires share the same political beliefs.
Of course they don’t, but so what? No one argues that all millionaires are political reactionaries like Alfried Krupp or H.L. Hunt; everyone knows about the rich Hollywood personalities who fund liberal causes. The issue is that all of them are paying significantly lower tax rates than they used to, and this circumstance is creating fiscal shortfalls, aggravating economic distortions, and endangering the social fabric.
And the “charitable foundations” that many of the rich found or endow are simply tax dodges, or else tax-free megaphones for propagandizing their own political views. This is true whether the very rich guy is George Soros or one of the Koch brothers (see: Cato Institute, Heritage Foundation, etc.).
This “myth” is a straw-man argument about millionaires’ beliefs that has nothing to with tax policy.
Myth 5: Obama’s ‘millionaires tax’ won’t seriously limit investment.
As Gordon notes, this is the argument made by the Obama administration. To counter it, Gordon cites a 2001 Joint Committee on Taxation report claiming that a dollar in taxes causes more than a dollar of losses to the economy. But the “report” is a political advocacy piece issued under the rubric of the committee’s Republican chairman. The paper’s claim amounts to proposing “dynamic scoring” of tax legislation – in other words, fudging the economic effects of a tax cut so that they outweigh the negative fiscal effects. Nonpartisan agencies like the Congressional Budget Office have resisted pressure to dynamically score legislation because the methodology is questionable.
Likewise, Gordon tries to argue that a decrease in unemployment in the four years (2004-2007) after George W. Bush’s tax policies were fully implemented proves that tax cuts drive job growth. But he doesn’t mention that the Clinton administration’s 1993 tax increase, which Republicans predicted would destroy the economy, was followed by similar drop in unemployment. It was also accompanied by an economic upswing that, for the first time since the early 1970s, provided significant income gains to the bottom 50 percent of income-earners. And the Clinton-era tax rates were hardly confiscatory towards the top earners: the rich still got richer. By contrast, the entire period of the administration of President George W. Bush (not just those four selected years) saw the slowest job creation rate since the administration of Herbert Hoover.
Gordon says that in the same 2004-2007 period the federal government received a 44-percent revenue increase. But this revenue bump was the fiscal equivalent of a sugar high. As a result of Bush’s capital gains rate reduction, many investors both in movable assets and real estate decided to take one-time distributions. Such activity does not result in a steady stream of revenue over many years the way income and consumption taxes do. And the revenue spike was a symptom of more dire events: the housing bubble, which was already underway owing to Federal Reserve Chairman Alan Greenspan’s artificially-low interest rate policy, got further impetus from the capital gains rate cuts. After 2007, revenue began to crater as the capital gains distributions fell off.
Bush’s tenure concluded with the Wall Street collapse of September 2008, the most severe financial meltdown since the crash of October 1929. The 2008 collapse had many authors: Wall Street’s securitization of subprime mortgages; Greenspan’s policies; the irresponsibility of Federally-guaranteed Fannie Mae and Freddie Mac; and the hands-off policy carried out by government regulators. But the fuel for the speculative bubble was also supplied by the flood of cash the tax cuts provided for the investor class, not least the windfall they received from a lower capital gains rate on real estate speculation.
Contrast that with the 1950s, a period of substantial real economic growth and shared prosperity – along with a 91 percent top marginal rate on individual incomes, while corporate tax revenues were a markedly higher share of total Federal revenue than today. President Eisenhower denounced attempts to reduce the tax rates as fiscally irresponsible. In view of the current $14-trillion national debt, maybe Ike was right.
Despite the present Great Recession, the possessing class is still awash in cash. It is able to hire publicists such as Larry Kudlow or Erin Burnett. This activity is in the tradition of PR efforts pioneered early in the 20th century by Ivy Lee and
But one would have thought the Washington Post Corporation could have hired someone with a better command of facts and plausible argumentation than John Steel Gordon. The nationwide demonstrations against Wall Street are evidence that the public isn’t buying it.