Lies, Damned Lies and Taxes

    While the "new" Blogspot won't let me upload any copyright images, I am referring to a photo (meme) of a young woman looking surprised . Above her head is a text box with the phrase, "Voted for higher taxes on rich property owners."   Below the photo is the phrase,  "Confused why rent was raised." 

       Sometimes people post memes such as this when they know full well that it really isn’t quite that way. This is one of those. For the ignorant (like many Trump supporters) it immediately resonates, and they nod their heads sagely as if only a fool could dispute it.      

        But, as Paul Harvey used to say, there’s the rest of the story. The only reason a landlord legitimately has to increase rent is if the cost of business increases. All those expenses are non-taxable.  Paying more on net income (income tax) only effects the money left after expenses are deducted, and a slew of landlord’s expenses are deductible. Of course, the real issue here is the current Biden proposal would increase the marginal tax rate only on taxable incomes of more than $400,000 annually and, even then, only on the portion above that figure. This group is about 1.8% of Americans. This means that voting against such a measure makes no sense for 98.2% of Americans.

        As we move farther into Oligarchy, we hear people like Trump whine about capital gains rates and income tax rates as if they were at an all time high. Not so much. What has happened over recent decades is that the capital gains tax rate has fluctuated some, from 40% in 1978 to 20% in 1980 and back to 28% in the 1986 Reagan budget, to 15% in 2012 (recession) and is right now at 22%. Trump thinks this is too high. On the other side of the revenue stream, however, from 1944 to 1963 with a couple of dips, the highest marginal income tax rate was 90% or higher! Marginal tax rate means the rate on income over a certain level. Biden is talking about increasing the highest rate on incomes above $400,000 taxable income. Remember the landlord’s costs of maintaining that rental are all deductible, so unless he sees a taxable income in excess of $400,000, he would be unaffected. What this really means is that his profit, not his ability to run his business,  might be reduced by whatever tax increase and then only if he makes clear profit of more than $400k.

         In Libertarian Land, raising the rent is legit because profit is sacred and there cannot ever be too much, regardless of at whose expense. Now back to marginal tax rates. The dirty little story is that since 1963, the highest marginal rate decreased to the 70% range from 1963 to 1980. Then down to a Reagan era low of 28% which was the all-time low. Remember this rate is only the rate on earnings over a certain amount. 97% of us will never be taxed at that rate. As of now, the top marginal rate is 37%. So, let’s see if we can do a cause and effect analysis of the consequences of these changes over time, The most immediately apparent is the general relationship between highest marginal tax rate, capital gains tax rate and Federal budget deficit.  (Warning! This is a generalization, draw your own conclusions)

        In 1956: the highest marginal income tax rate was 91%. The capital gains rate was 25% and the budget deficit was …oh wait, there was none.  In fact, 1956 saw a $4 billion surplus! Jump ahead to 1982. The highest marginal rate was decreased in the Reagan tax cuts to 50% And eventually by 1988 to 28%. The capital gains rate was still in the 27% range, but the deficits through the Reagan years went to triple digit billions and stayed there until 1997.  Circumstances have led to increased deficits since, with the exception of the Clinton budgets of 1998,1999 and 2000. Coincidentally (?), the highest marginal tax rates were also back up to almost 40% but the capital gains rate decreased to 20% until decreasing further to 15% just in time for the housing bubble collapse and the great recession, TARP, massive unemployment, greatly reduced federal revenues,  and the first trillion dollar deficit.

        As a generalization, the US has seen lower deficits during periods of high marginal tax rates. There are numerous other factors, obviously, but the Libertarians cling to the “trickle down” theory because it alleges that “higher profits mean higher reinvestment.” Perhaps in Adam Smith’s day, but not so much now.   

        The other factor, which is blatantly obvious, but which no politician seems willing to explain in plain language, is that social programs are costing steadily increasing percentages of the federal budget. Again, it is Libertarian chic to blame the poor but, in fact, the percentage of citizens in poverty has decreased from a 1962 level of 21% down to a current 14% to 15%. The real pusher of the social program budget is a statistical reality, not a failing system.

     The number of “baby boomers” entering the, Social Security, Medicare, Medicaid window is the reason for the huge budgets in these areas. This large “population bubble” moving through the system will, eventually even out (sounds better than “die off”) and the system will decrease its burden share of federal spending.

        The sad reality is that the current administration pre-CoVid and with what Trump “trumpeted” (see what I did there?) as the “greatest economy of all time” ran deficits as high as the Great Recession first several Obama budgets. Sadly, Trump definitely and many legislators, probably, have no cognitive grasp of what their idol, Ronald Reagan, meant (he also didn’t “grasp it”) by "Supply Side Economics." Dr. Laffer developed his theory in 1974, 6 years after Trump alleged to have studied it at Wharton (true, he said that!) He did not say "tax cuts always increase government revenues." However, Reagan, himself a bit of a dunce, believed it with all his heart, The result? A Reagan tax cut followed by a Reagan recession. Dr. Laffer admits that "The Laffer Curve itself does not say whether a tax cut will raise or lower revenues." It does show that if taxes are already low, then further cuts reduce revenues without boosting growth. Politicians who claim tax cuts always raise revenues in the long-term misinterpret the Laffer Curve. While Trump has claimed that his tax cuts will raise revenues, real economists say (in kinder, gentler words) he’s full of shit!

        Of course, we can all feel the pain for the poor schlub struggling to get along on $400 large taxable annually. Just don’t claim that it increases the cost of a rental unit where all expenses of doing business are deductible. If you’re lucky enough to clear that kind of money maybe you should try being grateful that you can do your share. And maybe, just maybe, realize that you don’t do it by yourself, even if you do take all the credit.