Where are we on the Laffer Curve?

[Crafter_Man]

For the U.S., that is.

Some people say we must raise taxes in order for the federal government to increase revenue. But will raising taxes automatically increase revenue? Based on where we are on the Laffer Curve, isn't there a real possibility that higher taxes could actually decrease revenue to the government?

I guess it all depends on "where we are" on the Laffer Curve. So where are we?

[Squink]

Originally Posted by Crafter_Man

I guess it all depends on "where we are" on the Laffer Curve. So where are we?

We are in Cloud cuckoo land, on the Laffer curve.

[RealityChuck]

Even assuming the curve was correct (and I doubt very many people believe in it any more), it's impossible to tell.

[wmfellows]

Originally Posted by Crafter_Man

For the U.S., that is.

Some people say we must raise taxes in order for the federal government to increase revenue. But will raising taxes automatically increase revenue?

In the short run, yes. There's no real doubt of that.

Based on where we are on the Laffer Curve, isn't there a real possibility that higher taxes could actually decrease revenue to the government?

Given your national prevailing tax rates, it seems rather

I guess it all depends on "where we are" on the Laffer Curve. So where are we?

From the wiki page is appears there is no unambiguous answer to that relative to the USA. Or perhaps anywhere.

Still compared to other OECD countries, you seem to have lower rates, it would appear that you have quite enough margin for raising taxes over a period to pay down debt, and there would also taking comparative examples, be little reason to fear 'reduced revenue.' Perhaps over more than a decade... but in any case, debt reduction has to come from increased revenues. Same thing the Greeks are learning right now.

ETA: I realise the US has a federalised tax system and the states have great leeway in taxing, so making US to say more centralised taxation system comparisons can be very difficult.

[wmfellows]

Originally Posted by RealityChuck

Even assuming the curve was correct (and I doubt very many people believe in it any more), it's impossible to tell.

I don't believe the curve in abstract form is considered incorrect, it merely states an obvious point, diminishing returns - and diminishing returns from BOTH taxation and tax cutting. Economically it make perfect sense that there might be a rate (or perhaps more sophisticatedly, a band of rates) which maximizes rate of return on taxation.

It appears from the reading that what is controversial are assertions re specific levels of taxation, assertions that seem in politics to be more about politics than empirical conclusions.

[Der Trihs]

Originally Posted by Crafter_Man

Some people say we must raise taxes in order for the federal government to increase revenue. But will raising taxes automatically increase revenue? Based on where we are on the Laffer Curve, isn't there a real possibility that higher taxes could actually decrease revenue to the government?

Given that America is known for its low taxes, especially on the people with the most money that is highly unlikely.

Originally Posted by Crafter_Man

I guess it all depends on "where we are" on the Laffer Curve. So where are we?

No one knows; no one even knows what the shape of the curve is, much less where we are on it.

[ralph124c]

I think we are at the point of declining returns (it is more profitable to evade taxation now). That is why we see guys like George Soros setting up operations in tax havens (like certain west indies islands) to avoid federal taxes.
I see the "underground' economy growing by leaps and bounds-my mechanic offered to do some work on my car for me: the price (cash, no receipt) was $60.00-if I paid via credit card, it would be $100.00.

[Stranger On A Train]

Originally Posted by Crafter_Man

I guess it all depends on "where we are" on the Laffer Curve. So where are we?

Somewhere in the middle.

Stranger

[Der Trihs]

Originally Posted by ralph124c

I think we are at the point of declining returns (it is more profitable to evade taxation now).

It's always profitable to evade taxation.

[wmfellows]

Originally Posted by ralph124c

I think we are at the point of declining returns (it is more profitable to evade taxation now).

While doubtless it is impossible to address Americans' chronic sensation of being over-taxed, you appear to have substantially lower tax rate than any of the other wealthy, industrial countries.

That is why we see guys like George Soros setting up operations in tax havens (like certain west indies islands) to avoid federal taxes.

Well, someone like Soros does it because he can, and he operates mostly off-shore regardless. They do end up paying your taxes, however, when the money is repatriated to the investors (unless the investors are non-American, but then that's a reason not to be on-shore in any OECD country).

So, I shall have to opine that this anecdote illustrates nothing in particular about the concept one way or the other.

