Busting Myths About Rich People's Taxes

Busting Myths About Rich People's Taxes

There are good reasons for the government to keep its hand out of the pockets of the wealthy. For example -- and this will be a shocker to most liberals out there -- it is a basic tenet of tax economics that an efficient system should eliminate all taxes on capital income. That translates into big tax benefits for the wealthy, who get the lion's share of that income.

That type of thinking recently led Kevin Hassett of the American Enterprise Institute to call the Buffett rule "the stupid rule." "It's basically just a back-door way to hike taxes on capital," he told Bloomberg News (Richard Rubin, "Top Earners Pay Higher Tax Rate Without Buffett Rule," Apr. 10, 2012). To maximize growth, economists would set the tax rate on capital gains, dividends, interest, and all business profits at zero. Yet for all the agreement about the optimality of minimizing taxes on capital, the magnitude of benefits from this policy is highly uncertain.

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But subjective views are not everything when it comes to fairness. Answers to some factual questions will play a critical role in any real-world debate. For example, what is the current distribution of the tax burden? And how would that change under various proposals? In the highly charged debate over the Buffett rule and extension of the Bush tax cuts for the top income brackets, many facts about income distribution and policies that would change it are getting distorted. The rest of this article tries to correct some of these distortions.

Myth #1: The Buffett rule is largely a symbolic political ploy because it would raise only $5 billion a year.

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Myth #2: The United States cannot raise taxes on the wealthy because "there appear to be limits in the real world as to how much tax blood can be extracted from rich turnips" and "the U.S. has the world's most progressive tax burden."

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Myth #3: The United States has a progressive income tax.

View TaxAnalysts'® Martin Sullivan's opinion in its entirety on TAX.com.

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