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Increase Taxes or Cut Tax Subsidies for the Rich?

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How you ask a question often decides a discussion. If you ask persons on the street whether they would prefer to increase taxes on the rich or cut tax subsidies for the rich, the chances are that you will get far different answers even though the economic effect is the same. Even someone as smart and sophisticated as Larry Summers has fallen into the trap of talking about increasing taxes on the rich as part of any tax reform, although he surely knows that what he is talking about is cutting tax subsidies or expenditures that benefit the rich.

Between 2009 and 2012 the incomes of the top 1 percent grew by 31.4 percent while those of the bottom 99 percent grew only by 0.4 percent or to put it another way the top 1 percent captured 95 percent of the income gains during the first three years of the recovery. Much of that disparity is because of the subsidies or expenditures in the tax code that benefit the rich.

Lower tax rates on capital gains is a subsidy that overwhelmingly benefits the rich. The top 20 percent own over 80 percent of the stocks. But there is no economic justification for taxing income from investments at a lower rate than income from labor. Eliminating the difference would eliminate many of the financial shenanigans that primarily benefit Wall Street. For example, it would no longer make economic sense to use corporate assets to buy back stock so shareholders can convert ordinary income into capital gains. Those assets could be then put to more productive uses.

Even the mortgage interest deduction is a subsidy for the wealthy because only about 30 percent of the taxpayers itemize their deductions and, if you don't itemize your deductions, you can't deduct your mortgage interest. Even Camp's tax reform proposal recognizes this because it contains a significant, albeit hidden, cut back on the mortgage interest deduction for all but 5 percent of individual taxpayers.

Those who have been in Washington for more than few days know that the more complicated a tax scheme is, the more likely it is to benefit some special interest whose subsidy can't be justified. The most current example is the push to adopt territorial taxation contained in Congressman Camp's proposed tax reform. Territorial taxation sounds like a reasonable proposal until you cut through the complexity and realize it is really a job killing tax. By taxing the "foreign" income of multinational corporations at a lower rate than paid by domestic companies it will encourage the continued export of jobs and profits and keep domestic companies at a real competitive disadvantage.

Those who write about taxes and other economic issues need to be very careful in their choice of words so the public has a chance to really understand what is at stake. It is all too easy to fall into the trap of using Pavlovian phrases that the spinmeisters for the rich and powerful use to hide what is really at stake.