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The Problem with Taxing the Rich

Why are states like California in dire budget crises nowadays? Sure, state expenditures have risen quite a bit, but according to Brad Williams, a former economic forecaster for the state of California, the root cause of all these budget woes is the states' reliance on taxing the rich.

Before you reach out for the metaphorical pitchfork, consider this:

Nearly half of California's income taxes before the recession came from the top 1% of earners: households that took in more than $490,000 a year. High earners, it turns out, have especially volatile incomes—their earnings fell by more than twice as much as the rest of the population's during the recession. When they crashed, they took California's finances down with them.

Mr. Williams, a former economic forecaster for the state, spent more than a decade warning state leaders about California's over-dependence on the rich. "We created a revenue cliff," he said. "We built a large part of our government on the state's most unstable income group."

New York, New Jersey, Connecticut and Illinois—states that are the most heavily reliant on the taxes of the wealthy—are now among those with the biggest budget holes. A large population of rich residents was a blessing during the boom, showering states with billions in tax revenue. But it became a curse as their incomes collapsed with financial markets.

Arriving at a time of greatly increased public spending, this reversal highlights the dependence of the states on the outsize incomes of the wealthy. The result for state finances and budgets has been extreme volatility.

Robert Frank of the Wall Streeet Journal explains: Link


Um, one missing piece to this magic answer is the deregulation of a lot of these so-called volatile industries--energy, housing, financial securities. This happened over the last 20 years.
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Also its easier for the rich to get around paying taxes entirely because of gaping loopholes in the tax code. For example the Tom Cruise incident in CO and not paying taxes on his "farm"

FTA: More attention is being paid to wealthy individuals who avoid paying taxes. The Denver Post reports actor Tom Cruise pays just $400 a year in property taxes for his 248-acre property in Telluride by taking advantage of a tax break written to help struggling farmers. As Tom Cruise lives virtually tax free, the state is facing a $375 million cut to education funding.
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Did they lose money, or just get more creative about where they stash it? This Times article http://www.nytimes.com/2011/03/26/opinion/26herbert.html?_r=2&src=ISMR_AP_LO_MST_FB claims that the top 10% of Americans (granted this is nationwide - not CA specific) received 100% of the average income growth in 2006 and 2007. There may have been some volatile nouveau riche fortunes that were lost during the recession, but by and large the super rich not just weathered the storm but came out stronger on the other side.

Also agree with the previous commenter re deregulation, corporate tax cuts being a major player in CA economic woes http://www.californiaprogressreport.com/site/node/7247
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Well, I guess my previous comment was removed - whatever. In any case, it is estimated that 90% of personal income tax in CA is paid by wage earners over $100K. If your stat is true about those over $450K paying 50% of the personal income tax contribution, then that would leave a little less than 40% paid by the $100K-449K group - still a sizable portion of the tax revenue in CA. I would suspect this group has been more negatively affected by the economic downturn than the top wage earners, and would expect the see a decrease in revenue from them more than the $450K group...

There may have been some percentage of nouveau riche who lost their fortunes in recent years, but according to a recent Time editorial, the top 10% of wage earners (this is nationwide, granted) received 100% of the income growth in 2006 and 2007. The super rich not only weathered the storm, but came out better on the other side. The issue for CA may not be a decrease in income, but the super rich getting better at where they stash the dough.

In looking up the revenue estimates used in the CA budget, it nauseated me to see that corporate tax revenue is about a quarter of what CA expects its residents to pay...
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Interesting, but the problem isn't with taxing the rich... although I'm sure many (rich people) would love to use this as an excuse to push for a slew of new/continued tax cuts.

No, the problem is with the "beyond your means," "too big to fail" attitude that tied up so much wealth in fundamentally shoddy financial tools in the first place.
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The problem with taxing the rich is that taxation is theft.

