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Fantasy Cliff: Debunking the Biggest Myths About the Bush Tax Cuts and the Rich

11/30/2012 10:45 am ET | Updated Jan 30, 2013

Over the past few weeks there has been plenty of posturing by both Republicans and Democrats on the issue of the fiscal cliff, an unholy basket of spending cuts and tax hikes slated to go into effect in 2013, but no amount of posturing by our politicians can compare to the hand-wringing by wealthy Americans over the issue of higher taxes for them (or more accurately, the expiration of the Bush tax cuts, which they have enjoyed for a while now.)

I can certainly understand the anxiety of the rich but it's hard to sympathize with them -- not because they have a lot of money but because the arguments they put forward are not based in fact but in the best spin that their wealth can buy, and because they reveal a hidden agenda that is blatantly un-American and which can have deadly consequences for our fragile economy.

Here are the three biggest claims made by the rich as well as an explanation of why they are wrong.

Myth #1: The Rich Pay an Excessive Amount in Taxes
While it is true that the top 10 percent of households pay 70 percent of the federal income tax in the United States, the major reasons for this are income inequality and the disproportionate concentration of wealth in the upper echelons of our society. The average CEO, for example, makes 379 times the average worker, 28 percent of workers are paid less than living wages and remain perpetually under or close to the U.S. poverty line, and the top 10 percent of the country also own 75 percent of its wealth, so it's no surprise that these same people pay a higher amount in taxes! Simple logic, not to mention mathematics, dictates that the more money people have, the more they will pay in taxes; and so this is not exactly a sacrifice.

Of course, no discussion about fairness in taxes would be complete without mentioning the infamous 47 percent, who, according to the Republicans, don't pay any taxes. First, that in itself is a myth since most of those people still pay payroll taxes, sales taxes, and into social programs. In addition, the reason for this phenomenon is that such so-called "freeloaders" either cannot find work in a tough economy or are making so little money to begin with that taxing them would hamper their very ability to survive. If these people were taxed in the same way as higher income brackets, the resulting increase in poverty, hunger, health problems, child neglect, crime, and a host of other social and economic ills would cost our nation even more. According to a study conducted by the Center for American Progress, childhood poverty alone costs the U.S. about $500 billion every year.

Myth #2: The Rich Deserve the Bush Tax Cuts
They might, if they were not getting a huge tax cut already. Unlike most low or middle income Americans, the rich make a substantial portion of their money from passive income (on average, the top 400 earners in the US make 59 percent of their income from capital gains or dividends versus only 9 percent from salaries), which is taxed at a preferential rate of 15 percent. If the Bush tax cuts were to expire, the capital gains tax rate would rise back up to the Clinton-era level of 20 percent, which is still far below the 35 percent that people pay on ordinary wages, and is still a massive tax cut.

Also, given that the treatment of passive income in the tax code, even at 20 percent, is essentially a giveaway to the rich -- since most others cannot take advantage of it due to a lack of disposable income to invest -- there is really no moral or economic basis for the rich to oppose the hike. At best, it is the equivalent of a child throwing a tantrum because he will have to make do with fewer toys.

Myth #3: Tax Cuts for the Rich Help our Economy
In the 100-year model of economic planning, that is probably true. After all, given enough time, all the money in the world taken together is bound to eventually get spent somewhere. But coming back down to earth and our own lifetime, the rich typically stash away extra cash for distant retirement or future generations rather than spending it. While the poor, the middle class, and the rich all spend close to the same percentages on basic necessities like housing, utilities, and food, the rich save a higher percentage of their income for the future (15.9 percent) versus 2.6 percent by the poor and 9.9 percent by the middle class. Making the very likely assumption that the rich already buy most of what they want in the normal course, and excluding over-the-top impulse purchases, odds are that an extra dollar from a tax cut in a rich person's pocket will go towards savings rather than consumption.

But consumption is what will drive our economy in the near term as well as the foreseeable future. In fact, in the midst of slow economic growth, this factor is more crucial to our economic health than anything else. Even if tax savings by the wealthy were to be applied towards investment rather than saving, it would be of little use without increased consumption of goods and services. On the contrary, the additional tax revenues that would be realized as a result of letting the Bush tax cuts expire for the rich would enable the government to lay off fewer federal employees, most of whom actually spend a larger percentage of their income than the rich, as part of a fiscal cliff deal.

Conclusion
Behind all these convenient myths is the implicit argument that the rich should be taxed less because they are job-creators and because our economy depends on them. That may be true but it is still not true enough to justify the arrogance of their stand at a time of national crisis.

Moreover, all this pushback camouflages another agenda that is much more insidious. By spinning their tax contribution into a great sacrifice, downplaying the preferential treatment they receive, and misrepresenting what they will do with tax cuts, the rich are trying to game the system, an action which mocks the American dream, and which insults the sweat and sacrifice of the working class.

The debate over taxes will certainly rage on, if for no other reason than that it makes for great political theater, but outside of that realm we should stop taking the flawed arguments of the rich seriously, and call it out for what it is. Greed.

SANJAY SANGHOEE has worked at leading investment banks and at a multi-billion dollar hedge fund. He has an MBA from Columbia Business School and is the author of a thriller titled "Merger", which Chicago Tribune called "Timely, Gripping, and Original". Please visit www.sanghoee.com for more details.