This is inspired by this article over at Five-Thirty-Eight. The gist of it is that the top marginal tax rate has been much higher than it currently is in US history. However, in previous decades this top tax rate applied to incomes much higher than the current top tax rate. What if we introduced more tax brackets with higher marginal rates for people making $1 million - $5 million, another for $5 million to $10 million, etc.?
The numbers above are rough hypotheticals - I think you get the idea without having to pinpoint exact income levels. I think this could be a beneficial change. One of the big objections about raising the top tax rate from 35% to 39% in a few years (repealing the Bush tax cuts) is that people aspire to wealth, and $250,000, while high, seems to be attainable to a lot of Americans. If there were higher brackets with higher percentages, people towards the bottom of the scale would not see much of a change in their taxes, but the wealthy would continue to see higher rates in proportion to their wealth. This could boost tax revenue while maintaining the status quo for the majority of Americans.
Just to be clear, I’m not putting forward a witch hunt against the wealthy. I think that a very high marginal tax rate (say, 90%) would probably be a bad idea. What I’m suggesting is more graduated. Something like an extra 1% or 2% above the current maximum rate for every $5 million dollars someone earns, up to an income level of about $50 million dollars.
I’m sure I haven’t thought this out with enough rigor, so I’d like to hear your thoughts.
There mini-laboratories for steeply progressive tax rates bubbling away right now in California and New York. In New York, for example, the top 1% of earners pay a shocking 36% of all taxes.
A few observations:
The income at the top end is lot more volatile. One of the reasons is that a significant portion of this income is due to capital gains. Invariably what happens is that governments bake in the ‘extra’ income during boom times, and when those times go away, a massive shortfall ensues. Extremely predictable stuff. And exactly what happened in California and New York from 2002-2007.
In general, when you rely more and more on a smaller and smaller number of people to foot the bill, you create a lot more risk to revenue. Those people can move. Or retire. Or give up and do something else.
High marginal rates do affect behavior. They create disincentives to work and invest, and result in stagnation of physical and human capital. People stop investing money and look for ways to hide it from the taxman.
It creates the risk for unstable, bad public policy and a serious threat to Constitutional freedoms. Suppose we did have steeply progressive taxes for a moment, and the top 25% paid the whole bill. The bottom 75% paid nothing. Why would anybody ever vote against a tax increase? It wouldn’t affect them anyway. So what is supposed to act as a check on government growth?
These kinds of numbers always come up, but what percentage of income does the top 1% earn? 36% doesn’t tell me anything without that context.
This, on its face, is logical enough, but is there any reason to think that an extra 10-20% at $50 million as the OP suggests is sufficient disincentive to outweigh the ramifications of an equivalent deficit? I’m sure there’s been discussion of such here before but I burned my 5 minutes on a failed search for ‘tax cut’ heh.
I see your point, but that sounds like an argument against the bottom 75% paying no taxes, not an argument against adding tax brackets. :dubious:
So let me back up and ask, why is marginal twiddling at the top end necessary at all? Why is there a need to generate a little ‘extra’ revenue at all?
Why don’t we instead do a little twiddling on the cost side, so all of this becomes unnecessary? Let’s put the burden on the government to do what every household does - attack the cost side first. Instead of putting the burden on the productive citizenry to prove why they shouldn’t have their money taken from them.
Stable tax policy is good for everyone. It makes the rules clear and allows people to plan and organize their lives and investments for the long term, without worrying about whatever capricious step the government might make next. We’re getting a real-time lesson in that right now with the bailout.
Let’s leave the rates where they are, and cut government spending instead.
It’s an argument against letting the majority add new taxes that only affect the minority. It’s the change in the rate schedule, not the absolute value, that is of concern here.
Perhaps, but realistically, that’s not going to happen. You have to start from the premise that government programs ought to be cut, but even the Republicans with full control of all branches didn’t make it happen, and earmarks don’t make enough difference to matter. The political weight is on the side of adding programs like UHC instead of cutting them, and the bailout ship has already sailed. So there’s good reason to focus on a debate regarding taxes in exclusion rather than in the context of what to do with spending.
Except that history indicates that we are incapable of making significant cuts in government spending. The American people simply WANT the current level of spending, and possibly more, as evidenced by their voting behavior.
Furthermore, the cuts needed to truly balance the budget at this point aren’t a possibility. Any honest attempt to remove the deficit and reduce the national debt will HAVE to be accompanied by tax or fee increases for a large number of taxpayers, both corporate and individual. Any argument that avoids that is foolishly simplistic and non-realistic.
Not unlike the 91% top marginal rate following World War II the situation in which we find ourselves is going to require something like that to reduce interest expenditures.
