It Tax a Village

It Tax a Village
By John Ransom
4/27/2011

The millionaire poster boy of the tax-the-rich crowd, who amazed everyone with the revelation that rich people don’t pay their fair share by his talking about his own example, has released his tax returns online with an accompanying asterisk because the truth is a lot less dramatic than his claims.

Turns out that Eric Schoenberg, chief cheerleader for United for a Fair Economy, only made about $37,000 after he paid his expenses, local taxes and accounted for charitable contributions.

He originally claimed he had income of over $200,000.

After telling the AP that he only paid one percent in taxes in 2009 on over $200,000 in investment income as an illustration of how the rich use the system to avoid paying their share of taxes, Schoenberg was so inundated with calls asking how he paid such low rates that he decided to release his tax return.

United for a Fair Economy is a group of rich people who are demanding that the federal government raise taxes on them in the interest of “fairness.” Schoenberg and his friends think that the tax code at its center is a “moral” document rather than a method for paying for government services.

But far from being an exposé of how the rich get away with paying nothing, instead Schoenberg’s return illustrates how rich people who already pay a big share of taxes- the people Obama wants to tax some more- get hosed.

It also shows how badly the tax code needs to be simplified.

Line 38 on the return discloses that indeed Schoenberg, a business professor at Columbia Business School and an expert at taxation, had a top line investment income of $207,415.

He says that the income is made up qualified dividends; that is profits distributed from companies on which a corporate income tax has already been paid.

Schoenberg’s return also revealed that he had total itemized deductions of $155,466.

Those deductions aren’t the loopholes though that Schoenberg claims “you can drive a Rolls Royce through.” Instead, they are commonsense ways of figuring a person’s real income. Even Schoenberg says he doesn’t favor getting rid of the deductions.

Schoenberg’s major deductions were: $46,000 in charitable contributions, $56,000 in state and local taxes and $45,000 in fee expenses he paid to brokerages, banks, etc to manage his portfolio. After deducting those expenses, he was left with an income of $37,349 in his pocket.

On that he paid federal taxes of $2,173 or a rate of 5.8 percent. Plus, you know, the $56,000 he already paid in state and local taxes.

When you take out just his business expenses, not including charitable deductions, he’s paying a whopping 36 percent on all his income taxes, state, federal, local- not a marginal rate, but a flat rate of 36 percent. If you take out his charitable contributions, his tax burden goes to 50 percent.

This is where even for an expert on taxation it starts to get a little confusing.

First he claims that a median family “would have paid roughly $2,761 (or about 5.5%) in federal income tax,” on income of just under $50,000, a little less than the rate at which Schoenberg was taxed. I’ll note just as an aside that the income figure he’s comparing it to is less than his entire tax bill for 2009, by about $10,000 if you include his state and local taxes.

Later however, he says that “If I'd been an ordinary worker, my tax bill would have been $4,764.”

I’m not sure exactly how the tax rate for a family who makes just under $50,000 ends up being smaller than an ordinary worker who made $37,349, but I suspect Schoenberg isn’t making an apples to apples comparison; and he doing that in order to make his case more dramatic.

I say that because he later throws social security taxes into the comparison too.

That’s rather stretching the argument since social security taxes are supposed to be insurance payments rather than general government revenues and thus can’t be compared to income or other taxes.

But again, I suspect Schoenberg threw it in to make his case more dramatic.

Look! The rich aren’t paying for social security either!

Schoenberg as much as admit that returns can be different for different people with the same incomes in the press release that accompanies the return: “I think there are reasonable arguments to be made for keeping each of these types of deduction, but the numerous ‘tax expenditures’ that litter the tax code mean that citizens with similar incomes can end up paying wildly different amounts in tax.”

I agree. Then fix the tax code.

The bottom line for Schoenberg is that he thinks that there is something morally wrong for society to collect taxes for investment income- passive income- at a lower rate than earned income.

But as you can see by the interactive charts at Heritage, those with incomes under $113,000 per year, that is 90 percent of us, have made up a steadily lower share of federal revenues since 1980, while the top five percent have made up a steadily higher percentage of federal revenues during the same period.

Assuming rich people have a higher percentage of passive income than the rest of us can only mean that the rich are paying more.

The top one percent has gone from paying 19 percent of income taxes in 1980 to 38 percent today.

I suspect that in the end there is quite a bit of guilt behind United for a Fair Economy by folks who have been very, very fortunate or who have inherited money and live off the income.

That’s their choice. Bravo for them.

But instead of taxing success and dissuading investment, I recommend that they do what many I know do to pay their fair share of taxes and feel a lot more fulfilled:

Give. Someone. A. Job.

Or maybe they can just wait for the other rich guys to do it for them.
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To read another article by John Ransom, click here.