Monday, April 11, 2011

Democrats Who Favor the Wealthy

In my previous post, I noted that some Republicans claim to defend free-market capitalism while
supporting policies that harm it. In this post, I'll discuss an analogous hypocrisy that can be found in the Democratic party. Democrats often claim to be defenders of the poor and working classes and argue that the wealthy must pay more of the share of the tax burden, while supporting policies that harm the poor and benefit the wealthy.

Tax Deductions

One important point to keep in mind when you hear politicians debate tax policy is that the amount someone pays in federal income tax is not solely determined by the tax rates, it is also determined by deductions and credits. While Democrats often claim that the tax rate for the top income bracket needs to increase, or not decrease, few Democrats will criticize tax deductions that disproportionately favor the wealthy.

Employer provided health care and the interest paid on a home mortgage are both tax deductible, for example. Since the wealthy are more likely to have expensive health care plans and borrow money for an expensive home, these tax benefits disproportionally go to the wealthy. Tax deductions for solar panels and hybrid vehicles also disproportionately go to the wealthy. Yet, most Democratic politicians continue to support them, even as they argue that the wealthy need to pay a higher share of the tax burden.

So, in the end, these Democrats are performing a sleight of hand with voters. They can claim that they support making the wealthy pay a higher share of government revenue, but then give the wealthy some of that revenue back in the form of deductions and credits. The result of these deductions and credits is that the middle class will pay a higher proportion of government revenue.

Cash for Clunkers

“Cash for Clunkers” is another good example of a program, supported by many Democrats, that disproportionately favored the most well off in society, and, in this case, was actually harmful for the least well off. Under this program, enacted in 2009, the federal government would give you a rebate if you traded in an older vehicle for a newer one. The goal was to boost the economy, reduce pollution, and aid fledgling domestic auto makers.

This benefit, obviously, could only go to those who could afford new vehicles, which means the poor would get nothing. To make matters worse, however, by removing many used cars from the marketplace, the supply of used cars went down, thus driving up the cost of used vehicles. So, the poor, who mostly buy used vehicles, would be faced with higher prices when they purchase a “new to them” used vehicle.

Payroll Taxes

Payroll taxes are some of the most regressive taxes* at the federal level. Little support can be found among Democrats, however, for reducing these taxes. The programs that are supported by payroll taxes—Social Security, Medicare, and Medicaid—were begun under Democratic administrations and continue to be strongly supported by Democrats.

Social Security and Medicare, in particular, are also strongly supported by the public, in part, because they are for everyone, not just the needy. They are funded by payroll taxes due to the notion that you pay into these systems while you work and the programs will be available to you when you retire. In actuality, most will get more in benefits than they pay in taxes, while the wealthy and those who die before they retire will pay more into these systems than they get in benefits. So, these programs do, in fact, transfer wealth from the most well off to the less well off.

Most of the public, however, do not see them as “welfare” programs, in part because they are tied to payroll taxes. Few Democrats support a decoupling of Social Security and Medicare from payroll taxes because they are worried that this illusion of fairness (you get out what you pay into it) would erode. And, without this illusion, support for these programs would disappear.

Eliminating payroll taxes would help poor workers and spur job growth. Payroll taxes are paid by employers as well as employees. This means businesses must pay more in taxes to hire new workers, or provide overtime to current employees. Eliminating this burden on businesses would reduce the cost of hiring new workers.

The Democratic Party's intractable position on payroll taxes can be seen in former House Republican Bob Inglis' effort to replace them with a carbon tax. Generally, Democrats would like to reduce the amount of atmospheric carbon, as well as reduce the poor's tax burden. One way to reduce atmospheric carbon would be to tax the industries that create it. Inglis' proposal would seem to be a win-win, therefore, for Democrats. They could tax carbon emissions while eliminating a regressive tax. His proposal, however, got little support from a Democratically led Congress.

*A regressive tax is one for which the less wealthy you are the higher a proportion of your income goes towards paying that tax.

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