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Financial Planning > Tax Planning

Legalized Tax Evasion

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Criticism of the tax deal that President Obama struck with Republicans is understandable. Income and estate tax breaks for the wealthiest Americans would increase the deficit at a time when we need to create jobs, not dole out dollars to people who already have plenty of money.

As of this writing, it appears the tax deal will go forward. Without the agreement, middle class income taxes would rise, while millions of Americans would see their unemployment compensation expire with no immediate prospects to land a job.

As President Barack Obama so aptly said, Senate supporters of tax cuts for the wealthy were holding the middle class hostage. In their resolve to nail down tax cuts for their wealthy admirers, right-wing legislators seemed aloof to the pain of those well down the income ladder.

There is no valid economic rationale to cut the estate tax to 35%, however. Estates are passed down to people who did not create those estates–and therefore should pay all the tax that is coming to them.

Likewise, there is no reason to extend the life of tax cuts for the top 2% of taxpayers. We can expect that song to be sung again in two years, when the “temporary” cut once again approaches its expiration. The lyrics will be the same old tired refrain: Tax cuts for high income individuals create jobs.

Here’s why that is not true: wealthy Americans do not cut down on spending just because their taxes go up. If they think there is money to be made, they will spend–regardless of their tax rate. The reason they are not hiring or spending on equipment or supplies right now is because consumers are not buying.

As Warren Buffett told ABC News in November, trickle-down theory “has not worked the last 10 years, and I hope the American public is catching on.” Buffet joined a group, Patriotic Millionaires for Fiscal Strength, which has asked President Obama to bring an end to the Bush tax cuts for the wealthy.

Tax cuts for the working stiff are another matter. When a working stiff gets a tax break, he or she spends that extra money on goods and services. That is what creates jobs.

Eliminating the Bush tax cuts would return the top income tax rate from the current 35% to 39.6%, where it was when the economy was booming. Those earning incomes between roughly $172,000 and $374,000 would see their tax rate climb from 33% to 36%.

Conservatives argue this would harm the economy. But do they really think there are businesses that are holding off on new hires until they have been assured of lower taxes through 2012?

An affluent individual who sees an investment that promises a high return will go right ahead and make that deal, sure as shooting. So the argument that that the rich are so sensitive to tax increases that even a minor one would cause them to cut back on investments is a load of trickle-down hooey.

In fact, back in 1964, the tax rate was 91% for the highest earners. Yet that was a time when the economy was growing faster than it is today.

Conservatives obfuscate such facts by saying that their tax cut proposal would help small businesses. The conservative Heritage Foundation has even warned that gross domestic product would fall by over $1 trillion in the next decade if the pre-Bush tax rates were restored, losing an average of 693,000 jobs per year in that period. The truth is, small businesses would pay only a relatively small tax increase if the Bush tax cuts lapsed.

Indeed, tax cuts can stimulate the economy and create jobs. But lest we forget, not all tax increases are bad, either. The tax increase imposed in 1982 under the Reagan administration was followed by falling deficits and rising employment. In contrast, the Bush tax cuts gave us the deficits we suffer now and did nothing to stop the excesses of financial firms that led to the 2008 meltdown and today’s high unemployment. It’s all relative.

Right-wingers advocate tax cuts solely to take money away from programs that would benefit the common weal, including Social Security, Medicare and the Affordable Care Act. If tax cuts mean continued high unemployment and the slowest income growth since the end of World War II, I believe they truly do not care.

“I’ve had a good business career and I don’t give a damn about tax cuts,”" said Sen. Frank Lautenberg, Democrat of New Jersey after Obama announced his deal with Republicans. “I’d rather have a strong country than to get a few bucks back on my taxes.”

People like Lautenberg and Buffett understand that taxes mean money that goes to benefit everyone, including people who are out of work or underemployed. Taxes enable government to provide adequate food, housing, transportation, education, infrastructure medical care, clean air and water and so on. When there are plenty of such good things going around, then we might think of cutting taxes.


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