I see the "underground' economy growing by leaps and bounds-my mechanic offered to do some work on my car for me: the price (cash, no receipt) was $60.00-if I paid via credit card, it would be $100.00.

Have your tax rates actually changed of late (and in particular the tax rates that would effect a mechanic who is presumably in a low tax bracket)? And do you have an actual data benchmark. As I am afraid I have a very hard time taking such assertions seriously.

[ralph124c]

Originally Posted by wmfellows

While doubtless it is impossible to address Americans' chronic sensation of being over-taxed, you appear to have substantially lower tax rate than any of the other wealthy, industrial countries.



Well, someone like Soros does it because he can, and he operates mostly off-shore regardless. They do end up paying your taxes, however, when the money is repatriated to the investors (unless the investors are non-American, but then that's a reason not to be on-shore in any OECD country).

So, I shall have to opine that this anecdote illustrates nothing in particular about the concept one way or the other.



Have your tax rates actually changed of late (and in particular the tax rates that would effect a mechanic who is presumably in a low tax bracket)? And do you have an actual data benchmark. As I am afraid I have a very hard time taking such assertions seriously.

Let me explain it to you (so that you can understand it). If my mechanic operates legitimately, he has to pay:
-the MA state sales tax (6.75%) on what he charges me (I of course would pay that)
-the Federal income Tax (his bracket is probably 20%)
-the State Income Tax (5.3%)
-the SS (FICA) tax on his earnings
-the the various environmental fees (disposal of used oil, antifreeze)
By working off the books, he saves himself about 40% on the transaction.
This appears (to me) to illustrate that the soct of evasion is now less than the cost of compliance.
As for Soros, his (American) clients can avoid capital gains taxes by maintaining accounts in places like Lichtenstein, Monaco, Switzerland, etc.)

[wmfellows]

Originally Posted by ralph124c

Let me explain it to you (so that you can understand it). If my mechanic operates legitimately, he has to pay:
-the MA state sales tax (6.75%) on what he charges me (I of course would pay that)
-the Federal income Tax (his bracket is probably 20%)
-the State Income Tax (5.3%)
-the SS (FICA) tax on his earnings
-the the various environmental fees (disposal of used oil, antifreeze)
By working off the books, he saves himself about 40% on the transaction.
This appears (to me) to illustrate that the soct of evasion is now less than the cost of compliance.

And you have also a complex deductions regime, so what he actually pays is.... different.

Regardless, 40% puts you in the average area of OECD country headline taxation rates, including countries with apparently low levels of evasion. Thus empirically we can't merely assert that level is on the declining end of a Laffer Curve type analysis. I suppose culturally it might be, but equally it might not.

One rather suspects your mechanic will evade at any and all levels of taxation (as he is so small that the likelihood of being caught and punished is doubtless trivial), and ergo is not an argument under a Laffer curve type analysis for any particular level. This person will always make more money in dodging taxes (although one supposes in dodging his retirement contributions he's cheating himself in reality, but I am not familiar enough with that system). There will always be economic actors who will dodge taxes regardless of their level (while doubtless always engaging in rationalisations along the way).

You also did not answer my question about change in tax rates. I do believe on this type of person I read the tax rate went down, correct?

As for Soros, his (American) clients can avoid capital gains taxes by maintaining accounts in places like Lichtenstein, Monaco, Switzerland, etc.)

If they are private clients (and if Soros accepts private clients, versus institutionals), perhaps, but the recent Swiss bank to-do highlights that this is not as easy as it sounds. Very wealthy ratepayers are generally what inland revenue authorities love to track down, the payoffs are generally quite large.

[DanBlather]

Originally Posted by ralph124c

I think we are at the point of declining returns (it is more profitable to evade taxation now). That is why we see guys like George Soros setting up operations in tax havens (like certain west indies islands) to avoid federal taxes.
I see the "underground' economy growing by leaps and bounds-my mechanic offered to do some work on my car for me: the price (cash, no receipt) was $60.00-if I paid via credit card, it would be $100.00.

Yep, it just happened too. Not 90 years ago when the highest tax rates were 90%, or 5o years ago when they were over 50%, but now that we have reduced taxes they are too high. Do you even think about the words before you type them?

[doubled]

Originally Posted by DanBlather

Yep, it just happened too. Not 90 years ago when the highest tax rates were 90%, or 5o years ago when they were over 50%, but now that we have reduced taxes they are too high. Do you even think about the words before you type them?

