Who Should Be Taxed?

As painful at it might be, there’s little doubt that the U.S. is going to have to ramp up the amount of money it takes from its citizens in the near future. Tax receipts from existing tax regimes alone are not going to be sufficient to pay for the fiscal stimulus plan and the financial system bailout, let alone new energy, health and education initiatives. Where will the money come from?

I had a post several days ago about the exploding fiscal gap and the likelihood that the middle class is in for a tax increase despite all the promises from politicians that it will never happen. Saturday, Clusterstock had an excellent article which pointed out that social security receipts are vanishing much more quickly than forecast. It doesn’t take a genius to realize that somehow, some way the government’s revenue has to be increased. Forget about expenditures decreasing. That is not going to happen.

For the time being, there is little that can be done. The country will have to be content to borrow to fund its yawning deficits but that alternative has practical limits. Sooner rather than later, the issue of how to get back to fiscal sanity is going to have to be addressed. When that time comes you can count on politicians proposing taxing the rich more just as surely as you can count on the sun coming up in the morning.

The post that I mentioned above made the case that the U.S. has a more progressive tax system than most European income tax schemes. This leads to the conclusion that there is little additional revenue to be derived from further taxes on upper income taxpayers and the income tax base either needs to be broadened or a new tax such as a VAT imposed. An article yesterday in the NYT Magazine suggests that there is some money that can be raised via more taxes on the rich and provides some interesting historical perspective.

It’s well known that tax rates on top incomes used to be far higher than they are today. The top marginal rate hovered around 90 percent in the 1940s, ’50s and early ’60s. Reagan ultimately reduced it to 28 percent, and it is now 35 percent. Obama would raise it to 39.6 percent, where it was under Bill Clinton.

What’s much less known is that those old confiscatory rates were not as sweeping as they sound. They applied to only the richest of the rich, because yesterday’s tax code, unlike today’s, had separate marginal tax rates for the truly wealthy and the merely affluent. For a married couple in 1960, for example, the 38 percent tax bracket started at $20,000, which is about $145,000 in today’s terms. The top bracket of 91 percent began at $400,000, which is the equivalent of nearly $3 million now. Some of the old brackets are truly stunning: in 1935, Franklin D. Roosevelt raised the top rate to 79 percent, from 63 percent, and raised the income level that qualified for that rate to $5 million (about $75 million today) from $1 million. As the economist Bruce Bartlett has noted, that 79 percent rate apparently applied to only one person in the entire country, John D. Rockefeller.

It’s not a long article and also happens to be a well balanced discussion of the issue, take a look at it. Personally, I hadn’t thought about the idea of introducing more brackets into the mix. It makes sense and from an historical point of view isn’t revolutionary.

Reaching an accommodation on taxes is going to be difficult. Given that neither party wants to go on record in support of increasing taxes, it is probably going to require some external stimulus to force the issue. Unfortunately, we’re probably sowing the seeds for that stimulus via the debt that the country is currently assuming.

Comments

[misterbillusa:]

The Fair Tax would bring in more revenue, but it lessens the amount of control that the government has over its constituents.

Apr 12 10:32 PM

[SteadfastMason:]

I prefer paying less taxes, too. Yet, the government is charging up alot of debt and assigning it to me - against my will. How, exactly will it be paid, then, if not by higher taxes? Aside from shedding our mortal coils, the only earthly answer I know of is through increased tax revenue from inflation of every day goods and service.

Apr 12 10:37 PM

[Nathaniel C:]

Why not just have the illegal Federal Reserve print money and keep buying US treasuries? They seem to be so good at it and everyone seems to want inflation so that we can conquer perceived threats of delfation.

In reality we could go back to a constitutional size government and save trillions. No foreign wars, no bailouts, corporate welfare, pork spending, welfare, and 500+ billion in military spending ( the money does not go to troops, just defense contractors and corruption).

If we did that we would not need an income tax--just as the founding fathers invisioned. A free prosperous country where people take care of themselves. But I guess that is not in the best interest of the corporations and elites who enjoy raping the taxpayers for their own personal gain. They would love to steal another 15% of our money from the VAT. We are already government tax slaves and pay over 60% of our money to the government. Medieval serfs only payed 1/3. The only exceptions are the rich like Geithner, Daschle and the other elites who do pay taxes. Taxes are for only the poor and middle class. The elite and corporations pay little to no tax.

