Where are we on the Laffer Curve?

[Wesley_Clark]

Government Revenue Details: Federal State Local for 1992 - Charts

http://www.taxadmin.org/fta/meet/05rev_est/platt.pdf

I am not sure how much was due to the ending of the recession in the early 90s and how much was just due to inflation, but after Clinton passed the budget in 1993 that involved several progressive taxes, revenues went up.

Omnibus Budget Reconciliation Act of 1993

It created 36 percent and 39.6 income tax rates for individuals.

It created a 35 percent income tax rate for corporations.

The cap on Medicare taxes was repealed.

Transportation fuels taxes were raised by 4.3 cents per gallon.

The taxable portion of Social Security benefits was raised.

The phase-out of the personal exemption and limit on itemized deductions were permanently extended.

In 1993 federal revenue was 17% of GDP, it grew after 1993 to reach 20% by 2000, then dropped dramatically under Bush down to 16% by 2005. Virtually all the revenue gain under Clinton came from the individual income tax.

[DSeid]

@Quartz

Cite please. It worked well enough for Margaret Thatcher.

I have in previous posts and Wesley Clark has been kind enough to give some more primary sources.

I never said he would. But what do you think that CP would do with the extra money in his pocket? Unless he lets it sit there, in his pocket, he’s going to use it. Even putting it in the bank is putting it to use as the bank will lend it out.

Again, that much is basic Keynesian economics; the Laffer bit is to claim that the resultant growth raises more tax revenue back in than the tax cutting stimulus cost.

[Chief_Pedant]

@DSeid

And I’ll again point out that DT’s actual statement was accurate: relative to most other countries America has low taxes, including for the wealthiest individuals.

You may want to review this old 538 post. The highest earners historically have paid much more. And that post brings us back to the subject of supply side/trickle down. Would an additional higher top marginal bracket (as discussed by Nate), including perhaps some slightly higher capital gains rate for that bracket, raise more revenues, or would the very wealthiest (those that make you, CP, look like a pauper, even though they are only a fraction of a percentile higher up than you), find ways to keep that money from being taxable income in response to the tax rise?

And I’ll point out again that since the top 1% pay 40% of the taxes, and since this is double in proportion to their income (they make 20% of the income) the notion that the US has low taxes for the highest income individuals is a canard.

The tax system here (and probably elsewhere) is much too complex to dissect out, but I’d be interested in cites which show for other countries what the actual national tax burden is for the top 1% of wage earners. It’s meaningless to talk about marginal tax rates and shelters and capital gains, and so on.

Here’s the statement I want to see someone defend: In other countries the top 1% of wage earners pays more than the 40% of the total income tax.

Is it your position that I am not correct in saying that, in the US, the high-income earners pay a large share relative to the rest of society and the rest of the world, or am I missing something?

[Quartz]

@DanBlather

Wealthy people have a lower marginal propensity to spend

Surely that depends upon your definition of spending? Consumables, sure - one can only eat so much, but what about stocks and shares?

[Damuri_Ajashi]

If we raise federal taxes right now federal tax revenue would go up.

Increases in tax rates may well result in a decrease in productivity but it is not likely to result in a decrease in revenue.

We can look at the revenue effect of the Clinton tax increase in the 90’s and the Bush tax cuts and see how revenue was affected by changes in tax rates.

Tax rates need to be significantly higher before a marginal increase in rates results in a amrginal decrease in revenues.

BTW, I think the Laffer curve is a stupid artifact of an idiotic economic theory.

As for tax evasion, short of confiscatory taxes (I know some of you think all taxes are confiscatory but lets assume that away and jsut acknowledge that we are operating under a historically low tax regime) the level of tax fraud seems to correlate far more with tax enforcement than with tax rates. Ther are countries where the top marginal tax rate is 10% and the welathiest people in those countries still engage in tax planning and outright tax fraud in proportions higher than we see in the states.

[Damuri_Ajashi]

@wmfellows

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.

So if the marginal tax rate on investment income were 95%, are you saying that people would bury their money in their back yard or are you saying that people would demand a higher pre-tax return to achieve an acceptable post -tax return? The notion of taxation and its effect on investment activity is somewhat different than the effect of taxation on productive activity.

[Damuri_Ajashi]

@Chief_Pedant

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.

I think we can all agree that we have a progressive tax system but I think we can also all agree that our tax system is significatnly less progressive than it used to be.

[Damuri_Ajashi]

@SmartAlecCat

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?

An interesting fact is that the year after Bush lowered the capital gains rate to 15%, we saw a lot of folks sell their businesses and other long term capital positions.

Then when bush gave corporations the opportunity to repatriate their foreign earnings at a 5% rate we saw a lot of companmies do that as well.

This gives people like me the impression that all these folks thought the tax cuts were likely to be temporary as people figured out that the federal government needed that icnome to pay its soldiers and senior citizens.

