Citizens for Tax Justice on Wall Street subsidies

Our friends at Citizens for Tax Justice in the US, which has a number of aims rather similar to ours, has just released a welcome report on tax and the current $700bn bailout discussions in the US. After noting, correctly, that reasonable people can differ on whether the government should step in to prop up the financial system right now, they point out that:

"if Congress is going to enact some rescue plan (which is still uncertain at this point) it would be sensible to include provisions ending the subsidies we are currently doling out to Wall Street"

What has happened instead? This, from Bloomberg:

The U.S. Senate approved tax cuts valued at more than $100 billion, including a host of alternative energy credits and dozens of breaks for businesses and individuals, as part of its $700 billion bank rescue bill. . . . The Senate added the tax provisions to woo Republican votes in the House.

This is not exactly the same as what the CTJ is describing, but what the CTJ is talking about is really very simple.

The biggest and most unjustified of these subsidies is the special low tax rate on capital gains and dividends. These tax loopholes subsidize people whose income comes from investments rather than wages, as well the Wall Street brokers who rely on their business.

Now this is important. Remember our recent blog, making the distinction between wages and income and explaining how the dominant and often only form of income for most Americans (wages) is slowly eroding, while the capital incomes earned by those at the top are soaring; and how schoolteachers, cops, and office workers pay marginal tax rates of more than 40 percent on wages that have been mostly stagnant over the past three decades, while for the wealthiest the marginal tax rate is just 15 percent.

CTJ illustrates this with a simple example.

Imagine that a woman who is the heiress of a hotel chain is so wealthy that she does not have to work. She has a huge amount of stocks and other investments. She gets an excellent income from two sources. She receives stock dividends, and when she sells assets (through her broker, of course) for more than their original purchase price, she enjoys the profit, which is called a capital gain. On these two types of income, she only pays a tax rate of 15 percent, thanks to the tax cuts enacted under President Bush.

Now let’s imagine a receptionist that works in the investment bank that handles some of the heiress’s dealings. Let’s say this receptionist earns $50,000 a year. Unlike the heiress, his income comes in the form of wages, because, alas, he has to work for a living. His wages are taxed at progressive rates, and a portion of his income is actually taxed at 25 percent. (In other words, he faces a marginal rate of 25 percent, meaning each additional dollar he earns is taxed
at that amount).

But that’s just the federal income tax. He also pays the federal payroll tax of around 15 percent. (Technically he pays only half of the payroll tax and his employer pays the other half, but economists generally agree that it’s all ultimately borne by the employee.) So he pays taxes on his income at a higher rate than the heiress who lives off her wealth. Most Americans would say this sounds pretty unfair, and they’d be right.

The CTJ report has a go at the entirely bogus notion - peddled by many lobbyists (often using the now wholly discredited "Laffer Curve" theory) that tax cuts lead to higher tax revenues,) or that they have brought economic growth (already it's easy to demonstrate that this is false; let's also take another look at that theory once the current turmoil has worked its way properly through to the growth figures). The rest of the report is well worth reading; it's not that long.