The difficulties that arise with executing said theft are myriad, and the methods for combating the difficulties are draconian and repugnant to a free society. They are also counterproductive; there is a practical limit to how much you can squeeze out of producers before they will simply flee the tyranny.
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Most of those dark blue states on the map are pretty red politically, even when excluding Texas and their higher than California budget woes. In fact several of those 'no income tax states' are suffering significantly but that lacks mention (I assume because it doesn't fit the storyline, but I'm jaded.) despite being a fairly good control group in arguing that income tax volatility is NOT the problem.
We are told about the instability of the wealthy, and as an example are given the one year time-frame of the second worst financial crisis in our history, one that predominantly affected those with substantial stock holdings, aka the wealthy. And the solution to this instability is to tax the wealthy less. Funny that. Rainy day funds are brought up but not really discussed. Instead we get to learn that a rainy day supporter has car dealerships and is doing 'fine'. Whew, good to know. Also little mention of how income inequality could play a significant role. Sigh, its about what I expect from WSJ and their usual slant, but it still frustrates me. By the way, Mr Williams in the fall of '05 told us that he 'doesn't foresee a housing collapse'. Oops.
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The question isn't about taxing the rich (we already do that: 50% of California's income-tax revenue comes from the top 1% of the state's taxpayer). It's whether to tax the rich more.

It makes sense to tax the rich - they're the ones with the money, but what does this do to California long term?

Re: rainy day fund - yes, it sounds great (common sensical, even) but remember that in 1978, when Brown was Governor, California had a budget surplus of over $4 billion - an amount that was called "obscene" by then state treasurer Jesse Uhruh. This led to the Prop 13 tax revolt. The moral of the story is that states should have a cushion, but not so much that its voters took it away.

BTW, Brad Williams was the chief economist at California's nonparisan Legislative Analyst's Office from 1995 to 2007. He has since moved to the private sector. His company was recently hired by Republicans to investigate public employee pension reform, so take everything with a grain of salt.
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CA personal income tax receipts have dropped significantly due to a very high unemployment rate (currently at 12.2%, which is an improvement sadly). During the bubble years, a large number of jobs were tied up in construction and development projects, which led the massive unemployment in those sectors during the housing crash. Many of these were middle class jobs that made a substantial contribution to the income tax base.

Also factoring into the budgetary problems is the massive drop of property values, which gutted property tax revenues. Property tax rates are frequently unusually high in CA (partly because Prop 13 has set up a system where a smaller portion of the population is shouldering the full tax burden) making the overall budget fairly sensitive to the property valuations.
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I blame myself. I suck at polotics. Do I spend my free time debating with people at work? Or passing out leaflets or speaking at city hall? No.
So every election, when there are 20 new bond measures to improve the neiborhood, I rolled my eyes and voted no to every one while the rest of my neigbors vote yes, yes, yes because 1. Hey, bonds are not taxes it's just an IOU my kids will pay later 2. Using that charge card will improve my property value 3. Saying no means you hate firemen or police or children, ect.
Now that the bonds are due, the only solutions are to raise taxes, sell more bonds, or cut spending. Only one of these will get them re-elected, right?
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This is another one of these 'oh look how bad it is to tax the wealthy' vacuum BS things. All of these articles keep looking at one thing, income tax, unfortunately what most people think of as income is quickly becoming a much smaller portion of the tope earner's income. Look at Buffett who has an effective tax rate of about 10% less than that of his secretary because the overwhelming majority of his earnings comes from places that are not income.

When all of these things talk about income they are really stating payroll and not the total earnings of an individual (Capital gains, dividend, estate). If they want to be serious about this they need to start treating all earnings the same. The worst thing you can currently do, per the way taxes are handled, is work for a living.
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We need to tax the rich more. They use more of the common resources. They have been getting more money while they pay workers so little that their employees qualify for tax payer funded programs for the working poor.

Thomas Jefferson wanted a progressive tax so we wouldn't end up with an aristocracy who could pay whatever they want for labor.

There were times when marginal tax rates and capital gains taxes were probably too high. They are too low now.
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This misguided political post just cost Neatorama a longtime reader.

At a time when the (Forbes) 400 wealthiest Americans have more combined wealth than 150 Million of us put together, and the wealthiest have enjoyed the lowest tax rates since the great depression... the defense of shifting the tax burden even further onto the shoulders of the shrinking middle class is insanity.

