Lehigh University
Lehigh University


Taxing the Rich

This week, GOP candidate and sometime front runner Mitt Romney bowed to political pressure and released his tax records, revealing that he paid about $6.2 million in taxes on $45.2 million in income from the last two years.

The news didn’t surprise, but it did generate headlines during a time when income inequality in America is under intense scrutiny. The former Massachusetts governor and wealthy executive had an effective tax rate of 13.9 percent in 2010 and expects to pay 15.4 percent in 2011. That places his tax rate well below most wage earners—who are taxed up to 35 percent—because Romney’s income is taxed at the 15 percent rate for capital gains.

Are we missing an opportunity to tax the wealthy in America? Frank Gunter, a Lehigh economist, agrees the tax code needs a rewrite but not in the way you might think. Taxing the wealthy, he says, is a temporary measure at best.

“If you tax 100 percent of the total wealth, not just the annual earnings, of all 397 billionaires in the country,” said Gunter, “and let’s assume they all stay in the country after that bill has passed, than according to Forbes magazine, tax revenues would increase by about $1.5 trillion.

“That’s a lot of money,” said Gunter. “But it’s only a bit more than one year of our deficit. What do we do next year? After we’ve taken everything? There aren’t that many really rich people in this country to solve all our problems. If Washington wants more money, it has to raise taxes on the middle class because they are the largest group of taxpayers in America.

“In the short term, higher tax rates on the wealthiest individuals might make us feel better,” he said. “But in the long term it will not solve our problems.”

The problem, says Gunter, is not taxation. The United States has collected about 19 percent of Gross Domestic Product (GDP) for the past 20 years. “It’s the explosion of government spending,” said Gunter, “which is now up to about 25 percent of GDP.” The question, according to Gunter, is “Are we really getting as much for the 25 percent of GDP as we thought we would get?”

Gunter argues that cuts in government spending are the answer. He suggests:
  • A federal hiring freeze
  • A return of many federal responsibilities to their original caretakers—state and local governments
  • The reevaluation of programs that might have once been considered beneficial (farm subsidies from the Department of Agriculture, for example) but now no longer may be necessary
  • A change in culture in Washington—no longer are large government programs left unsupervised because they affect millions. No longer will small programs escape review simply because the cost is underwhelming
  • A consolidation of the many similar programs to improve efficiency and reduce waste (e.g. There are more than 4 dozen federal poverty alleviation programs and yet every year more people are living in poverty. Why not consolidate them, looking at both the overlaps and underlaps?)
Should changes be made in the tax law? Sure! But not by taxing us more, says Gunter.

“I am University educated,” he said. “I have taken tax courses, accounting courses. Yet, I am unable to do my own taxes. It is too complex. We have created a tax system so complex that only insiders can understand or take advantage of it.

“Americans spend half a trillion dollars filling out their tax returns, buying tax prep computer software, or hiring a tax professional,” said Gunter. “If we could simplify our taxes, reducing the cost to just $100 billion annually, we could split the $400 billion in annual savings between the people and their government.”

Story by Jordan Reese

Posted on Tuesday, January 31, 2012

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