Is is astonishing how Fox News and the tea party movement have convinced people that Obama raised their taxes, when in reality he actually lowered them. While it's true that **starting in 2 years**, taxes will be raised on the richest 2% of america, to date federal taxes haven't gone up a dime for even one single person; and in fact, have actually gone *down* for most americans over the past year. But for some reason, most people seem to not understand that.

[doubled]

Originally Posted by Crafter_Man

I guess it all depends on "where we are" on the Laffer Curve. So where are we?

Really, I don't understand how any honest person still believes the Laffer Curve is a useful concept. Sure, it's true that if taxes are 100% then no one will work and the government would be better off cutting taxes. But outside of that exact case, it's a much harder to claim the Laffer Curve says anything useful.
Ask yourself -- you already have a job working 40,50,60 or however many hours a week. Now suppose your taxes were cut 10%. Would you then go out and get a second job? Would you start working more hours at work than you already do? No? Honestly, the vast majority of people would not.
What about the other way around? Suppose someone raised your taxes 10%. Would you quit your job then? No? Well, since the alternative to working is to starve, then most people wouldn't do that either.

So if raising and lowering the tax rate +/- 10% really won't affect most people's decision to work or not, then doesn't that count as some pretty serious evidence against the Laffer Curve?

[Ravenman]

Look, the Laffer curve has some use as an illustrative model, but not as a predictive one.

But to ralph124c's point, his mechanic isn't paying 40% taxes. For one thing, his state income tax is deductible from his federal taxes, and what's more, that 20% (notional) tax bracket does not apply to all income. According to the CBO, not even the richest one percent of Americans have an effective Federal income tax rate of 20%. (see page 4) Odds are pretty good that the amount of his paycheck that he's actually paying in Federal income taxes is somewhere around 6-12% -- which is a more accurate measure of taxation than just throwing around tax bracket numbers.

[Johnny L.A.]

What's the equation for the Laffer Curve, anyway?

[Ace309]

It's not an equation, per se. It's just a parabola with two positive roots at 0 and 100, a 0 y-intercept, and a maximum somewhere between 0 and 100. It's not a mathematical formula, just a picture you can point at and say "if you're here, and raise taxes, you'll lose revenue."

If you wanted to approximate it, one way would be to look at the places where the revenue (which I'll call f(x)) is 0 (x = 0, x = 100), and multiply it out: f(x) = (x - 100)*(-x - 0) = -x² - 100x, which gives you the correct roots; a maximum at x = 50 (f'(x) = -2x - 100 = 0); and the correct concavity (f''(x) = -2x < 0 for strictly positive x). Still, that's reasoning out from the properties we want to the function, not starting with the formula and finding useful properties of it.

[Ace309]

And in editing I failed to correct a functional mistake I made, which is that the function should be -x² + 100x. That leads to the correct maximum at x = 50 (-2x + 100 = 0) and leaves the concavity untouched.

[Rand Rover]

I think the point of the Laffer curve is to show that tax revenue will not necessarily increase as tax rates increase. It's just a way of saying "don't count your eggs before they hatch."

So, the Laffer Curve is a meaningful concept without knowing where we are on it (or even knowing how to determine where we are on it).

[bashere]

Originally Posted by Der Trihs

It's always profitable to evade taxation.

Really? So I should pay my accountant $20,000 to avoid a $5,000 tax bill? That doesn't sound profitable

[Scruff]

Originally Posted by bashere

Really? So I should pay my accountant $20,000 to avoid a $5,000 tax bill? That doesn't sound profitable

It is if you are the accountant!

[wmfellows]

Originally Posted by bashere

Really? So I should pay my accountant $20,000 to avoid a $5,000 tax bill? That doesn't sound profitable

Normally when one speaks of evasion, one is speaking of using extra-legal means. Paying an accountant to reduce your tax exposure is not typically thought of as evasion.

[ivan astikov]

My take on this, and I am admittedly far from knowledgeable in the field of economics, is that if someone is rich enough to have vast amounts of spare cash accumulating large interest rates, it is in the best interests of the state to encourage that money to go back into the economy. If that means "encouraging" them with 95% tax rates on all such profits, then so be it.

What am I missing?

