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Fletcher: Who do we tax and how much?

December 11, 2012
Stephen Fletcher , The Alpena News

Everyone is talking about taxes but nobody is doing much about them.

The president and speaker of the House spoke privately earlier this week but aren't saying what, if any, conclusions they came to. Blame abounds and people are frustrated.

As one would expect in this type of environment, the truth and hard facts appear somewhat elusive.

First, President Obama and House Speaker Boehner didn't agree on anything this week because if they had, we would have known it. Neither party is compromising so they don't "lose face" with their party faithful. The rhetoric returned to talk about soaking the "rich," but who are these people?

According to the Internal Revenue Service for the tax year 2010, 3 percent of the tax returns filed reflected adjusted gross income of more than $200,000. These folks paid 52 percent of all taxes paid that year, and did so at a tax rate of 22 percent.

In comparison, 41 percent of those who filed in 2010 paid nothing. Most people (56 percent) fell into the income bracket of $30,000 to $200,000. This group paid 48 percent of the taxes. Tax proposals being discussed apply only to the 59 percent of the people who pay 100 percent of the taxes currently. There is no proposal to tax the 41 percent who pay nothing.

Except for billionaire Warren Buffet, I haven't heard of anyone volunteering to pay more taxes. Buffet actually never said that either. Rather, he said he thought it was absurd that he paid so little tax on all his income.

The spending cuts so hotly contested on the table account for about 3 percent of our country's annual budget. Could you cut your budget by 3 percent?

I have seen absolutely no mention of a possible cut in the corporate tax rates - some of the highest business tax rates in the world. What I have heard is that large corporations are keeping their foreign earnings overseas to avoid U.S. taxes.

These companies face a quandry. If they keep their assets overseas and create jobs in other countries, they pay no U.S. taxes obviously. If they bring the money home, however, they face the high business tax rates. You have to ask yourself as an economist if this quest for higher business taxes doesn't come at even a greater cost - lost opportunities here. The answer is obviously yes, although some elected leaders prefer to just call these American corporations unpatriotic rather than address the economic inequities they've created.

A popular scapegoat in recent days has been the Laffer Curve, with "talking heads" saying this economic principle doesn't work any longer. I believe that assertion to be just wrong. The Laffer Curve measures the level of tax collections charted against marginal tax rates.

Obviously, if the tax rate is zero then tax collections are zero. However, if the tax rates is 100 percent of all wages earned, then very few people would work just to give all their income to government. Again then, the tax collection would be zero. Somewhere between those two ends of the spectrum is a place where tax collections will be maximized. Most economists, including Christine Rohmer of the Presidential Council of Economic Advisors, think this number is around 33 percent rate of taxation on AGI.

Tax rates above 33 percent cause folks to adjust their AGI or drop out of the system by retiring, which lowers your income by the amount of your wages. Others move their assets to such popular tax havens like Panama, Costa Rica, Belize, Cayman Island or Bermuda.

Under the current U.S. tax code you can remain annually in the U.S. for 120 days without incurring any tax liability. Maybe with the Democrats maintaining the top 3 percent earners in this country are, in effect, "enemies of the people," those 3 percent might find a change in climate very attractive.

The only problem - who then would make up that 52 percent of taxes that would disappear with them?



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