Wealthy in America-Inequality in America; where is the ROI? Higher taxes on the “wealthy” is a losing strategy

A favorite theme of today’s politicians is income inequality; not paying ones fair share, etc. However, inequality has been with all societies since time began. Inequality is not necessarily bad and can result simply from the high achievements of a relatively few in a society. This is not unfair as long as the successful have not intentionally prevented the mass of people from achieving success. For example, through unfair taxation or poor educational opportunity.

In a society such as in the U.S. opportunity abounds regardless of how difficult ones situation may be as the result of circumstances of birth. Some people rise above their circumstances to amazing heights, some rise modestly, some plod along and some do nothing positive, what’s new?

Today we focus on the taxes paid by the rich; billionaires such as Warren Buffett claim they pay too little because most, if not all, of their income is taxed at capital gains or dividend rates. While true that those rates result in a low effective tax rate for the super wealthy, that argument seems to ignore the many government transfers and credits applicable to the majority of Americans. Various tax credits and deductions are unavailable or are limited for higher income (starting in some cases around $80,000 in annual income) Americans. If circumstances such as the number of children one decides to have can result in no income tax payable, how is it unfair that income invested (already taxed once) and at risk is taxed at a lower rate than ordinary income?

Higher income (far below millionaires and billionaires) Americans are limited in their tax advantages in many ways such as the taxation of Social Security benefits, higher Medicare premiums, limited IRA contributions, the alternative minimum tax, the estate tax (which the new Obama budget wants to raise to 45%), limited retirement benefits and 401(k) contributions, several new taxes under the Affordable Care Act including a new 3.8% tax on unearned income such as taxable profit from selling a home and more.

Virtually every tax advantaged program passed by Congress contains limitations or exclusions applicable to higher income individuals. In other words our tax system goes out of its way to benefit the non wealthy which is one of the reasons nearly 50% of Americans pay no income tax. Despite this, we are besieged with criticism of the 1% and far lower who, according to our President, don’t pay their fair share.

We struggle even defining wealthy. Is it income or is it assets and net worth? Is the senior citizen living on Social Security and a modest pension wealthy? What if he has accumulated $500,000 in savings and investments and has a fully paid home worth $400,000? Many government transfer programs ignore such assets when defining eligibility. One could easily have a half million dollars in net worth and still avoid taxation of Social Security and higher Medicare premiums. Is that fair?

Is it fair a man can be married three times, be divorced twice and each of those ex and current wives receive his Social Security benefit based on his earnings alone? Not only do higher income people (again, far from millionaires) pay Medicare payroll taxes on all of their wage income, they pay higher Medicare Premiums, while the taxes they pay on their Social Security benefits also pay for a portion of Medicare.

Should higher income people pay more to their government and get less, ok that’s a fair argument. But what is not fair is claiming the successful in America are not now paying their fair share.

If you are poor or low-income and have lived your life accordingly, you have received a disproportional amount of wealth transfer (not to mention access to hundreds of government programs designed to improve your education and lift you out of poverty) and will continue to do so in old age. If you are middle-income, you should remain middle-income in retirement and if you are higher income the same holds true. You lived your life, made your choices, reaped the rewards or suffered the consequences.