[wmfellows]

Originally Posted by ivan astikov

My take on this, and I am admittedly far from knowledgeable in the field of economics, is that if someone is rich enough to have vast amounts of spare cash accumulating large interest rates, it is in the best interests of the state to encourage that money to go back into the economy. If that means "encouraging" them with 95% tax rates on all such profits, then so be it.

What am I missing?

You're missing even a remote understanding of economics.

Money held in accounts is going back into the economy, it will be lent out again. So your presumption under a modern economy starts from utterly false premises (it makes sense only in the context of hoarding of say physical bullion). While the "middle" of the Laffer curve is quite ambiguous, it is not ambiguous relative to a 95% tax rate.

[Chief Pedant]

Originally Posted by Der Trihs

Given that America is known for its low taxes, especially on the people with the most money that is highly unlikely.

Known by whom? People who don't read any actual data? Are you just making stuff up, or what? Well over half my income goes to various taxes, including about 40% to Federal and state taxes alone (not including Social Security, Medicare, sales tax...)

As to the implication that the distribution of taxes is not skewed toward those with higher incomes:

In 2007 in the US, the top 5% earned about 35% of income and paid about 60% of all Federal Income tax. The top 1% earned about 20% of income and paid about 40% of Federal Income tax.

The bottom 47% this past year paid no Federal income tax it all.

I agree add that we have no mechanism , current or proposed, to tax wealth per se, but that hardly justifies promoting the idea that our taxes are low or that we do no preferentially tax those with higher incomes.

[ivan astikov]

Originally Posted by wmfellows

You're missing even a remote understanding of economics.

I mentioned that right at the beginning. And it would seem from recent economical blunders by "experts", that I'd be in good company.

Originally Posted by wmfellows

Money held in accounts is going back into the economy, it will be lent out again. So your presumption under a modern economy starts from utterly false premises (it makes sense only in the context of hoarding of say physical bullion). While the "middle" of the Laffer curve is quite ambiguous, it is not ambiguous relative to a 95% tax rate.

So, do the persons providing the money for the banks to lend out get a cut of the bank's profits, when they make a particularly good investment, or do they just get their fixed interest rates?

[wmfellows]

Originally Posted by Chief Pedant

Known by whom? People who don't read any actual data?

If you take a moment to review OECD analyses on income tax, the US does not come out at the top of the leagues. Indeed overall pay rate is near bottom. That is data.

Der Trihs being rather hard left of course views that as a bad thing.

On the other hand, my impression is Americans are particularly tetchy about any tax paid at all.

Are you just making stuff up, or what?

You can consult the OECD website for comparators.

but that hardly justifies promoting the idea that our taxes are low or that we do no preferentially tax those with higher incomes.

On the 2nd I have no opinion, but on the first, the data do say that relative to other high income nations, your taxes (income and total taxation) are in fact low, comparative to peers.

[wmfellows]

Originally Posted by ivan astikov

I mentioned that right at the beginning. And it would seem from recent economical blunders by "experts", that I'd be in good company.

Which experts would those be?

Economists don't run banks.

Regardless, the very basic point about diminishing returns and real world examples of effects of tax rates toward 95% are not particularly controversial.

So, do the persons providing the money for the banks to lend out get a cut of the bank's profits, when they make a particularly good investment, or do they just get their fixed interest rates?

Your example was of wealthy persons putting money into bank accounts and earning interest. That would be bank accounts, as such they would earn a fixed rate - that is what bank accounts are.

But in any case, that is beside the point relative to your original presumption and point, that assumed that money in the bank earning interest was somehow not in circulation, back in the economy. With few exceptions (say Post Bank accounts, as in Japan) that is far from accurate. Thus your logic for such a tax rate was entirely fallacious.

[SmartAlecCat]

Originally Posted by Chief Pedant

In 2007 in the US, the top 5% earned about 35% of income and paid about 60% of all Federal Income tax. The top 1% earned about 20% of income and paid about 40% of Federal Income tax.

The percentage of all income taxes they pay, while interesting, it is kind of a red herring to consider only income tax.

What is their personal overall tax rate, including payroll taxes, sales taxes, etc.

Is it possible that someone making $100m in long term capital gains with no other income has an overall tax rate lower than someone who makes $100k in earned income?

