Monday, July 31, 2006

The Rich Get Richer

On Friday, the House passed a bill which raises the minimum wage to $7.25 over a period of two years. This would be the first time in nine years that the minimum wage has gone up. It’s a nice gesture, but a little late considering how much the cost of groceries and gas has risen in nine years.

Attached to the minimum wage bill is a proposal to cut the estate tax, a bill which republicans have been trying desperately to pass and which benefits only the richest Americans.

Here’s a very interesting analysis of the bill (from Axcess News):

The minimum wage increase helps some 6.6 million Americans with an average dollar benefit of $1,200. The estate tax cut benefits some of the nation's wealthiest, about 8,200 people, with an average dollar benefit of $1.4 million.

The Center on Budget and Policy Priorities said Friday that the House approach of marrying the minimum wage hike to estate tax cuts juxtaposes policies that are aimed at two groups at opposite ends of the economic spectrum.

The Center argued that the House version of the legislation passed on Friday doesn't give minimum wage earners a benefit from $7.25 per hour level for two years. The citizen's advocacy group also said that the estate tax will only benefit the nation's wealthiest individuals.

The Center stated that, "While these income gains could be critical to the well-being of a low-income family, the dollar amount of the gain pales in comparison to the dollar gains for estates benefiting from the House estate tax proposal. The Tax Policy Center estimates that in 2011 an estate tax with a $10 million per couple exemption ($5 million per individual) and with tax rates of 15 percent and 30 percent - similar to the proposal under consideration in the House - would yield an average tax cut of $1.4 million for the 8,200 beneficiaries, relative to making the 2009 estate-tax parameters permanent. Thus, the average tax benefit for these estates would be more than 1,000 times the average yearly income gain for workers who would benefit from the minimum wage change. Moreover, the benefit of the estate tax reduction would grow with the size of the estate -- for example, the Tax Policy Center analysis shows that the 900 estates worth more than $20 million would receive an average tax cut of $5.6 million in 2011."


Justin said...


The minimum wage increase will only bring that dollar value to those 6.6 million people who are making less than 7.25 an hour if all of them keep their jobs. The problem is, businesses must keep the company profitable, so when you have a concrete cost that rises, you deal with it accordingly; by laying off your least productive workers (typically the poorest, least educated, who are making 5.15 an hour) So, the hike in minimum wage may help a bunch of white middle class teenagers, but low skill workers with darker skin probably won't fair so well.

And about the tax cut, the wealthiest one percent of Americans pay 34 percent of all taxes in this country. Those 8200 people are paying a third of our budget every year. Yet, they only make 16 percent of the income in this country. People making under 29,000 dollars a year which is appx half of the country, only pay 3.5% of total income taxes for this country, yet they make up 14% of the country's total income.

If we cut taxes anymore on the low middle class, they won't be paying any taxes. The way its going, eventually the tax cuts will only be able to go to the rich because they are the only ones paying the taxes.

Besides all that, when you cut taxes more is invested (rather than being sent overseas through tax loopholes) which brings in additional revenue to the federal government. Tax cuts don't cause government deficeits (I have typed that a million ways and can't spell it correctly) the government spending more money than it brings in causes them.


JMG said...

Business owners and company CEOs are more worried about their bottom line than the well-being of their employees. Why do you think so many manufacturing plants are moving overseas? It's so they can hire low skilled workers at a lower wage than what they would have to pay here and not have to worry about so many regulations.

Even if the low middle class didn't pay any income tax, they still are burdened with sales tax, gas tax, and property tax--if they are fortunate enough to own a home. The price of everything has gone up tremendously in the past few years. Food and clothes are hauled to the store in a truck which runs on gas or diesel, so the prices of those necessary goods are higher. People in lower income brackets have a much larger burden when it comes to trying to live. One small emergency sets people back tremendously, forcing them to choose which expense to pay. People who work at low paying jobs have nearly no chance at "getting ahead."

True, the richest people pay more in taxes, but Jesus said that to those whom much is given, much is required. I think that can apply in this case as well.

Yes, when taxes are cut for the wealthiest people, they likely do invest the money, and these investments bring them even more money--which should be taxed.

The estate tax is a tax on inheritences. If I inherit an estate worth $100 million, and taxes take away $25 million of it, I'm not going to miss the 25 million because it wasn't mine in the first place.

You're right, the government's spending more money than it makes is what causes the deficit. We could do a lot better than to spend billions of dollars every month on war.

Justin said...

The main problem with the estate tax is that it doesn't do much to keep the rich from getting richer and the poor from getting poorer. in 2005, the estate tax brough in 24 billion dollars. Sounds like a lot, but compared to the US Budget, its pocket change.

What's interesting is that what the estate tax DOES do is it brings lots of money to lawyers and accountants who specialize in estate planning (aka finding creative loopholes to prevent estate taxes from being paid) 4 Billion is spent on those guys a year. A sixth of what the estate tax brings in a year is spent avoiding the estate tax. That's 4 billion that would otherwise be invested in new business that could be more beneficial to the poor (since accountants and lawyers aren't typically among the lower classes).

I'm for getting rid of all taxes and having a progressive sales tax. (Poor people receive some sort of stipend for food, clothing, shelter, etc) National Sales tax would bring in far more money than an income tax because it gets rid of loopholes. Also, its not a deterent from making money, like the income tax is, but it encourages saving money. Also, its progressive in nature because the more you spend the more taxes you pay to the government. Someone making a billion a year is going to pay a whole lot more sales tax than someone making 20,000 a year, especially when the 20,000 dollar a year person isn't paying sales tax on food clothing and shelter.

Anyway, back to the point. The biggest negative for the estate tax isn't that it taxes homes, but it taxes family businesses. This hurts lower middle and the poor the most. You know the Mom and Pop store on the corner that has been a family's living for years? Well, when mom and pop die, all the sudden, despite the income of the sons and daughers, the business is taxed at 45 percent of its worth. So, if they can't pay that tax, the business is sold and all the sudden people have no lively hood.

This is the reason why everyone should study economics; because answers to poverty aren't so cut and dry as people would like to believe

Here's an information blog on the estate tax.

JMG said...

The small family business or farm typically has as much or more liability attached to it as it has assets, so the tax isn't going to affect them. The current exemption, according to sources I've read, is $2 million. Most small family businesses and farms are not going to have assests of at least $2 million above their liabilities.

I do agree with you, though, and have believed for a long time that a consumption tax is a much better idea than an income tax.

Justin said...

Right, the income tax is hardest on those that make just enough money to start paying a significant amount of taxes, but who can't afford an accountant to help them find all their exemptions and loopholes.

But consumption tax (or fair tax as some libertarians and republicans call it) will never happen.

Tony Arnold said...

Traveling JMG but reading. Very few people earn minimum wage. During the low unemployment period we have been enjoying for the past few years, supply and demand in the work force has driven the relative minimum wage way above the government set minimum. Those earning the government minimum wage are typically illegal immigrants being exploited by employers who know they will take the job below market value because they have no recourse.

Want to catch the employers hiring illegal immigrants, look for those with a high number of employees earning government minimum wage.

On the tax issue, I'll abstain comment. It is such a mess. Check out the principle of the Lafer curve which shows that increasing taxes reaches a point of minimum return and will eventually decrease tax revenue as you raise taxes (no one has any money). Gov't has never understood Lafer.


Justin said...

I'm glad someone else knows about the laffer curve Tony. My roomate at school my freshman year (who was a junior accounting major) showed it to me. I'd always heard about cutting taxes bringing in increased revenue, but that laffer curve really explains it.