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Is Taxing the Super Rich a Waste of Time?

Critics of Obama's tax plan claim the uber-rich will find a way to evade tax hikes. But history tells a different story.
 
 
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Last fall, in the Presidential campaign, candidate Barack Obama promised to raise taxes on the rich and "spread the wealth." Candidate John McCain, figuring that Obama had committed a major political gaffe, spent the next month ridiculing Obama for that promise.

The gaffe would be McCain's. Most Americans, we learned on Election Day, would welcome a bit of wealth spreading.

And that puts Republican leaders in Congress in a bit of a bind. President Obama, with the budget he proposed late last month, has made good on his promise to modestly raise taxes on the rich. Mere ridicule, GOP leaders now understand, will not derail the tax hikes this budget proposes, not this time around. Tax hikes on the rich, most voters have concluded, make sense.

Even Republican voters want to see the rich pay more in taxes. In New York State, for instance, one new poll has found that 62 percent of the GOP rank-and-file want to see higher taxes on annual incomes over $1 million.

GOP leaders, in the face of this reality, now seem to be zeroing in on a more sophisticated line of attack. They've retired the rhetoric that ridicules Obama for wanting to "spread the wealth." Their new pitch: Beware, America. Higher tax rates on high incomes aren't going to do what you think they'll do -- because the really rich have always known how to get around paying taxes.

The right's top ideologues are already busy pushing this formulation.

"Obama’s 'tax the rich' scheme," former Reagan administration assistant treasury secretary Paul Craig Roberts argued last week, "will devastate the upper middle class and leave the super rich undamaged."

Does this case against upping tax rates on high incomes have any merit? Do higher tax rates on high incomes merely roll off the super rich, as opponents of these higher rates charge, like water off a duck's back?

We don't have to guess at the answer here. We need only examine the historical record. Higher tax rates on income in the nation's top tax brackets, that record shows, do make a clearly discernible difference. The higher the tax rate on high incomes, the more in taxes the super rich pay.

Tax loopholes, of course, do exist, and the super rich have, down through the years, spent large fortunes on tax lawyers who know how to max out on the opportunities these loopholes offer. But they spend these fortunes whether tax rates on high incomes are rising or falling. The lower the tax rate, consequently, the less the rich will pay in taxes.

The current top federal tax rate, 35 percent, has been in place since 2001. On 2008 tax returns, this top rate will apply to ordinary income — that's wages, salaries, and bonuses, but not capital gains -- over $357,700.

Back in the mid 20th century, years of much greater equality in the United States, the top tax rate hovered around 90 percent. In 1955, with Republican Dwight Eisenhower in the White House, the wealthy faced a 91 percent tax rate on ordinary income over $400,000.

America's 400 most affluent taxpayers in 1955 reported incomes that averaged, in today's dollars, $12.3 million. These taxpayers worked hard to find loopholes and exploit them. And they did fairly well at that effort. The top 400 in 1955, after loopholes, paid 51.2 percent of their total incomes in federal income tax.

In 2006, our most recent year with statistics available, the top 400 worked just as hard to find and exploit loopholes, even though they faced a top tax rate that stood at a mere 35 percent. In the end, top 400 taxpayers in 2006 -- households that averaged $263 million in income -- paid just 17.2 percent of their total incomes in federal income tax.

 
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