Mmm. Since I’m playing catch up let me put out there what I think is the most likely, given the inaction of the players, for the debt to be repaid and the budget balanced: inflation.
By allowing the currency to inflate it becomes easier for government to repay its debt. It’s hard for everyone else involved, whoa nelly, but it DOES lead to easier debt service.
The best thing? Simply pursuing our current policies will bring it about and no one has to make any decisions other than inaction! Nothing could be simpler! And the inflation can be attributed to forces ‘outside our control’ or to ‘existing economic realities’ or some other convenient third-party phrase. Woot!
That is a highly dubious proposition. More likely, most of them do not clearly analyze their choices. Not to mention that it is in the nature of poltiical systems to insulate themselves and build centrally-funded (read: bought and paid-for) power blocs, as Democrats and many Republicans have been doing for decades.
Well, I don’t think that’s quite the same argument that he was making, but I suppose it doesn’t matter in the scheme of things.
But how does it hold water when you consider it in terms of the actual players involved instead of abstractions? Voters aren’t directly enacting tax legislation in any case; they’re voting in legislators who enact tax legislation. So are you suggesting that legislators should not let themselves propose new taxes on the wealthy because there’d be political pressure on them to vote for it…? Unless you’re actually arguing for making it unconstitutional to enact tax legislation with disproportionate effects, I can’t see how what you’re saying applies. You can’t handwave away the political pressure, and there’s nobody to police the legislators.
At least until the law of unintended consequences inevitably takes hold. But maybe it is the ‘least bad’ option at this point.
You’re absolutely right. Of course, the worst thing is that it’s probably the most destructive way to finance the debt, but I expect nothing less from government than finding the most destructive way to do something, so long as they can blame someone else for it. For example, almost all economists would agree that a carbon tax is a better idea than cap and trade. But cap and trade it is, because the tax increase inherent in it will come not in the form of a government money grab, but in higher prices for the goods and services affected by higher energy costs - which the demagogues in Congress can then blame on the ‘greedy oil companies’ or something.
As far as inflation goes, in the end they may not have a choice. Yesterday, the Fed printed a trillion dollars and used it to buy long bonds. Coincidentally, at the same time, the Chinese started dumping long bonds and moving to short-term securities, because they have no faith in the long-term stability of the U.S. dollar. What do you do if you need to raise a trillion dollars to pay for your government, but no foreign countries are willing to buy your debt? Well, you print money and buy it from yourself, and watch the value of your dollar collapse.
The Fed’s buy yesterday amounts to 12% of M2. If GDP declines by 2%, that one buy would, all all else being equal, translate into 14% inflation. The fed claims it won’t be inflationary because it’s simply counteracting a decline in velocity. Which is probably true in the short term, but to prevent inflation from spiking once the economy recovers the Fed will have to unwind that money back out of the economy. I’m not sure it knows how to do that - especially if it can’t find foreign buyers for the debt.
You’re right that it’s become almost impossible to cut the size of government once it has grown. Wouldn’t that be an argument for not growing it further? How about not adding another 200 billion per year of new spending?
Amazing. The principle seems to be that you have to tax poor people to give them an incentive to work harder and make more money, while you can’t raise the taxes on rich people because it takes away their incentive to work harder and make more money.
In fact, the time was 1945 to 1960 had the highest marginal rates in history and also had as high a growth rate as at any time in history. Incidentally, the ratio between the highest paid person in most enterprises and the lowest was under 100 and is now approaching 500.
In many ways the current tax system is highly regressive. Social security, medicare taxes and such like tax only the lower slice of income and taxes then go down substantially before rising again in the highest bracket. A lot of these are paid by the employer and provide a strong disincentive to employment.
P1. I don’t see where anybody claimed the first clause of your second sentence. Are you claiming that higher taxes have no effect on incentives? At all? But wait. It seems like I should read on. More below.
P2. Amazing. Your assumption of correlation somehow implying causation, that is.
The fact that nearly all of the First World’s productive capacity outside the United States had been bombed into oblivion probably had nothing to do with the high growth rates.
P3. I completely agree. Let’s get rid of all of them. Or make them voluntary. Tomorrow would be fine with me.
And your last sentence is awesome. I wish some of the 535 folks in Washington, D.C. would grasp that basic understanding.
So what you’re saying is, when you tax something and therefore raise the cost of it, you will create disincentives to create more of it. In fact, you might get less of it. I completely agree. Then why the disconnect and self-contradiction with your first paragraph?