[Ravenman]

Originally Posted by Chief Pedant

Known by whom? People who don't read any actual data? Are you just making stuff up, or what? Well over half my income goes to various taxes, including about 40% to Federal and state taxes alone (not including Social Security, Medicare, sales tax...)

How do you figure 40%? Are you just adding up your tax brackets? Because as I discussed before, adding the percentages of tax brackets gives one a simply incorrect view of your tax burden. See my previous post and the CBO study on tax burdens.

For example, my income places me somewhere around the top 18, maybe 15% of earners in the country. Adding up the actual amount I pay, just a shade under 19% of my total salary goes to Federal and state income taxes. Unless someone is making a lot more money than me, has no mortgage, and takes the standard deduction, I have a hard time figuring out how people get to paying 40% of their income to income taxes.

Let me make another point more on-topic to the OP: let's say the Laffer curve as illustrated was, in fact, ground truth on tax rates, in which the government gets no income at 0% or 100% taxation, and optimal taxation were somewhere in the 50% range. Again, according to my CBO citation, the current average burden of Federal taxation across all income groups is currently 20.7%, including income, payroll, corporate, and excise taxes. ETA: and below is a citation showing that the average state tax burden is about 10% of income.

That would seem to indicate that we could nearly double taxation and have much more revenue coming in to the Treasury.

http://www.taxfoundation.org/taxdata/show/335.html

[Ravenman]

Just to provide another citation, here's a Forbes PDF from 2006 which shows that the total tax burden for Americans - including Federal, state and local taxes -- totaled to 25% in 2004. Link.

Again, it seems we could nearly double taxation if the Laffer curve as typically drawn were to be taken literally.

[bashere]

Originally Posted by wmfellows

Normally when one speaks of evasion, one is speaking of using extra-legal means. Paying an accountant to reduce your tax exposure is not typically thought of as evasion.

Fair enough, although I would point out that many of the forms of extra-legal means require the use of an accountant (all the charity-based evasions I know of do). The point remains that if the cost of evasion is greater than the cost of paying the tax, it ceases to be profitable to evade the tax, legally or extra-legally.

[DSeid]

Few economists take the Laffer curve very seriously (minimally there is no way to ever know where one actually is on the curve, or how the curve is actually shaped or if it shifts), at least not without some serious modifications, but perhaps the best way to answer the question of the op is to go to Laffer himself - he thinks

the economy is headed for a sharper decline next year when tax rates are expected to jump sharply, sending the economy into a new tailspin

But then one suspects that Laffer would state that any taxation puts us on the wrong side of his curve.

More than that is not GQ but GD I think ...

[wmfellows]

Originally Posted by bashere

Fair enough, although I would point out that many of the forms of extra-legal means require the use of an accountant (all the charity-based evasions I know of do). The point remains that if the cost of evasion is greater than the cost of paying the tax, it ceases to be profitable to evade the tax, legally or extra-legally.

I presume you mean use of an accountant for knowing fraud, as opposed to merely ending up on the wrong-side of a tax analysis.

Evidently for complex and serious frauds, the amounts evaded - if purely relative to tax - would have to be important to justify the bother (rather than merely not paying).

In any case, I believed his point was excepting the implicit and probability weighted cost of getting caught... (which for the example should likely to be near zero).

Originally Posted by DSeid

Few economists take the Laffer curve very seriously (minimally there is no way to ever know where one actually is on the curve, or how the curve is actually shaped or if it shifts), at least not without some serious modifications, but perhaps the best way to answer the question of the op is to go to Laffer himself - he thinksBut then one suspects that Laffer would state that any taxation puts us on the wrong side of his curve.

More than that is not GQ but GD I think ...

Well, the GQ resolution to the question may probably be stated that taking American taxation comparatively to historical and current examples of similar countries, there is no particularly strong reason to believe that a rise in tax rates in the US of some modest magnitude would genuinely have a Laffer Curve kind of effect.

The OP may find other reasons to argue against or dislike a rise, but this argument empirically does not seem arguable.