To post this partisan lunacy in an entertainment blog... what kind of Fox-news haunted demon would posess a blogger to alienate their readership like that?

Farewell Neatorama. You used to be entertaining.
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It's very easy to vilify the rich (especially the obscenely rich) but remember that they already shoulder the majority of the tax burden:

New data released by the IRS today offers interesting insights into the distributional spread of the federal income tax burden, new analysis by the Tax Foundation shows. The new data shows that the top-earning 25% of taxpayers (AGI over $62,068) earned 67.5% of the nation's income, but they paid more than four out of every five dollars collected by the federal income tax (86%). The top 1% of taxpayers (AGI over $364,657) earned approximately 21.2% of the nation's income (as defined by AGI), yet paid 39.4% of all federal income taxes. That means the top 1% of tax returns paid about the same amount of federal individual income taxes as the bottom 95% of tax returns.

Most people equate income with earnings and wealth, but they're not the same. A huge portion of the wealth of the richest Americans are in forms of equities. Gains in those equities are calculated as wealth, but taxation only occurs when that gain is converted into real dollars (and at a lower capital gains tax rate).

So Steve Jobs make millions through Apple's stock, but his regular annual income is "only" $1.

@dogwithwings - there's a growing voice calling for a whole earnings approach to taxation. Indeed, Warren Buffet himself has called for higher taxes for the rich.

@Hank Michaels - I think so far the comments has been civil and enlightening. I've always valued the thoughts that many Neatoramanauts have put into the discussion, even when they have opposing views.
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I find the sense of jealousy and class warfare here alarming. The accumulated wealth of others has not driven our financial problems. It has been the chicanery of elected officials and deceptive business practices, namely Fannie Mae and Freddy Mac, that have caused a deep recession and faltering recovery. For decades our nation and subsidiary states have spent more than they've taken in through taxes. Now the bill is coming due. Buckle up.

The seniors don't want their entitlements cut. The poor don't want their entitlements cut. The sick don't want their entitlements cut. Politicians want to keep getting re-elected. A dangerous mix.
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@Alex, it's a fallacy in all these discussions to discuss income taxes in isolation. Payroll taxes currently account for approximately the same amount of federal revenue as income taxes are are paid disproportionately by people who are not wealthy because its a regressive tax system (people can debate whether that's appropriate or not, but since the amount you pay at $110K is the exact same as the amount you pay at $5M, it most definitely is).

Some will claim that the rich have gotten more money because they have done things to deserve it, but I would issue the challenge to prove to me that their productivity has increased at the same percentage rate as their income over the last 20 years. Is a CEO really 185x more productive than their average worker?

Ironically, I'm pretty sure I came across this link on Neatorama, but it provides a good summary of the relative economic positions of Americans. Like most Americans, I believe a certain level of income inequality is expected (and even desirable), but the current situation is absurd:

http://motherjones.com/politics/2011/02/income-inequality-in-america-chart-graph
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Lies, damned lies, and statistics. This article is a numbers game.

The average income in California is higher than most places because it's so expensive to live here. Someone making $100,000 and living in the SF Bay Area is not rich, not even comfortable. Taxes should be up on people over about $400,000 in income, for they are at the level of easily paying in more.

Additionally, as pointed out, this study is limited to income taxes. Property taxes, sales taxes, motor vehicle fees, gasoline taxes, and many others, are not included. I pay the same amount in taxes on gasoline as everyone else.

Motor vehicle fees decline with the automobile's age, but they're not cheap.

Sales taxes can be claimed on income tax in lieu of certain other deducations, which definitely helps the wealthy.

Prop 13 limited taxes on property, which made it easier for those who held onto their property to pay very low rates (I agree with the ideal Prop 13 model wherein elderly people did not have their taxes raised at a rate that caused them to lose their homes, but the average person who has to sell their home and move for work gets totally screwed by rising property taxes, as opposed to the wealthy who can easily afford them).

Inheritance taxes are gotten around by living trusts, which most people don't know about.

California income taxes are not nearly as high as federal income taxes. I believe that the levels at which they tax people are fair and equitable, which the federal taxes are not.

