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GreenTraderTax Blog
Is widening progressive tax rates unconstitutional?

August 15, 2010

President Obama wants to widen progressive income-tax rates to redistribute more money from the upper income to the middle-class. Does this targeted tax attack infringe on the constitutional rights of upper-income taxpayers?

Progressive tax rates have been an integral part of the American tax system for a long time. When Presidents Kennedy and Reagan reduced the top marginal rates, it spurred growth and the upper income people felt better about fairness. Lowering their top rates gave them an incentive to invest in innovation and spend on consumer items, all of which grew the economy and tax receipts.

But President Obama proposes to do the reverse, which could hurt the economy. The President wants to retain the lower Bush tax rates for all but the upper two highest income tax brackets, raising the two top brackets from 33 to 36 percent and 35 to 39.6 percent, respectively. (Actually, the top bracket would be 41 percent with phase-outs.)

With health care taxes on investment income and higher Medicare taxes coming in 2013, the top federal rate will be closer to 45 percent. Add in state taxes of 5 percent (on average in many states), and the top marginal tax rate is 50 percent. Social security FICA taxes are another 12 percent on the base amount of $106,800. The President campaigned on subjecting incomes over $250,000 to the FICA tax again too. If that happens, the top tax rate will be 62 percent.

There are more taxes to consider as well. Sales taxes average 5 percent around the country, property taxes are on the rise and there are various excise taxes, too. The deficit commission could even propose a national sales tax (VAT) as well.

Why would anyone want to continue working hard if their make-an-offer-you-can’t-refuse partner — the government — grabs 65 percent of the income? No wonder the upper income seem to be on capital and job-creating strike. More deficit-stimulus spending and paying for spending with tax hikes will not spur job growth; retaining lower Bush tax cuts for all along with business friendly initiatives will do so.

The government argues that it needs to raise tax rates, yet it has done little to nothing to rein in spending, waste and fraud in its own ranks. Obama’s government never addressed Fannie Mae and Freddie Mac’s wasteful spending and policies in Dodd-Frank financial regulation, and it protected the personal injury attorneys in health care reform. Thankfully, the media, pundits and politicians have picked up on the story of government pay and benefits far exceeding private workers. I started on that concept in early 2009 when writers asked me about the escalating problems with state deficits. I also told everyone to let Wall Street pay the bonuses, as government collects half in taxes.

As of January 2010, the budget office (CBO) projects debt will rise to $13.7 trillion (more than 65 percent of GDP) — a difference of $8.6 trillion from 2008. Of this change, 57 percent is due to decreased tax revenues resulting from the financial crisis and recession; 17 percent from increases in discretionary spending, much of it the stimulus package; and another 14 percent due to increased interest payments on the debt — because we now have more debt. Hopefully, interest rates won’t skyrocket anytime soon, as that will really hurt taxpayers. By the way, deflation increases the value of what we owe — the opposite effect of inflation.

The biggest blow to the deficit was decreased tax revenues caused by businesses collapsing — not because tax rates were decreased by President Bush. Restore the financial system and the economy, spur growth and these tax receipts will reappear. Raise tax rates and regulations and the system will not restore itself; the problems will get worse.

It’s not widely understood that President Obama proposes to retain lower Bush progressive tax bracket rates for all but the two highest brackets, which means even the rich will benefit from those lower tax brackets under $250,000 of “married filing joint” adjusted gross income. In fact, the rich will have a small tax cut, because the third-highest marginal bracket (the 28 percent rate) will be widened to reach the threshold of President Obama’s declared cut-off for the new rich of $200,000 single and $250,000 married.

The simple message of the Bush tax cut story is true. The President wants to raise taxes on the upper income and reduce taxes on the middle-class. Conversely, Republicans want to retain the Bush tax cuts for everyone including the upper income. It’s important to note that if Congress can’t pass a new tax bill before year-end, the Bush tax cuts will expire as planned and tax rates rise for all brackets.

Pundits on both sides acknowledge that President Obama has an agenda to redistribute income, capital and benefits (like health care) from the upper income to the middle-class and poor. Popular Democratic rhetoric claims the rich enjoyed most of the benefits of the economy over the past decade while the middle-class stagnated. The left often blames the upper income, big corporations and Wall Street for their economic malaise. Republicans feel raising taxes on job creators during a potential double dip in the economy may reduce tax revenues and cause more job losses.

Let’s focus on the real issue of widening progressive tax rates to redistribute money. The majority of upper-income Americans don’t feel very wealthy now and handing over more of their hard-earned money to the middle-class may seem unfair to them, especially after a large chunk of benefits were already forked over with health-care reform.

Wikipedia says “Progressive taxes attempt to reduce the tax incidence of people with a lower ability to pay, as they shift the incidence increasingly to those with a higher ability to pay.” Even Adam Smith, the great author on capitalism thought progressive taxation is a good idea and most Americans probably agree.

However, there are many good arguments against applying progressive tax rates: “It has been argued that progressive taxation violates the principle of equality under the law — the principle under which each individual is subject to the same laws, with no individual or group having special legal privileges.”

This brings to mind the recent ruling overturning California’s passage of Proposition 8. The court ruled that the wishes of the majority to ban same-sex marriage could not trample the constitutional-rights of the minority. Upper-income taxpayers appear to be a minority too and they deserve constitutional protection from President Obama’s active redistribution agenda.

The President’s health-care mandate forces all taxpayers who can afford it to purchase health insurance or pay stiff penalties. State attorney generals along with their courts may strike down this mandate as unconstitutional based on the commerce clause. It’s amusing that the President’s side is calling it a health-care tax to win that lawsuit. This case shows the Obama administration is trampling on citizens’ constitutional rights.

Big banks are also gearing up to fight the President’s proposed $90 billion bank fee (or tax) based on constitutional grounds. The banks’ attorneys claim it’s an unfair bill of attainder. The constitution bars bills of attainder in Section 9 of Article I. This is another example of soak the rich and people you demonize with higher taxes for redistribution. The banks have paid back TARP with high dividends already.

Progressive tax rates are fair, but widening them too much — especially during a recession cycle that won’t give up — is unfair and unwise. It may even be unconstitutional.

Posted 4 years, 5 months ago on August 15, 2010
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