[DSeid]

But wmfellows that as an answer presupposes that the curve has some validity to begin with, which is itself, at best, a matter of debate. OTOH it may be a valid answer to the question of "Is there any empirical basis to claims like those that Laffer currently makes that allowing some of the Bush era tax cuts for the rich expire, or for that matter even raising other taxes in America, would cause a decrease in total tax revenues collected rather than an increase? "

But then if one wants to go with empirical basis you can merely say that if Laffer says something it is more than likely wrong. Tax revenues did not increase during the Reagan era even as the economy rebounded. In 2006 he was cheerleading how the US economy "has never been in better shape", pretty much right before it collapsed. In 2008 he had changed his tune and was writing that the stock collapse was the start of a long term bear market, likely -6% per year for the next 16 years, and that "Twenty-five years down the line, what this administration and Congress have done will be viewed in much the same light as what Herbert Hoover did in the years 1929 through 1932. ... We are now witnessing the end of prosperity." And prosperity's end came not because of the failure of the Bush era supply side approach, or inadequate oversight by regulatory bodies, nope, it was because Congress and Bernanke "panicked". Of course the stock market subsequently rallied nicely. In mid-2009 he was writing that we are due for interest rates rises and inflation unlike anything we have ever seen before. So he's called it wrong every time so far. Heck, even Ben Stein, a conservative's conservative, saw that back in 2006.

Arthur Laffer, a likable and intelligent man who, with no substantial backup at all in data that I am aware of, said that if you cut taxes on income, you would stimulate so much economic activity that you would collect as much in tax as you did when rates were higher. ...

... Supply side is fun in the same way it's fun to rationalize spending as if it were saving, and in the same way any theory is fun when it says that the easier, softer way is better than the hard way. But it doesn't work, or at least it hasn't worked yet.

"Tax and spend" was the old way, but people did not like to be taxed. The new way seems to be "don't tax, but keep spending and things will be fine."

Wouldn't it be pretty if it were true?

The best you can say is that may be some degree of "taxable income elasticity" such that a rise in tax rate may be met with some avoidance of reported taxable income by the very richest (for example by legally postponing the income as reportable until some later date that may have a more favorable tax environment, or reporting it in the year ahead of anticipated changes that would increase their tax rate) resulting in less revenue production than one would expect on a one to one basis. That's a far cry from vindicating the Laffer curve and supply side mysticism. All of which means the ops question is answered thusly - the evidence is that raising taxes will raise revenues, however sometimes by less than we might expect.

[Chronos]

Quoth Chief Pedant:

Known by whom? People who don't read any actual data? Are you just making stuff up, or what? Well over half my income goes to various taxes, including about 40% to Federal and state taxes alone (not including Social Security, Medicare, sales tax...)

As to the implication that the distribution of taxes is not skewed toward those with higher incomes:

In 2007 in the US, the top 5% earned about 35% of income and paid about 60% of all Federal Income tax. The top 1% earned about 20% of income and paid about 40% of Federal Income tax.

The bottom 47% this past year paid no Federal income tax it all.

So, the fact that nearly half of Americans pay no federal income tax is supposed to be evidence against the proposition that American taxes are low?

And where are the comparisons to other countries?

[DSeid]

Originally Posted by Chronos

And where are the comparisons to other countries?

Well FWIW here is a graphic that shows America in the lower portion for mean personal taxation but up there with Japan on corporate tax rates.

And here is msn money's take on it.

Believe it or not, Americans enjoy some of the lowest income tax rates in the world. ... For a family with one wage-earner and two children, only Iceland and Ireland have a lower income tax burden than the U.S., according to the most recent data for 2005 ...

And Forbes ratings of marginal tax on the wealthiest puts America in the lower grouping as well.

[wmfellows]

Originally Posted by DSeid

But wmfellows that as an answer presupposes that the curve has some validity to begin with

That depends on if you mean the naive curve of the abstract analysis. I understand the naive and non-empirical curve was taken very seriously in the US, but that does not mean the diminishing returns analysis is baseless.

The rest of your comment is very American politics specific and I would suspect argumentative on that basis, although if you wish to highlight that it is not empirically sensible to take that curve literally, and that it should be seen as a simplistic expression of diminishing returns and tax policy elasticity... well fair enough. I don't believe that this materially is terribly different than what I wrote, but of course I am not sensitive to the US politics in this area.

[DSeid]

But wmfellows it does mean that there is no empirical basis for any definable curve.

As a matter of abstract theory, yes, there is very likely some taxable income elasticity, and therefore some degree of diminishing returns. In the real world that depends on the presence of many other factors such as legal means to defer income or to avoid reporting it as fully (often referred to as "loopholes") and perceptions of what future changes may bring to both the tax code and to the economy.

