I have met the rich, and they are us
By John D. Turner
23 Dec 2011

“I mean, understand, it's not as if we haven't tried this theory. Remember in those years, in 2001 and 2003, Congress passed two of the most expensive tax cuts for the wealthy in history. And what did they get us? The slowest job growth in half a century.” – President Barack Obama, 6 Dec 2011

Back in May, I asked the question “who are the rich”? Now, thanks to President Obama, we know the answer to that question. To understand the answer we need first to look at what the president said, and what the Bush tax cuts, to which he is referring, did.

The Bush tax cuts were not simple. They were not simple for a very simple reason; President Bush did not control Congress in 2001 or 2003; like now, we had a divided Congress, with the Republicans controlling the House, and the Democrats controlling the Senate. This meant that even though President Bush wanted to enact an immediate tax cut to stimulate the economy (we were going through a recession at the time), the Democrats, who were vehemently opposed to a “tax cut for the rich”, had something to say about how the cuts were implemented. The result was that Bush got his tax cuts, but they were phased in over time, diluting their effect. Even worse, they were only temporary, designed from the start to sunset at the end of 2010. The gradual phasing in and the sunset clause were insisted on by the Democrats as “payment” for their vote.

The first set of cuts in 2001 cut marginal tax rates for most brackets, and created a new 10% bracket, carved out of the first part of the 15% bracket. The new brackets (as they still stand today) are:

Please note that the existing 6 brackets are up from only 2 brackets (15% and 28%), put into place under President Reagan in 1986. This is why I no longer support a “flat” tax. Although it sounds like a good idea, how long will it remain flat? Two brackets are as close to flat as you can get, and yet in just 15 short years, we were back up to six. But I digress.

Additional cuts in 2001 included elimination of the “marriage penalty”, so that people, making the same gross amount of money, that were married and filing jointly did not pay more tax than two people living together and filing singly. It also made beneficial changes to 401k and 403b retirement plans, including “catch-up” provisions for older workers, allowing them to put additional money into those retirement programs. Note that these changes were not made immediately, but rather were phased in gradually between the years 2001 and 2010.

So, looking at these changes to the tax code, we can narrow down a bit who it is that the President is referring to when he talks about one of the two “most expensive tax cuts for the wealthy in history”:

There were also changes made to the estate and gift tax rules. Perhaps this is what the President was referring to. After all, if you have an “estate”, you must be rich, right? Only rich people have “estates,” the rest of us just have “stuff”.

The changes to the estate tax gradually increased the amount that you could exclude from taxation, beginning at $675,000 in 2001 and eliminating it entirely in 2010. Of course, because of the sunset clause, that happy state of affairs only lasted one year, since in 2011 it was scheduled to reset back to $675,000 as if nothing had ever happened. This tax is also known as the “death tax”, because it is not a tax that you pay, but that your heirs pay on everything they inherit. The tax rate? 55% on everything over the exclusion amount. But that’s fair, right? I mean, only “the rich” have to pay it. So in addition to the above, we can also include “anyone who has an “estate” larger than whatever congress deems “appropriate.”

So what about those cuts in 2003? It was probably those that the President was referring to, right?

The 2003 cuts accelerated the phased in cuts put into place in 2001. For example, the child tax credit, which was increased incrementally each year, was increased to what would have been its 2010 level immediately, while the marriage penalty relief was accelerated to 2009 levels. The long term capital gains rate was reduced from 20% to 15%. Taxes on “qualified dividends” were reduced to capital gains levels. What qualifies as “qualified dividends?” Among other things, credit union and bank “dividends” that are normally considered interest.

The act also increased the thresholds for the Alternative Minimum Tax (AMT), originally imposed in 1982 to ensure that around 80 or so high income individuals would not escape taxation. Tax is calculated both ways; regular income tax and AMT. You the taxpayer are liable for the greater of the two amounts. Because the Bush tax cuts resulted in many people paying less tax, and the AMT thresholds are NOT indexed for inflation, the AMT dips deeper into the taxpayer base each year.

So the rest of those wealthy folk the President was referring to include:

Let’s put this baby to bed, shall we? I think that if you look closely at the above, you will see that the Bush tax cuts positively affected nearly every American, not just “the rich.” I know that it has been a favorite Democrat talking point since before their enactment to cast them that way, but looked at in the clear light of day, that dog just won’t hunt.

Perhaps what the Democrats are really upset about is that those dastardly rich folks benefitted at all from the tax cut. The only proper way to handle rich folks, if you are a progressively minded Democrat, is to tax the bejebbers out of them.

Just the simple fact that President Obama says he doesn’t want to repeal the Bush tax cuts for everyone, just those making over $250,000, belies the claim that the tax cuts were simply “for the rich.” Were that the case, why not just let them expire? Only the “rich” would be affected after all.

The truth of course is that the cuts, which were enacted too slowly to really be a stimulus to the economy, benefitted all Americans paying taxes, even many who ultimately got back more from the government than they paid. The more tax you paid, the bigger the benefit of course. If you paid more in taxes you got back more in actual dollars than someone who paid less in taxes. What is unfair about that?

Of course, if you actually got back more than you paid, you made out real well. Who do you suppose managed to pull off that trick; the uber rich, perhaps, with their sneaky tax lawyers?

Actually, that would be the folks at the other end of the tax spectrum, those who qualified for the earned income credit and such things as the expanded child tax credit. Being credits, not deductions, you get that money from the government even if the amount exceeds what you paid in taxes. And if you look at this as a percentage of income, I would expect that these folks, percentage wise if not dollar wise, made out much better than those sneaky rich people.

Why is it that those seeking to soak the rich always look at percentages of gross income, not dollar amounts, when looking to squeeze more money out of rich folks, and then turn around and present dollar amounts, not percentage of gross income when trying to make the argument that poor folks are not getting enough?

If a person making $1 million pays 20 percent of their income in taxes they pay $200,000. If a person making $20,000 pays no tax and gets $4,000 back from the government in tax credits, they have received a check equivalent to 20% of what they earned.

And yet to progressives, somehow that 20% the rich guy paid is insufficient, while the 20% the less well off individual pocketed is not enough. Why can’t society be satisfied with the 20% they took from the rich guy, and congratulate him on being productive enough to not only do well for himself, but to be able to pay for 50 of those folks who received $4,000 checks from the government? And as for the folks receiving the $4,000, can’t they too be satisfied, knowing that not only did they not have to pay any income taxes for the privilege of living in this great country, but that they received a bonus of $4,000 on top of that?

But no; instead people look at the $800,000 the wealthy individual has left, and covet a piece of that as well.

So who are “the rich?” Certainly, the 1% is rich. No doubt about that. Are you one of the 53% who pay income taxes? Count yourselves in as well. In fact, whether you pay income taxes or not, based on those who received a benefit from the Bush tax cuts, those “tax cuts for the rich”, pretty much all of us are rich.

And we won’t even go into the standards for rich and poor enjoyed by the rest of the undeveloped world. By their standards, even our poor are wealthy beyond their wildest dreams of avarice.

Don’t think you benefited from the Bush tax cuts? There are many who don’t. My parents don’t think they did. For those who don’t I have a really simple test. If the Democrats are successful in letting the cuts expire, next year when you pay your taxes, check and see if you are paying more than you did before. If you aren’t, then great! You are probably right. You didn’t benefit. But if your taxes go up, well then, welcome to the club! Whether or not you knew it before, you are officially “rich.” Congratulations are in order, I am sure.

There was more in the President’s speech that was either misleading or factually incorrect. For further analysis, check out this article from The Fact Checker; he gives the speech “three Pinocchios.”