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THE TRUTH ABOUT LIES ABOUT THE TRUTH ABOUT TAXES

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In a criminal trial, a witness must swear or affirm to tell the truth, the whole truth, and nothing but the truth. This affirmation is three-pronged. The reply to a question must be not only true in fact, but must include the whole truth, not leaving out critical details so as to be misleading, nor adding false details to an otherwise truthful answer. In politics, when the subject comes to taxes, the Republicans not only outrightly lie, but hidden within their lies are untold truths, or added to a true statement are misleading details. Sometimes, even frequently, the Democrats are also guilty of this same false witness. In other words, they fail to tell the whole truth, and nothing but the truth. 

For instance, when Republicans frequently cite that 51% of Americans do not pay any income taxes, not only is that statistic a lie, but they fail to include the fact that all employees pay the highly regressive social security and Medicare taxes (FICA or payroll taxes), which, in effect, total to around 15.3% of the employee's gross income (including the employer's 50% contribution which the employee would obviously get in wages if the employer were not forced to contribute it to the employee's FICA). 

Additional various accounting charges, payroll handling charges, penalties, and other fees which the employer must divert from payroll to other entities increase the real percentage lost as wages to the employee to around 17%.. For many, if not most, Americans, the payroll or FICA tax has long been the higher of the two forms of direct income taxation they pay, but FICA is not considered an income tax but an investment in the employees' futures. In fact, according to The Center on Budget Policy Priorities three out of four Americans pay more in FICA taxes than they pay in income taxes. (source) Thus, when some Republican claims that 51% of Americans pay no income taxes he or she is intentionally misleading the listener by not including the caveat that all wage earners pay between 15.3% and 17% of their income in FICA taxes, which are used by the federal government as general revenue when the government borrows from the Social Security Trust Fund and Medicare funds.

Perhaps even more egregious is the 51% figure itself. Were it true, it would make any hardworking American angry, and rightfully so, Of course, as with most of what the Republicans say, what they do not say is more significant. According to the Bureau of Labor Statistics (source) approximately 143 million Americans of working age out of a total population of 350 million people in America are unemployed, whether by choice or by the inability to find employment. Either way, that makes for a substantial portion of any percentage Republicans quote merely to anger working Americans over how many Americans pay no income taxes. Moreover, that 143 million figure only includes working age Americans, persons 16 years older and above, and persons above the retirement age who seek employment anyway. However, America's retired, her youth, her infants, her disabled, and her imprisoned, are included in the Republican's fake 51% figure, which may be true, but is certainly not the whole truth, unless we expect infants to work, grandmothers to work, quadriplegics to work, and people to work for whom there are no jobs.

All of which brings us to the question whether tax cuts for the great corporations and rich individuals create jobs as the Republicans argue is self-evident. The following is an historical chart of marginal top tax rates since the early twentieth century. One can see that the American economy flourished under extremely high tax rates on the wealthy.


Historical Highest Marginal Income Tax Rates

One can see the reversal of a successful tax policy starting in 1981 when Ronald Reagan assumed the presidency, with a steady downturn until George H.W.Bush was forced to raise taxes to deal with the deficit in 1990, and William Clinton raised the top rate substantially in 1993 again to contain the deficit. Clinton's actions resulted in the first surplus in decades, which he expressed a desire to use to strengthen Social Security, but which George W. Bush used as an excuse to give the upper class a radical tax break, ultimately sending the American economy into a downward spiral. I remember clearly Clinton's plan to use the surplus to bolster Social Security, but I cannot remember nary a single member of the press who has mentioned that Clinton held such plans which were thwarted by the interloper president, George W. Bush, the president chosen by the Supreme Court.

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The problem is that the Republican argument makes a certain sense, notwithstanding the historical proof. By granting the rich tax breaks they are free to invest in job creating projects. If the government taxes away their income, from where will new jobs come? Republicans argue that only the government will be able to provide them, and we certainly do not need more government. Yet, like most Republican arguments this one is also built upon half-truths and concealing the whole truth. We must separate the corporation from the individual when considering this issue. Under American tax law, the standard C corporation involves double taxation. The corporation as a legal entity pays taxes on its own income. Then, when it makes distributions to shareholders those distributions are taxed again as capital gains but not at the same rates as people who earn wages, nor subject to FICA taxes. Similarly, the C corporation pays taxes on its income, then pays its officers and directors, who, in turn, must pay income taxes on the money they receive in wages from the C corporation. As a result, a closely held corporation (one owned by just a few stock holders, usually a family), is arguably unfairly taxed since the income is taxed twice: once when it comes into the corporation as profit and again when disbursed to the corporate owners.

The whole truth is this. Tax breaks for wealthy individuals only makes those individuals more likely to take profits out of any corporations they control, and they do not make that withdrawal with the intent of creating more jobs but of avoiding taxes. Very high marginal tax rates on the wealthy forces them to keep the corporate profits within the corporation where there is nothing to do with that capital except to find ways to reinvest it profitably, thereby creating jobs. As a result, low corporate tax rates for domestic corporations combined with high marginal rates for the wealthy is the true job creation plan just as the historical chart above demonstrates. Low corporate tax rates attract corporations to invest in manufacturing in the United States, while high marginal tax rates for wealthy individual taxpayers forces them to continue to reinvest in the American labor force. Since we are supposed to have a progressive tax rate, even wealthy taxpayers can control their tax rate by simply taking less from the lightly taxed corporation.