There are many reasons for the falling state taxes (all taxes): the economic booms and busts, which hit California unusually hard, as we're often at the center of them; rising immigration, with lower salaries and increased draw on social services (it's estimated that over 30% of California residents are first generation); high cost of real property in economic centers, limiting home buying and business startups; mismanagement of and a short-sighted focus on government costs; and many other small, but significant reasons.

The article is fallacious and inflammatory.
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Something to consider when taxing the rich... how many people do the poor employ?

Nobody wants taxes to increase on themselves, but taxing someone else... sure, no problem! The "evil rich" are a common political punching bag that plays into wealth envy and class warfare.

The concept of an income tax is flawed at its core. You exchange a portion of your life (labor) in exchange for a wage (income). By imposing an income tax, the government is laying claim to a portion of your life. How is this different from part-time slavery? Oh wait, in exchange the government is suppose to supply services that are for the common good of the people, right? In reality, much of this money is spent on entitlement programs (large and small) that politicians leverage to secure continued public support for themselves and/or their political party. In essence, they are bribing you with your own money.

The income tax is more about control than anything else. Want to discourage something? Simply tax it more. Encourage something? Make it deductible! Need votes? Reduce taxes. Etc. etc.

Rich or poor, you have a right to all of your income. There are better systems out there (sales tax, fair tax, etc.).
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Wow, they consider $490k rich?

I consider $90k rich. Tax everybody making over a hundred grand; if they complain about it have them swap places with me. If they'd rather work 60 hour weeks for $30k to dodge taxes then more power to them.
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@Rob, the middle class actually employs the most people. Employers of very large numbers of people are all corporations, which follow a completely different set of tax rules. Trying to argue that the personal income tax is relevant to corporations is either failed logic, or outright deception. Small businesses which are not incorporated by a vast majority have middle class incomes, and are not subject to the margin tax rates applied to the wealthiest Americans.

Corporations also don't increase employment based on how much money they have. A corporation increases employment only when it must in order to keep up with demand, because their goal in profit, not employment. If you can fulfill the demand for your goods without increasing employment, why would you hire more people?

And why would a company have more demand than they have capacity to produce? Because a large number of other people have enough money to buy their goods or services. In other words, a strong middle class drives the demand that ultimately produces more jobs. The upper class is not responsible for job creation, the middle class is.
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@Talby, we do tax the poor to cover most of their services. It's call the payroll tax and it currently accounts for over 40% of federal revenues, and covers unemployment insurance, Social Security, Medicare, etc.
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It really depends on what the definition of "middle class" is. Small businesses are indeed the largest employers in the country. However, many of these have incomes that fall on individual tax returns... and many of these are in excess of of what many deem as "rich". Already one commenter thinks $90K a year to be rich. I'd venture to say a large majority of small businesses (especially those large enough to have several employees) show a balance of over $90K a year. Are they "rich"? Should they be taxed more? Is $250K a year "rich"? Maybe in Iowa, but what about LA or NYC? What some may consider to be rich enough to share a heavier tax burden may find that this directly impacts the ability for their boss to maintain their employment.

This kinda illustrates my point. It's not the government's business to know or care what income anyone makes. Just like it's not my or your business to know what other people make. Unless I'm a shareholder, I really don't care what income any random corporation makes either. Tracking income for "tax purposes" serves nothing more than to fuel wealth envy and class warfare. As a result, it fuels the power of politicians. It's no business of the government's (or ours) to define the magic number where someone is deemed "rich" and thus should have more of their income confiscated.

Taxation should be based off of consumption (with the exception of essentials such as food).
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@Charles The payroll taxes paid by "the poor" don't even come close to paying for those services. According to 2007 stats (most recent I could find), the top 1 percent of income earners paid 40 percent of all federal income taxes. The bottom 50 percent of earners paid only 3 percent of federal income taxes. More than one-third of U.S. earners paid no federal income taxes at all.
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@Rob, First, over 90% (I forget the exact number at the moment) of small businesses make less than $250,000 a year in income (they are allowed to deduct all costs associated with running the business from their revenues, including paying their employees, meaning they have less than $250,000 in profit). So when we're talking about the marginal tax rate for wealthiest Americans, the vast vast majority of small businesses do not fall into the category being discussed.

