Contrary to popular belief, raising tax rates on “the rich” doesn’t generate more revenue for the government, at least not the amount most people seem to think it will. One of the reasons why is because the ultra-rich don’t have a traditional income, as Jesse Drucker points out:
Much of the top 400’s income is from dividends and capital gains, generated by everything from appreciated real estate—yes, there is some left—to stocks and the sale of family businesses. As Warren Buffett likes to point out, since most of his income is from dividends, his tax rate is less than that of the people who clean his office.
The true effective rate for multimillionaires is actually far lower than that indicated by official government statistics. That’s because those figures fail to include the additional income that’s generated by many sophisticated tax-avoidance strategies. Several of those techniques involve some variation of complicated borrowings that never get repaid, netting the beneficiaries hundreds of millions in tax-free cash. From 2003 to 2008, for example, Los Angeles Dodgers owner and real estate developer Frank H. McCourt Jr. paid no federal or state regular income taxes, as stated in court records dug up by the Los Angeles Times. Developers such as McCourt, according to a declaration in his divorce proceeding, “typically fund their lifestyle through lines of credit and loan proceeds secured by their assets while paying little or no personal income taxes.” A spokesman for McCourt said he availed himself of a tax code provision at the time that permitted purchasers of sports franchises to defer income taxes.
This is a prime example as to why we need comprehensive tax reform – like The Fair Tax. Maintaining a system that allows for abuse and manipulation only for those able to afford specialists but denies the majority of the population the same consideration serves no one in the end.