Heard Off the Street: Analysis offers unorthodox tax rate notion

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Orthodox doctrine in certain circles is that raising tax rates on the more affluent is a jobs-killing exercise that would weaken a painfully anemic economic recovery. More broadly, those who would render less to Caesar believe lowering taxes for everyone would invigorate growth, boost savings and investment, and create a bigger, healthier economy for everyone.

Some outside-the-box thinking on this vexing issue has been offered by the Congressional Research Service. An arm of the Library of Congress, CRS "is well known for analysis that is authoritative, confidential, objective and nonpartisan." It says so on its website.

CRS took a look at the relationship between the relentless reduction of tax rates on those in the upper-income brackets and economic growth -- and concluded that there is no relationship.

A review of the data "suggests the reduction in the top tax rates have had little association with saving, investment or productivity growth," CRS concluded.

However, it did find another relationship: Taxing the more affluent at lower rates "appear[s] to be associated with the increasing concentration of income" among those in the higher tax brackets.

The top marginal tax rate -- the percentage paid on the last dollar of income earned -- was higher than 90 percent through the late 1940s and 1950s, according to CRS. Today, it is 35 percent and set to increase to 39.6 percent next year unless Congress extends the Bush tax cuts.

The Congressional Research Service also looked at average tax rates -- what individuals pay after they capitalize on the myriad deductions and credits engineered into the U.S. tax code as well as the lower tax rates that apply to investment income such as capital gains and dividends.

Average tax rates explain why billionaire Warren Buffett pays a lower percentage of his income in taxes than his secretary pays on hers. They also explain how President Barack Obama paid 20.5 percent of his $789,674 income last year in taxes and why Mitt Romney, his Republican opponent, paid $1.9 million, or 14.1 percent of his $13.7 million income.

CRS also found that average tax rates for the top 0.01 and 0.1 percent of taxpayers declined during that period, from about 55 percent to 60 percent in the mid-1940s to about 25 percent currently.

Its findings notwithstanding, the economy today is a much different animal than it was over the period of time that CRS examined, said James Holtzman, of Legend Financial Advisors in McCandless.

"We're in a massive deleveraging cycle right now. That wasn't the case in any of these other eras," he said, adding that generalizations between taxes and economic growth then and now "are sort of worthless."

Robert Fragasso of Fragasso Financial Advisors, Downtown, said the decline in tax rates since World War II "corresponds to the greatest period of growth in our country's history." But tax rates are only one of many factors that move the economy. Growth also depends on interest rates, regulation, trade, inflation and other factors, he said.

"When all factors work together, we get positive results," Mr. Fragasso said.

Ronald Heakins of OakTree Investment Advisors in Shadyside said he would not dispute the conclusion that the Congressional Research Service reached.

He said more favorable tax treatment of long-term capital gains -- currently taxed at a maximum rate of 15 percent and scheduled to go to 20 percent at the end of the year -- have increased income inequality by making the rich richer.

Mr. Heakins cited a recent study by the Cleveland branch of the Federal Reserve Bank that shows wages, salaries, pension, insurance and other types of work-related income as an overall share of income has shrunk over the last 30 years while the share generated by investment income has increased.

Short-term capital gains -- gains realized by selling an investment held for one year or less -- are taxed at the same rate as wages, up to a maximum of 35 percent. Sell the same investment a day later and it's considered a long-term capital gain and taxed at considerably lower rates.

Mr. Heakins believes the holding period should be extended to at least three years, preferably five, before the favorable tax treatment kicks in.

"I do not think anyone would not buy shares of Exxon, Heinz or Apple because the capital gains and dividend tax rate was the same as ordinary income," he said.

Greg Melvin of C.S. McKee, a Downtown investment firm that is organized as an employee-owned partnership, believes low tax rates promote growth.

He said employees pay taxes on the partnership's profits at individual rather than corporate tax rates. Lower rates have enabled them to pay off their mortgages, contribute the maximum to their retirement accounts, and make other investments and purchases. The rates have also helped the firm grow from 22 to 38 employees, he said.

Whether based on their own rigorous analytics or political expediency, members of Congress will agree or find fault with CRS' authoritative, objective and nonpartisan conclusion that there is little connection between taxes and economic growth. Regardless of where they stand, their fortunes this November to a large extent hinge on whether voters find CRS' findings believable or balderdash.

businessnews - bizopinion

Len Boselovic: lboselovic@post-gazette.com or 412-263-1941.

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