The New York Sun is alarmed to find out that “Tax Rates For New Yorkers Would Top 50% Under Obama,” as the dramatic headline read. “The Democratic presidential candidate is proposing not only raising the federal income tax, but also adding a Social Security tax for those Americans earning more than $250,000 a year. For New Yorkers, that could mean that if the current Social Security rate is applied, the marginal tax rate, or rate on every extra dollar earned, could rise to 58%,” up from 42% for the wealthy today. That includes the 10% for New York State and New York City income taxes. Of course many wealthy executives agree to pay each other wages in the form of capital gains, even when they put no capital at risk. “Mr. Obama is proposing to raise taxes on capital gains and dividends by two-thirds, moving the rate up 10 percentage points to 25%. When New York State and City taxes are added in, the tax rate would be 33%. In comparison, the tax rate for capital gains and dividends is currently 22%.” Somehow I’m not sympathetic.
The Sun neglects to consider that as a non-rich but well off New Yorker, my marginal tax rate by their measure (including the employer share of FICA which, based on tax incidence, is fair) is 53% right now – 28% federal AMT, 15% FICA, and 10% state and local (with no federal relief due to the AMT). I earn less than the FICA maximum, but as the also have a working spouse who earns more than I do, so our joint income is high enough to get a relatively high tax rate. That situation, I’d bet, is very common in the New York area. And if someone paid me a fee to write this, I would also have to pay the city’s unincorporated business tax, pushing the marginal tax rate to 56% or so. And after the federal, state and local rates are increased to pay for all the debts and pensions older generations have awarded themselves, something I consider to be inevitable, I’d expect my marginal rate to exceed 60%, and perhaps eventually reach 67%.
“While the average rate will be lower, the marginal tax on wages is considered a critical measure because it ‘affects the incentive to work and report income to the Internal Revenue Service, as well as invest in legal and illegal tax shelters,’” the Sun correctly points out. Evidently the additional contributions of hedge fund managers to society are critical, but any additional work I and others like me might do can be lived without. How much exactly do I earn? Given my lifestyle and my marginal tax rate, frankly. I’ve never really worried about it. The Sun also seems to believe that people like me are less likely to invest in illegal tax shelters. They are almost certainly right about that.
What the Sun also neglects to consider is that after the dot.com bust, executives have increasingly been awarding each other rich pensions – sometimes in the seven figures per year – instead of stock options. Then, when they walk off after huge corporate losses are revealed, they get the first claim on all future company revenues, before a dollar is paid in profits for shareholders, and have an equal if not superior claim to other creditors in bankruptcy. (Just as politicians and public employee unions award each other rich pensions to get absolute priority on rising taxes even as services collapse). The state and local tax on that pension income is zero. That FICA tax on that pension income is zero. If these high income folks live in one of the new luxury condos and benefit from a 421-a tax abatement, their property tax rate is zero.
Even in the worst case scenario for the rich assumed by the Sun, a top federal income tax rate of 39.6%, these wealthy people, having “earned” nothing and extracted enormous value away from shareholders, would have a much lower marginal tax rate than I do right now. Another benefit of pension income, executives have learned from public officials, is that after they were convicted, past corrupt corporate executives lost much of their wealth, while past corrupt public officials got to keep their pensions. Those executives are not stupid.
Still investing in stocks? How much of the future earnings of American business is already encumbered by executive pensions, even in those companies not being wiped out by union pensions? Good luck figuring it out.
Phil Gramm was widely criticized for the following quote: “We have sort of become a nation of whiners.” Many criticized him, but I think he had a point. But I’ll bet Mr. Gramm, when making that statement, wasn’t thinking of the following whine: “Waaaa. Waaaa. I don’t want to pay more taxes to be spent all all those inferior people!” To me they are the whiniest of all. A quote in a recent Vanity Fair article captures the anxiety of those at the top:
“’I did lose a lot of money,’ sighs one former Bear Stearns director with a house in Sagaponack south of the highway. But, he adds, ‘I just turned 60. I’ve been working since I was 13. I don’t necessarily need to work. From my personal point of view, this means I might not fly on a private jet, but I’ll still fly first-class. I’m not cutting back on my personal trainer or housekeeper.’ And, he says, he’s not selling his house. ‘Maybe my kids might have to work more in the long run,’ he muses, ‘but it’s not going to change my lifestyle.’”
Well, based on the decisions made by those who just turned 60, and those a decade older or younger, the kids will certainly have to work more in the long run, particularly if they aren’t in line for a big inheritance from someone with a house in the Hamptons. The politcal issue in the past 30 years that made things better, at least for some, in the future is the estate tax repeal. And those kids will certainly be paying a higher marginal tax rate than the typical executive has over the past 30 years.
So what is my advice to those worried about their taxes under Obama? Buck up and face the tough times. Sell the third house. Keep the third wife. And for crying out loud, stop whining!