[Damuri_Ajashi]

@Chief_Pedant

I made the point earlier that we don’t tax wealth in this country at all (and I do think that is a glaring but possibly insurmountable issue).

We tax wealth once at death if you have more than 3.5 million in wealth when you die.

For those of us unfortunate enough to be the poorest of the top 1% it is at least painful, particularly at tax time.

LOL, I suppose being in the top of the poorest 1% is better around tax time?

[Damuri_Ajashi]

@Chief_Pedant

Why should he when it just gets taxed away? He’s clever enough to only use long-term capital gains rates. Like many super-wealthy folks, he does not need ordinary income on which to live, and to reiterate again, I agree that we do not tax wealth in this country very well.

Whoa? Wait a minute. You are saying that there is no incremenetal value to Buffett if Bufett draws a higher salary? As long as the marginal tax rate was not higher than the inverse of his ownership in BRK, he is better off taking the salary than selling shares and I don’t think Buffett owns anywhere near 65% of BRK.

[pulykamell]

@DanBlather

Wow, a small business with zero overhead. What do they do, sell air?

It was not meant to be a real-world example: I was trying to eliminate the distinction between business receipts and gross income, making them one and the same. I gave my real numbers before: my taxes were 21.3% of my gross receipts (which is not income), and 29.4% of my gross adjusted income (which, for me, is business profit minus health insurance costs minus half of self-employment tax.) If you eliminate those deductions and just go by the total income number, we still see 27.9% of my money going to the feds. Those last two numbers are the closest to what I would consider the real tax rate for me and that’s the number a business person would use when figuring out, were they trying to skirt their taxes, what they might charge a cash-paying client.

ETA: I think we are somewhat talking past each other. I’m talking about an employee, you’re talking about small business owners. I’m talking about gross wages, you’re talking about taxable. If we clarify our terms, I don’t think we’re in too much disagreement.

Perhaps. But I’m still not sure. Yes, I am talking about self-employed person, because, given the mechanic example, I assumed that person would have been self-employed. I thought this was all in relation to the mechanic who charged a $60 cash rate for a $100 job. But it seems that’s a subtopic in this thread, so apologies for not making it clear.

But I’m not just talking about taxable wages. I gave all the numbers: In 2008, I paid 29.4% of my adjusted gross income. 27.9% of my total income (unadjusted gross) in taxes. Add 3% for state tax, and you get what equals to me about a 30-33% tax rate. So, while the mechanic giving a 40% discount for paying cash (with the assumption it’s off the books) may be overestimating his bottom line tax burden, it’s not by much. Were I to charge $600 off the books for $1000 worth of labor, given my numbers, it would be better off keeping it on the books. However, if I were to charge $750, assuming there’s no significant extra deductible expenses to go along with that job, I’d be slightly better off.

[md2000]

The real question for the mechanic was not total tax paid but marginal tax rate. If on each extra dollar he earned, he paid 30% tax, plus 6% sales tax - he can make more than one-third profit by collecting unreported cash.

There is a substantial difference between final overall tax rate and marginal tax rate, espcially the more you make.

As a practical counterpoint example - in Canada, I typically pay about 25% - 30% of my income as income tax. Below about $70,000 the marginal tax rate is about 35% for each extra dollar, above that about 42%; depends on the province, but outside of Quebec the feds collect the provincial tax too. It used to be as high as 55% marginal rate until a while ago.

If I were a contractor, I would have to collect/pay around 13% combined provinjcial and federal sales taxes (GST and PST) depending on province. So your Canadian mechanic would have to charge $1.13 to take home 58 cents if he has a decent income. Any wonder the small contractor market is rife with cash deals? Please tell me you Americans are overtaxed…

OTOH, I pay zero / nada / zilch for health care; it’s rolled into those taxes. What does the average American family pay? I hear horror stories of $5,000 to $12000/year. Maybe Buffet was adding in his secretary’s health insurance costs, since that’s part of taxes in the first world even if not in the USA.

When Margaret Thatcher took over in Britain, the marginal rate was 83%. The Beatles song Taxman summed it up:
Let me tell you how it’s going to be…
One for you nineteen for me…
Cuz I’n the taxman, yeah!
OK, so Lennon exagerrated a little, but do you wonder why he moved to the States? In those days benefits were not taxed, so It was more effective for a company to give a middle manager a car and driver, or club membership, than to give him more money.

The Americans - especially the rich - are nowhere near the apex of their Laffer curve. The only better locations either (a) are special tax havens so their tax policy is not representative of what the government needs, (b) are trying to attract investment because they are dirt poor, or © have some special income like oil revenue to offset missing taxes.

