Thursday, October 31, 2013

To the Editors: Victor Davis Hanson doesn't understand income taxes

My LTE published by the Mercury News:
Hanson fails to understand tax rates

Victor Davis Hanson (Opinion, Oct. 25) strips more from the credibility of his arguments than anything else when he writes of the quiet desperation of the 1 percent in Silicon Valley, beginning with his assertion that they pay well above 50 percent in aggregate income tax rates. Hanson is unaware that a marginal rate applies only to income above the rate cutoff -- the amount a person earns below a rate cutoff is taxed at lower rates. A California couple has to earn more than a half-million dollars annually to begin paying slightly over 50 percent income tax on the additional money they make. They would have to earn many millions of dollars annually before their aggregate rate exceeds 50 percent. We're discussing far fewer than 1 percent at this point, people who can afford to give back to the California economy that helped them build that wealth. The rest of his argument is no better.

Hanson's Op-Ed read "Beneath veneers of high-end living, there are lives of quiet 1-percent desperation. With new federal and California tax hikes, aggregate income-tax rates on dot.commers can easily exceed 50 percent of their gross income." And it went south from there.

I expect a couple would have to make over $4 million annually to have a chance at 50% aggregate income tax rates, but that's making the ludicrous assumption that $4m includes no capital gains and ignores deductions. If you define income the way people usually do, as salary plus commission plus all investment income, I think few people below $10m annually pay over 50% in aggregate income tax. And while Romney's 14% rate was probably an outlier, the vast majority of people making over $10m have lots of investment income and pay very little. This doesn't include payroll taxes but those become a rounding error when your annual income exceeds $4m, and other taxes are also unimportant unless you've chosen a bonfire of vanities lifestyle.

Buffett said he paid a lower tax rate than his secretary, and he seems more accurate about the wealthiest than Hanson.

In other financial news, the US budget deficit is the lowest since the 2007-2008 fiscal year, at $680 billion. Interest on the debt is $415b, so the US is effectively spending only $265b above revenues and the rest is debt turnover. We're very close to having an operating/primary surplus in the near future, probably not a good idea with a still-limping economy.