[DanBlather]

Originally Posted by Chief Pedant

The bottom 47% this past year paid no Federal income tax it all.

This seems to be the Republican talking point right now, but I'm not sure where it's going. Are they proposing lowering taxes for the wealthy or raising them for the less well off?

And as above, how does this git with the meme that US income taxes are too high?

[Quartz]

Originally Posted by doubled

Really, I don't understand how any honest person still believes the Laffer Curve is a useful concept. ...
Ask yourself -- you already have a job working 40,50,60 or however many hours a week. Now suppose your taxes were cut 10%. Would you then go out and get a second job? Would you start working more hours at work than you already do? No? Honestly, the vast majority of people would not.

You're missing the point. Because people have more money in their pockets, they can spend or invest more, employing more people - who then pay taxes - and creating more wealth - which can also be taxed.

[Squink]

Originally Posted by Quartz

Because people have more money in their pockets...

Which axis of the curve is that on?

[doubled]

Originally Posted by Quartz

You're missing the point. Because people have more money in their pockets, they can spend or invest more, employing more people - who then pay taxes - and creating more wealth - which can also be taxed.

The idea of "tax less and that money will be invested, thereby creating jobs" doesn't hold up -- by that logic, you'd get the exact same effect if the government taxed MORE and then invested those tax dollars in public works projects, new R & D initiatives, educational spending, scientific research and other efforts to create jobs. All that extra government spending would also (in your words) "employ more people -- who then pay taxes and create more wealth." So therefore, it doesn't matter whether we tax more or less, cause the money will get invested in job-creating programs either way, whether it's the government or private individuals.
But I assume you wouldn't be in favor in that plan of increased taxes & spending, even though it leads to (in your words) more wealth?

[pulykamell]

Originally Posted by Ravenman

Look, the Laffer curve has some use as an illustrative model, but not as a predictive one.

But to ralph124c's point, his mechanic isn't paying 40% taxes. For one thing, his state income tax is deductible from his federal taxes, and what's more, that 20% (notional) tax bracket does not apply to all income. According to the CBO, not even the richest one percent of Americans have an effective Federal income tax rate of 20%. (see page 4) Odds are pretty good that the amount of his paycheck that he's actually paying in Federal income taxes is somewhere around 6-12% -- which is a more accurate measure of taxation than just throwing around tax bracket numbers.

I'm not exactly sure how all these numbers are calculated, but I can tell you, as a self-employed person (who is actually fine with the income tax rates as they are and who is not in the upper 15% or anything), in 2008, my federal taxes were 34.5% of of my taxable income, and 29.4% of my total adjusted income. In addition, there was another 3% for state tax. Now, Turbo Tax reports this to me as an effective 16.52% tax rate. I have absolutely no idea where this number comes from: when I add up my Schedule C gross receipts and all my other income (capital gains, interest, etc.), without any deductions, the income tax I paid is still 21.3% of all the money I had coming to me.

The numbers I have this year (with an accountant) are similar, and the small business owners I talk to all seem to have a similar 33-35% tax burden, all things considered. So I don't think that 40% "off the books" discount sounds completely bizarre. It seems a little much to me, but not that far off.

[Chief Pedant]

by Chief Pedant:
"Known by whom? People who don't read any actual data? Are you just making stuff up, or what? Well over half my income goes to various taxes, including about 40% to Federal and state taxes alone (not including Social Security, Medicare, sales tax...) As to the implication that the distribution of taxes is not skewed toward those with higher incomes: In 2007 in the US, the top 5% earned about 35% of income and paid about 60% of all Federal Income tax. The top 1% earned about 20% of income and paid about 40% of Federal Income tax. The bottom 47% this past year paid no Federal income tax it all."

Originally Posted by Chronos

So, the fact that nearly half of Americans pay no federal income tax is supposed to be evidence against the proposition that American taxes are low?

And where are the comparisons to other countries?

The point is that for most Americans income taxes are relatively low because of the fact that high-income earners pay such a disproportionate share of taxes. I was responding to this phrase (which I quoted, in an effort to make that clear) from Der Trihs:

by Der Trihs:
..."Given that America is known for its low taxes, especially on the people with the most money that is highly unlikely...."