Why do we never hear of any this from the Democrats? Why do Republican lies always go stand without rebuttal? Why do the talking heads never tell the public about this simple principle? Yet, the lies, half truths, and distortions of the truth, do not end here when it comes to taxes. There is much more to learn from across the aisle.

First, let us return to FICA taxes to note that the taxpayer only pays FICA taxes on the first $106,800 earned in a tax year. All earnings after that amount of yearly income is reached are free of FICA taxation. This makes FICA tax extremely regressive and very favorable to the highly paid executive or professional. Moreover, regardless of financial status, upon reaching the age of eligibility, whether one be a billionaire or a pauper, one is equally entitled to his or her social security and Medicare, despite the fact that as a percentage of income the pauper paid 20% of his entire income on FICA while the billionaire may have paid as little as .001% of his income. The obvious way to reform Social Security and Medicare to protect their viability is to remove this arbitrary limit which has been imposed to protect the wealthy wage and salary earners in America, and to simultaneously means test the receipt of Social Security and portions of Medicare.

In their many misleading pronouncements about taxation, the Republicans and Democrats also ignore the glaring discrepancy between the income tax paid on the wages and salaries of workers who must actually do hard or difficult physical or mental labor every day of their lives and the capital gains taxes paid on income derived from investment in stocks, bonds, land, and other transferable assets. Currently, the capital gains tax, a tax which applies mostly to only the wealthy, runs between 0% on qualified investments up to a maximum of 15%. The hedge-fund manager, stock broker, or wealthy coupon clipper invested in municipal bonds, pays a mere 15% capital gains tax at most on his or her yearly income despite the fact they are not directly involved in working and creating anything of value at all. While all logic suggests that the hard working wage earner should pay the lower tax rate, it is in fact the class that works the least that enjoys the benefit of the lowest tax rates. Finally, to ultimately cap off the injustice of the capital gains tax as compared to the income tax we find that the FICA tax does not apply to capital gains.

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The wage or salary earner thus pays income taxes as a percentage of his or her income according to whatever income bracket he or she enjoys, and pays his or her FICA or payroll taxes along with, in essence, also losing the employer's matching FICA contribution, which he or she would otherwise receive as wages or salary. Oppositely, the ruling class, or the owners of capital, pay the capital gains tax with no FICA tax, and the capital gains tax may run from 0% to 15%, which is less than the working class pays in payroll taxes alone. This is considered fair in America.

Finally, the inheritance, or death tax, as Republicans have renamed it, closes out the list as the crown jewel of Republican half-truths. They argue the fundamental injustice of taxing the passing of wealth from one generation to another since the assets passed were presumably taxed when the decedent first earned them. This is double taxation, they urge. Ignoring the point that double taxation occurs all of time to lesser folk, the inheritance tax is, in fact, designed to capture a tax upon value that has never been taxed before at all. How could that be? Because the inheritance tax is designed to capture the increase in the value of the assets the decedent held throughout his or her life from the time of acquisition until the time of inheritance, just as if the decedent had sold the asset and realized a capital gain. For example, if I buy 10,000 shares of X Corp at $10.00 per share, my basis in those shares is $100,000. Ten years later I die leaving my X Corp shares to my son. The shares are now worth $50.00 per share. 

My son receives untaxed income in the amount of $500,000, of which only the original $100,000 of value was purchased with taxed funds. While it is possible to make a weak argument that the first $100,000 of the inheritance should not be taxed, as this is double taxation, (even though the government is taxing two distinct people on two distinct transactions), no justification exists for not taxing my son on the capital gain of $400,000. The inheritance tax is not on death, but on the exchange of capital, which is nearly always a taxable event. Since the Republicans have been able to effectively eliminate the inheritance tax through the misleading argument that it is a tax upon death and double taxation, fortunes in lost revenues have passed between the generations which never saw the tax man's blade at all. Current law provides for a $5,000.000 tax credit on the front of an inheritance, and trust law allows the wealthy to skirt any remainder of the estate right around any tax law that might otherwise generate revenue from this completely untaxed transfer in value.

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I am a retired criminal defense attorney who has also held many different positions from carpenter, teacher, short order cook, land-man, and corporate attorney.

I am also a husband and father, both roles, I suspect, do more to change a person than one's choice of profession.

I am a passionate reader, particularly of non-fiction, and attempt to keep informed on developments in the major disciplines, such as history, physics, political economy, economics, theology, linguistics, sociology, etc., through reading books, rather than the INTERNET, although the net certainly has its place. I believe the decline in reading books in the last decades is responsible for the lack of critical thinking skills reflected in the American electorate, both left and right, but that this decline was planned after the near revolution of the 1960's and early 1970's, and obtained by changes in the curriculum at the various Colleges of Education around the country to emphasize the "self-esteem" movement and the "tolerance" ideology. The latter misused the word "tolerance" to mean that all ideas, cultures, religions, ideologies, etc., are equally valid and true, rather than equally to be respected. The difference led students to believe their feelings, as opposed to empirical facts, made their opinions true.

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Taxes are an easy subject to lie about because peo... by John Reed on Thursday, Aug 11, 2011 at 8:55:20 PM
I agree with you John that the Democrats continual... by Howard Schneider on Friday, Aug 12, 2011 at 7:48:40 PM
I am glad to hear from somebody that there was som... by John Reed on Saturday, Aug 13, 2011 at 10:50:52 AM
Even with the truth most politicians would not kno... by David Chester on Sunday, Aug 14, 2011 at 9:51:35 AM