Oh, and Buffet and Bill Gates have not relocated to Monaco or the Bahamas, so the rates can’t be that horrible…

[pulykamell]

@md2000

The real question for the mechanic was not total tax paid but marginal tax rate. If on each extra dollar he earned, he paid 30% tax, plus 6% sales tax - he can make more than one-third profit by collecting unreported cash.

Sure. I was keeping sales tax out of it (which is why I used the word “labor,” which is not taxed here. Also, prices are generally reported before sales tax, so if somebody tells me something is $100, I assume they mean before any sort of sales tax is added.) But, yes, agreed on everything.

[BlinkingDuck]

@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.

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.

What % of social security taxes did that top 1% pay? What % of property taxes?

[Ravenman]

@pulykamell

So, while the mechanic giving a 40% discount for paying cash (with the assumption it’s off the books) may be overestimating his bottom line tax burden, it’s not by much.

I find it difficult to believe that a mechanic would have a tax burden 33% higher than you (40% vs. 30%-ish) unless he was doing something something wrong in filing his taxes. I mean, your taxes are already about 33% over the “average” American with 2.3 children, 3.9 limbs, and a typical income, so the idea that there are folks who pay twice the amount of taxes than such an “average” person with a similar income isn’t outside the realm of possibility, but it is stretching my understanding of the system quite a bit.

But regardless of your own situation, or that of this fictional mechanic, you must understand that the data indicate that you appear to pay more in taxes than the “typical” American. That doesn’t make your wallet any less sore, but you also cannot conclude that most Americans would be in your shoes come April 15.

[pulykamell]

@Ravenman

I find it difficult to believe that a mechanic would have a tax burden 33% higher than you (40% vs. 30%-ish) unless he was doing something something wrong in filing his taxes.

Yes, it seems an weirdly high discount for just using cash. But if, as md2000 points out, sales tax is included in the $100 for this calculation, it might not be so far off reality. Sales tax here in Chicago is 10.25%, for instance. But, yes, now we’re throwing in sales tax, which is slightly beyond the scope of this discussion, but may help us understand where the numbers for the 40% discount come from.

But regardless of your own situation, or that of this fictional mechanic, you must understand that the data indicate that you appear to pay more in taxes than the “typical” American. That doesn’t make your wallet any less sore, but you also cannot conclude that most Americans would be in your shoes come April 15.

Like I said, I have no problem with it, but I was using my circumstances in order to discuss the mechanic that was mentioned upthread (who, from my reading, is not at all fictional or hypothetical). It seemed to me, given some posts, that there was some doubt that it was plausible that 40% of his income was going to taxes. I assumed he would be self-employed or otherwise the owner of the business if he had the authority to be making offers of cash discounts. I am not arguing at all this is the position of most people. I am merely saying that the mechanic’s tax situation is not completely implausible. It seems about 5-10 percentage points higher than I’d expect, but who knows.

[Lemur866]

@Chief_Pedant

by Chief Pedant:
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.

Again, you keep conflating “income tax” with “tax”. It’s true that low and middle wage earners pay very little in income tax, because there are substantial deductions for home mortgages, earned income tax credit, dependents, and on and on. So by the time you add it all up you might owe no income tax. INCOME TAX. Which doesn’t include social security tax, or medicare tax, which are straight payroll taxes with no deductions at all. And note that since your employer pays another 7% social security payroll tax, your effective SS payroll tax is 14%, not 7%, as anyone who has self-employment income knows.

This is an extremely common talking point lately, but everyone who brings up how much taxes the rich pay, and how little taxes the poor pay, always seem to only talk about income tax and never talk about other payroll taxes.

[Lemur866]

@pulykamell

I am merely saying that the mechanic’s tax situation is not completely implausible. It seems about 5-10 percentage points higher than I’d expect, but who knows.

The real possibility is that he’s got some sort of judgement against him, and reportable earnings will just go to his creditor, while cash will go into his pocket. Or he could be trying to hide income for child support reasons.

[pulykamell]

@Lemur866

The real possibility is that he’s got some sort of judgement against him, and reportable earnings will just go to his creditor, while cash will go into his pocket. Or he could be trying to hide income for child support reasons.

This would certainly make more sense. If you’re going to offer a cash discount, anyway, what would the incentive be to make it exactly your marginal tax rate? You might as well report it, since it’s exactly the same amount of money to you. More likely, if you were actually being taxed 40%, you’d offer something like a 20% discount. If you’re going to be a tax dodger, why the heck would you do it for no net profit?

[spinky]

@Chief_Pedant

Here’s the statement I want to see someone defend: In other countries the top 1% of wage earners pays more than the 40% of the total income tax.

You’re very focused on this “portion of the total income tax” angle. Why? It’s completely meaningless in a discussion of whether our taxes are “high” relative to other countries. All it does is demonstrate that taxes of the top 1% of wage earners in the US are high relative to the taxes of the rest of the US. Which is by design: that’s the way a progressive income tax works.