Unfortunately, census data appears to cut out at 250k, but given that the mean of the 1.9% of households above $250k is $418k, that puts a hard cap of 0.067% (or about 80,000) on $5m earners, and almost certainly quite a bit lower. And unfortunately for the OP, even if you slap an extra 20% on the 250k bracket, you only get 2245k * (418-250)k * 20% = $75b. For perspective, the 2009 deficit was projected at $1.2 trillion before Obama took office! Even a 100% 250k bracket doesn’t come anywhere near that.
But you can say that about anything in politics. Not analyzing choices is practically the default condition. Is there some reason to expect Americans to be forced to a reckoning with their choices from which a backlash against the size of government ensues? If anything spending is particularly easily defended politically during a recession under the banner of ‘creating jobs’. A broad-based tax hike could do the trick, but that’d be a great way for Obama to eviscerate his popularity and the economy in one stroke. And given the recent focus on corruption scandals and failing businesses kept online with government money, I wouldn’t want to be the politician promoting the competence of business right now.
Sure, but that’s distracting from the topic. Even if we all agree to hypothetically freeze the size of government, we still are left with the choice of sucking down a tax increase and/or eating a massive deficit. The Republicans only have the luxury of calling for a spending freeze because they’re out of power and don’t have to accept the political ramifications of actually doing it. You sure didn’t hear it from them before Jan20.
Indeed, but I could easily postulate that what it means is that not only should there be higher marginal rates for the highest earners but that taxes in some form or another would likely have to go up for all earners.
We’re in a hole and, contrary to the old saying, not only can we not stop digging but we’re committed to digging deeper for the foreseeable future. Taxation hikes are coming. I could easily see the top marginal rate going above 50% in the next ten to fifteen years as I also see some form of NHS in the next twenty. The electorate is going to demand that it be done and somehow it will have to be paid for.
As for those who say that wealth and earnings are mobile I can already hear the pundits speak “Fuck you, wealth is mobile. Where are you going to go? Canada? Mexico? France?”
Highest Marginal Tax Rates
United states 35%
Denmark: 59%
Netherlands: 52%
Austria: 50%
Israel: 49%
France: 48.09%
Australia: 47%
Italy: 43%
Ireland: 42%
Germany: 42%
South Africa: 40%
Barbados: 40%
UK: 40%
New Zealand: 39%
Japan: 37%
Canada: 29% (there MUST be a joker in the deck, there)
Just to show you that it could be worse, and it’s likely going to be so sometime soon. That is, of course, a list of numbers without context but it should give some idea of what’s going on.
Yes… and several revolts and revolutions throughout history have been triggered by high taxes perceived as unfair.
The USA taxes its citizens regardless of where they live so simply moving to Canada doesn’t really accomplish much.
Maybe what people mean by “wealth is mobile” is the flexibility of moving/hiding/sheltering/manipulating money throughout the global financial system. In the old days of agricultural society, your “taxes” were a portion of your farm animals or a percentage of your crop yields. This type of material “wealth” isn’t mobile so it’s easier for the state to collect its share. Obviously, money is easier to manipulate. There are several legal (and some illegal) strategies to prevent earnings from being taxed. For example… form a corporate entity and leave the retained earnings in the business account instead of “paying” out a salary. There are hundreds of very legal and legitimate tax avoidance strategies like that.
There’s a certain psychological limit that people will tolerate with high taxes. In other words, even if the “official” tax rate is 90%, the human mind will find it unfair to pay more than ~35% and will find ways to get around oppressive taxes. Higher and higher taxes creates a negative feedback loop –> the higher the tax, the higher the activity of tax avoidance strategies. The end result is overall net tax receipts collected the federal govt is the same or even a little less. I think there’s a scientific term for this psychological limit regarding a human’s acceptance of taxes but I can’t remember it at the moment. I also want to emphasize that I’m using “tax avoidance negative feedback loop” in a generalized way which also includes disincentives to work/invest to avoid having the higher income to tax in the first place.
People often cite that highest margin tax rates were 90% between 1945 and 1963 but interestingly, they always leave out the fact that the govt didn’t collect higher overall tax revenues (as a % of GDP) during those years. One reason is the negative feedback loop as mentioned above.
I wouldn’t accept that as a given without any form of rigorous back up, I’m afraid. More research is required there.
As far as revolutions go I feel pretty certain that, while revolutions may have been caused by perceived high taxation a marginal tax rate for the top bracket of 45%, or even 60%, would not cause it. Tax-oriented revolutions tend to be caused by unsustainable taxation on the bottom rungs of the ladder. You simply won’t get a large enough group of people at the barricades if you’re bringing the rates up for the upper 5%. Those people are much more likely to work to change the system, if possible, than to throw paving stones. Revolution, or replacement of government through violent means, is more the tool of Vox Populi than of those with real assets to lose.