Second, payroll taxes account for the same percentage of federal revenue as income taxes (just over 40%). Talking about what percentage of the income taxes come from each bracket is a smokescreen used to justify selfish or ignorant action. Payroll taxes go to cover the social services people most often cite (Social Security, Medicare, Unemployment Insurance), and until this year Social Security ran a surplus which was being loaned to the general fund to cover expenses that other taxes (including income taxes) could not cover.

Note also that the wealthiest Americans benefit most from the expenditures of the general funds. These go to pay subsidies to corporations, which can directly affect their income, but increases in the general economy also benefit those with large investment portfolios the most. Employment right now is just barely starting to recover, but the stock market is back above 12k and a non-trivial number of companies are reporting record profits. So who really benefited the most from economic stimulus?

Understand that all my reasoning does not come from any sense of jealous too. I AM one of the lucky ones who has a six figure salary. But paying slightly more in taxes is not going to significantly affect my lifestyle and has no perceivable effect on my happiness. And yet it can leave a large number of other people much better off, and most likely increase my stock portfolio value more than enough to offset the short term reduction.
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@Charles "The average small business owner or chief executive brings home an annual salary of $233,600, according to Salary.com's 2006 Small Business Compensation Survey." Not the magic $250K number, but pretty darn close. Enact tax laws now with that as the "rich" benchmark, and not much time will pass (given inflation) before large numbers of small business owners start feeling the impact. Yes, CEOs are included in the same survey as many small businesses (particularly those large enough to employ people) operate as an S corp. Regardless, these are the people we are looking to tax more... the very same people making business decisions that effect employment.

I don't know where you get your information about social security running a surplus. According to the Congressional Budget Office, this year social security is projected to collect $45 billion less in payroll taxes than it pays out. Going forward, the CBO projects social security running deficits every year until its trust funds are eventually drained in about 2037.

The government is a very poor stand in for Robin Hood. Charity should be in the hands of the people, not forced by politicos that squander it. I don't believe anyone (rich or poor) is any better off paying more taxes until the government makes a serious effort to cut waste and curb corruption. Excuse me... there is one (and only one) group that does indeed benefit from increased taxes and that is politicians... the last people you want benefiting from it.
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@rob, are you talking about the proposed 250k mark above which income would be taxed an additional 2%? I loved hearing about the people who said they would have no incentive to make over 250k when each dollar above that would be subject to an additional 2 cent tax. I hope they don't get mad and won't give people jobs! I'm sick of charity for the super wealthy.

Taxes fund things like roads, wars, government assistance for the working poor and all kinds of things rich people like and use. It is hardly theft or charity.
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I simply think that the way our tax code was created a century ago is the reason we are so screwed today. The progressive era of American history led to the addition of the 16-18th amendments. First, the established the income tax, and for the first time the government had the "right" to look into each and every person's wallet and take a "fair" amount out. The second one was the abolishment of the way senators were elected. Prior to the 17th amendment senators were elected by state representatives and not by popular vote. and finally, these progressive minded individuals passed the 18th amendment, and for the first time americans were denied a comodity.

This isn't right vs left, its reason vs progressive thinking. All progressive thinking can be summed up in one sentence. "I am a progressive, I believe that a person should recieve something for nothing." The only problem is absolutely nothing in this world is free. charity for those less fortunate should be given freely, and not taken by force from people who truely fund everything.

those on this board that argue the rich should pay more can simply not suggest a way to do just that without adding to our overburdoned tax code. Take this example: General Electric has not payed a dime in corporate taxes in the last three years, the simple reason why is that they have an army of lawyers and payed for politicians that created the loopholes all of you guys are screaming about. a small buisnessman can not afford an army of lawyers, and therefore pays a larger percentage of his earnings in taxes than those ridiculously wealthy individuals who can get around everything. He does it simply because he's not thinking about taxes all the time like the lawyers, he's thinking about his buisness. ALL OF THIS IS BECAUSE OF THE 16th FREAKING AMENDMENT!!!!!