The idea that high wage earners don't carry a significant load is not supported by data. As to whether or not taxes--particularly income taxes--are high on the proportion of our population that actually pays them...well, I suppose that's a matter of opinion. But as a high wage earner I am annoyed by the mindless repetition of this idea that high wage earners don't pay much in Federal Income tax.

[doubled]

Originally Posted by Chief Pedant

by Chief Pedant:
But as a high wage earner I am annoyed by the mindless repetition of this idea that high wage earners don't pay much in Federal Income tax.

Warren Buffett (one of the three wealthiest men in the world) said: "“The 400 of us [ie, the Forbes 400 richest americans] pay a lower part of our income in taxes than our receptionists do, or our cleaning ladies, for that matter."
Quoting from the following article: " Mr Buffett said that he was taxed at 17.7 per cent on the $46 million he made last year, without trying to avoid paying higher taxes, while his secretary, who earned $60,000, was taxed at 30 per cent."

http://www.timesonline.co.uk/tol/mon...cle1996735.ece

THAT is why we say that America is known as a place where taxes are (relative to the rest of the world) low.

[Ravenman]

Originally Posted by pulykamell

I'm not exactly sure how all these numbers are calculated, but I can tell you, as a self-employed person (who is actually fine with the income tax rates as they are and who is not in the upper 15% or anything), in 2008, my federal taxes were 34.5% of of my taxable income, and 29.4% of my total adjusted income. In addition, there was another 3% for state tax. Now, Turbo Tax reports this to me as an effective 16.52% tax rate.

Because you're defining your tax burden in relation to your taxable income, whereas Forbes, CBO, and your accountant are talking about taxes in relation to total income.

[pulykamell]

Originally Posted by Ravenman

Because you're defining your tax burden in relation to your taxable income, whereas Forbes, CBO, and your accountant are talking about taxes in relation to total income.

That number is still 21.3% of my gross. My taxes are 21.3% of all the money I saw in 2008. This includes money I paid to contractors, cost of goods sold, for equipment, etc. A lot of that money was not money that was mine to begin with. (For example, I have some associates that contract through me, and I keep $500 of a $2000 contract, but they get paid $1500. That entire $2000 is in my gross and part of the 21.3% number I'm giving you there.) That's still more than that 16.52% number Turbo Tax listed as my tax rate, and far more than the 6-12% number you've cited.

[DSeid]

Chief Pedant, again Forbes places the US as way down the list on their "misery index", the amount that the highest wage earners have to pay. In this case DT is correct: America's tax burden on individuals (not corporations) is relatively low compared to the rest of the world, if not especially for the highest earners, then at least for them as well as for the average tax payer.

In fact

clearly the top earners have seen the most significant tax reductions in the past few decades ...

And found through that link is this article, which makes some very interesting points.

The Earned Income Tax Credit, for instance, is an income-support program created by Richard Nixon and expanded by both Ronald Reagan and Bill Clinton. The underlying idea came from legendary conservative economist Milton Friedman. So this is bipartisan stuff. And it was designed to run through the tax code rather than just send recipients a separate check. So if your income is low, you may (1) owe very little in income taxes, and (2) get a check through the EITC. The result isn't that you don't owe anything in federal income taxes, but that your income tax liability is wiped out by your EITC check. The critics of the tax code don't seem to know this, but their problem is with programs like the EITC -- of which there are many, some of which help the middle class -- not income tax brackets.

That accounts for a lot of the people who don't owe federal income taxes. But it doesn't account for the bigger dodge here: Why are we talking about federal income taxes at all? ...

... Most people's tax burden has a very different composition. As David Leonhardt points out in a typically excellent column today, "about three-quarters of all American households pay more in payroll taxes, which go toward Medicare and Social Security, than in income taxes." And that doesn't even mention state and local income taxes.

The graphic on the link is telling.

Quartz, cutting taxes to stimulate the economy is one thing and that is basic Keynesian theory. The bit that doing so stimulates the economy so greatly as produce more tax revenues than is lost because of the cut has been shown to be false. Even the hold-outs at Cato no longer try to argue that point - they are reduced to trying to claim that the highest earners will reduce their taxable income to avoid paying taxes at "too high" of a rate and that will reduce tax revenues overall. But do you really think that high wage earners like CP works less because his top marginal rate is 35%?