Apr 13 12:18 AM

[Alan Young:]

Our "progressive" tax system has had little or no effect on the ability of the super-rich to continue getting richer at the expense of the middle class. There is no other developed country in which the disparity between the super-rich and the middle class has been allowed to become so bloated.
The richest 1 percent of Americans now get about 15 percent of total US income, close to the 18 percent the same small group had in 1913, when the income tax was introduced. (source: www.csmonitor.com/2006...)
In recent years, the disparity has increased dramatically. If the bottom 90 percent of America's families and the wealthiest 1
percent held the same share of the nation's income in 2004 as they did in 1989, the average family in the bottom 90 percent would have had $12,208 more to its name and the average top 1 percent family $1.7 million less. (source: www.federalreserve.gov...)
The idea that we are taxing the rich too much is completely bogus. Instead, we should start asking how it is that these spoiled brats are allowed suck hundred$ of million$ each year out of our financial system for their personal indulgences, while our national treasury goes deeper and deeper in debt throwing money at them.

Apr 13 01:36 AM

[DougM:]

Taxing the incomes very rich at super-high rates won't work. Given a choice between paying a huge tax or just giving the money away, most will choose the latter, or simply stop producing and just consumer their wealth until it's gone. Then what?

More importantly, it won't work because there just isn't enough total income available in the ranks of the super-rich. Their incomes are high, but their numbers are small. For similar reasons, taxing the poor won't work - their numbers are large, but their incomes small. Income taxation will fall where it always does, on the "working rich", professionals that make good incomes but not ball-player level incomes, who don't make enough to just stop working, and who can't restructure their income in some way so as to avoid the taxes. Income taxes always fall on this group because, as Willie Sutton said, "that's where the money is".

My bet is that once the government's squeezed as much as it can from these people, we'll end up with a VAT, or try to square the books via taxes on forms of consumption the government wants to discourage. You can already see the example of this with the high taxes on cigarettes, alchohol, etc. In the future, carbon taxes, etc. JMHO.

Apr 13 02:20 AM

[Kevin Hollins:]

Until there is political will in this country to debate a wholesale revision to the tax code itself, any debate about tax increases is bound to degenerate into class warfare (see the comment re "spoiled brats" above). The FairTax is worth consideration, as is a flat tax. Of course, finding the political will is difficult, but there is a way--call a joint session of Congress, lock all the doors, and tell them they can come out after they've competed their own tax forms. Auditors will be standing by at the doors to check their math. Voila--tax reform!

Apr 13 09:27 AM

[Allan Frain:]

The effective tax on the productive sector must take into account the rise in financial profits from 10% to 41% of corporate profits since the early 1970s. It is this phenomenon that has lead to a shift of wealth to the upper class, graduated income tax notwithstanding. During this same time frame real wages have stagnated.

Apr 13 10:02 AM

[DougM:]

This link may be of interest:

www.taxfoundation.org/...

It doesn't split out the upper 0.1%, but I have these figures from a 2005 article in the NYT:

Returns: 145,000
Income split: $1.2 million
Average income: $3 million
Total income: $435 billion

Putting it all together and rounding the numbers a bit:

Lowest 50%: $1 trillion
50-75%: $1.5 trillion
75-90%: $1.5 trillion
90-95%: $1 trillion
95-99%: $1 trillion
99-99.9%: $1 trillion
Top 0.1%: $0.5 trillion

2/3 of the income available to be taxed is in the range from 75%-99.9%, i.e. from $62k to $1.2m. Taxing the upper 0.1% at a 90% rate won't generate as much money as raising taxes on the larger group to, say, 50%.

Leaving aside the question of whether taking more of the money earned by the 0.1% is a good idea as a matter of "justice", the fact remains that if we don't reign in government spending but still want to close the budget deficits, through income taxation alone, this upper-middle group will have to feel the pain. Once Clinton-era rates are back in effect, what then? This group, which is also a source of a lot of political support, probably can't be squeezed much harder before it makes its displeasure known politically.

Apr 13 11:45 AM

[Leftfield:]

Government work is all about "process." Getting something done is beside the point. This awful government is everywhere getting in our business or being the business. Are we safer, happier?

The solution has always turned out to be more taxes. Sorry, I should think it's obvious to most everyone that government has solved almost nothing at unthinkable cost. Plus they want to take on more, like, "climate change."

Symbiotic Wall St. and government exist in an alternate reality that has gone further than anyone but Lenin might envision. Main St. America is on life support and will die if we don't put a stop to higher taxes and reelection of incumbents.

Apr 13 01:07 PM

[Gedankonomist:]

"...there’s little doubt that the U.S. is going to have to ramp up the amount of money it takes from its citizens..."

Really? Haven't you ever heard of the concept of downsizing the government?

"Where will the money come from?"

Relax, the FED will print the money.

Apr 13 02:09 PM

[dybydx:]

Its time to think about emmigration or move your assets offshore (or into Swiss banks).

From an economic perspective, the middle class is made of mostly skilled workers (ie doctors, lawyers, etc). Economically, it is easier to transfer human capital than physical capital. So moving away should be easy. Besides, why pay taxes for benefits that you have never received and never will. The middle class is never rich enuough to lobby the gov and never massive enough to vote a president into the office. Taxation without representation at its best!

Apr 13 02:38 PM