Here is an idea for everyone, i hope alex can read this and post it as a simple compromise to our insane tax system.

The government can only issue sales taxes. sales taxes can not excede 10% on purchases less than or equal too $500,000 dollars, can not exceded 15% on purchases less than or equal too $5,000,000 dollars, can not excede 20% on purchases less than $10,000,000. and can not exceded 25% of any purchase made legally through the united states of america.

i think that would be a great way of doing things, the government would not have the right to see how much money you make. it can only have the right to tax you on what you BUY. rich people buy EXPENSIVE THINGS, therefore they will spend MORE money than the poor will and therefore pay EXPONETIALLY more money in taxes. all staying legal of course.

the tax problem is so confusing nowadays but it can truely be simplified to what i was just suggesting. "I am buying supplies for my factory, i need to spend 50K on supply X, well, now i as a small buisness KNOW that I will not spend more than 10% on taxes." no lawyers, no four hour a sleep nights reading every inch of law to make sure you're not liable for 8 years in prison.

seems pretty fairminded to me, and while those who scream for class warfare continue their sprint off the cliff of insolvency, i want to find those willing to admit A) we need to change the way things are run, B) give individuals more freedom over their finacial lives, and C) create simple systems of governance that do not favor anyone over anyone else.

we currently live in a world where C) is openly laughed at by those with the correct connections, we have to change this with reason and not with handouts, welfare, and sob stories.

we should be a nation of laws not men, where everyone has the same opportunity to both succeed AND fail.

and for everyone who still thinks our problems and debt can be payed for by the rich, whats plan B?

youre going to first tax the rich, whos next? its the middle class, and even then we cant cover everything, so whos next?

we need to shake things up in america, i think this article is perfect for highlighting the number one flaw in our system of governance, and that is how we collect taxes.
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@ Rob, Your question baffles me. How do you think the Social Security Trust Fund was created without a surplus in the preceding years? This is the first year that Social Security has run a deficit (a fact I also noted in my original post). I'm not arguing that it doesn't need some changes (gradually raising the SS retirement age to account for our increased lifespans would be a start), but arguing that it isn't funded right now by SS taxes is simply denial of reality.

As for inflation, why is it that you think that problem only applies to the top tax brackets? ALL tax brackets need to be adjusted with inflation (and they do get adjusted).

This has nothing to do with the government being Robin Hood. The wealthy benefit the most from virtually everything the government does. It provides transportation, water, and electric infrastructures to allows businesses to run. It imposes tariffs and provides subsidies to protect the price of goods. It uses it political weight to prevent unfair trade practices in foreign countries from gutting local industries. It keeps workers alive and healthy(-ish) so they can keep working at otherwise unlivable wages. All these things primarily benefit corporations, and therefore those with the big payouts from corporations, far more than the average individual.

Almost every rich person out there likes to pretend their wealth is created in a vacuum, but its not. It's a product of the environment they exist in, which is provided by the government and people of the United States. If they really think there's a better environment out there for creating wealth, they'd already be there. But most choose to stay here, because they know that's where their wealth comes from, even if they won't admit it. And paying for the right to reap that reward is not asking too much.

@pooliejoe, national sales tax often sounds very simple and appealing, but it turns out to be a very regressive tax system. There is a simple base cost of staying alive that cannot be avoided (food, water, clothing, housing, transportation to and from work, etc). If you barely make enough money to meet that level (and a large number of people do), your effective tax rate is the sales tax rate. It's also been shown repeatedly that the wealthier you are, the lower your marginal spending rate is. That is, you spend less of every new dollar added to your income. That means the wealthier you get, the lower your effective tax rate is going to be, because you spend fewer of those dollars. You end up shifting even more of the tax burden on those who can least afford it, while those who can most afford it reap most of the rewards.

And BTW, despite your suggestion, the estimates they came up with to have just a national sales tax cover everything was in a baseline 20-25% range, possibly more. Sure, that might increase the effective tax rate on Warren Buffet and a handful of other rich people, but mostly it would just increase the tax rate on the poorest people, who already live paycheck to paycheck.
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