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The Wall Street Journal Missed the Forest for the Trees on the Millionaires Tax of 2012

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It takes a lot to get me to write about the opinions of The Wall Street Journal because they are so consistently ideological and out of touch. To find out what they say, I can usually skip a step and just read Karl Rove's daily talking points. But last Friday, WSJ personal finance columnist Brett Arends wrote a column that just begs for a fact check, so here it is.

Mr. Arends, who apparently provides financial advice to all comers, completely misses the point about the proposed Millionaires Tax of 2012, which would raise taxes on those earning more than a million dollars a year here in California. And just to be clear, the point is that the uber rich can and should pay more to make the society that benefitted them so handsomely last longer and work better.

Mr. Arends wrote about the measure only because the 750,000-member Courage Campaign created a video highlighting Kim Kardashian's $12 million income (2010 Forbes estimate) and promoting the idea that she could pay more in taxes than someone who makes $47,000. That's a pretty simple premise, incontrovertible we thought. But not to Mr. Arends. Let's look at his arguments one by one.

1. Mr. Arends says, "the (Courage) campaign has the Californian (sic) tax rates wrong... someone earning $47,000 a year wouldn't pay '9.3%' state income tax. That's just their marginal rate -- the tax on the last dollar earned."

Our ad says that Ms. Kardashian pays a 10.3% tax rate; an average taxpayer who makes $47,000 pays 9.3%. Income tax rates are calculated on "marginal dollars," meaning that the tax rate in question only applies to each dollar of income over a certain amount. In this case, he's up in arms because Ms. Kardashian pays 10.3% on every dollar she earns over $1 million, while a middle-class person making $47,000 only pays 9.3% on each dollar over $46,766. (If you're curious, the term "middle-class" generally applies to an individual making between $19,000 and $91,000).

I guess Mr. Arends would have preferred a video with this text: "Kim Kardashian's marginal tax rate for the last 11 million of her 12 million dollars of annual income in 2010 is 10.3%. A middle-class Californian's marginal tax rate for each dollar of income over $46,766 is 9.3%. Do you think that's fair?" Of course, we could have done that, but why? It only confuses the issue, and most people (unlike the super rich) pay their fair share in taxes and understand what a marginal tax rate is. We thank Mr. Arends for clarifying and underscoring how much our current system overtaxes the middle class.

2.

The Courage Campaign is mixing up two different things: The tax rate and the actual amount of taxes paid... Kim Kardashian would have paid about 56,000% more in taxes than a middle-class Californian, not 1% more.

Ms. Kardashian's total tax bill is bigger than someone who makes less than she does! Well, Ms. Kardashian's $12 million income is 255.32 times more than the middle-class earner of $47,000! As I told Mr. Arends on the phone, that's why we have tax rates and not established dollar amounts for taxes. Here's how tax rates work. If Ms. Kardashian were to buy a $500,000 Rolls Royce, she'd pay $42,500 (at 8.5%) in sales tax. If a middle-class taxpayer bought a 10-year-old Ford for $5,500, he'd pay $467 in sales tax, which -- as Mr. Arends points out -- is less than the sales tax paid on the Rolls Royce.

But here's the point: that $467 is about 1% of the middle-class guy's income, but that $42,500 in sales taxes is only about .004% (four hundreds of one percent) of Ms. Kardashian's income, demonstrating yet again that sales taxes are more regressive than income taxes.

3. But this one is my favorite. Mr. Arends decided to argue about federal taxes when our state ballot measure obviously cannot do anything about federal taxes. We wish it could, but alas, it cannot. So Mr. Arends decided to guess how much in total taxes, largely federal, Ms. Kardashian might pay on her income (as estimated by Forbes magazine) and suggests that we left that out to mislead.

I'm still scratching my head over this one, because Mr. Arends quotes me saying, "...as Kim Kardashian pays a higher federal tax rate than a middle-class Californian family, she may be able to write off more of her Californian state taxes, meaning her effective rate might actually be lower." News flash: State income taxes are deductible against federal income taxes, so the more you make, the lower your effective state tax rate. Who knew? Of course, this only furthers our case that Ms. Kardashian should pay a higher rate of state income tax.

4. Finally, here's the old-saw argument. "...Presumably she (Ms. Kardashian) can wiggle that asset (her figure) to another state if California hikes its taxes too high. Then the state will get 100% of nothing." Except that study after study, including this one from Stanford and Princeton, shows that state taxes do not drive the uber rich to relocate. It happens so rarely as to be insignificant.

I had never heard of Mr. Arends before he called me on Thursday, so I did some reading of his old columns. He actually seems like a pretty decent guy who dishes up practical advice, things like "Pay off your credit card" and "Don't take on debt." In one article, he even suggested that underwater homeowners not pay their mortgages. But, as with anyone who has to get attention for his writing, he goofs sometimes, missing the forest for the trees, as he did with the Kim Kardashian video, with which he wants to pick nits (which he fails to do) rather than attend to reality. It's noteworthy that this column generated hundreds of comments, not nearly so many as the one he wrote in February 2008 entitled "Investors Should Step Back and Look at Shaken AIG." Suggesting that AIG might be a good buy, he said, "The likelihood of serious accounting problems has to be remote, for one very good reason: Eliot Spitzer, the New York governor who was then the attorney general, went in there with a magnifying glass during the corporate governance probe three years ago. The company went through a pretty intensive house-cleaning that cost Mr. Greenberg, longtime CEO, his job."

I hope Mr. Arends will step back and look at what the Millionaires Tax of 2012 is all about, not just try to defend a tax code that helps the uber rich while punishing the very middle class he says he advises. Had he done that with AIG, he might have noticed that the very CEOs who undid an entire economy were the forest, while he busily focused on the trees.

Restoring California is a broad coalition of educators, unions and community groups looking to restore critical funding to schools and universities, essential services for children, seniors, and public safety, as well as start rebuilding the state's crumbling roads and bridges. It asks the wealthiest Californians -- people who earn over a million dollars per year -- to pay their fair share to help rebuild the state. Follow us on Twitter at @Restore_CA and like us on Facebook at "Restore California -- Millionaires Tax of 2012."

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