The 90% Tax Rate Myth
[NOTE Augusut 8, 2017:
The marginal and effective U.S. Tax rates mentioned in this 2011 post have been supported by research conducted by Thomas Piketty (Paris School of Economics), Emmanuel Saez (UC Berkeley and NBER), and Gabriel Zucman (UC Berkeley and NBER). These economic researchers are well-respected by progressives. Data are data, though we differ on interpretations. "Income" vs. "Wealth" presents much of the challenge, as wealth accumulates but is not taxed in the United States. Distributional National Accounts: Methods and Estimates for the United States published July 6, 2017, includes the following table:
As the table shows, the effective tax rate for the top 1 percent peaked at 45 percent of income in 1944-45. Unfortunately, the overall revenue intake of the United States kept growing and the burden has been falling most on the bottom 50 percent. Tax increases on the middle and lower classes reduce potential economic growth since these individuals spend more of their income.
This column is on the misunderstanding of higher federal tax rates, which are marginal and not effective rates. There is a theory, and one that seems to hold in European nations as well as in the United States, that the high-income taxpayers will pay no more than 50 percent of their income to taxes, in various forms. Higher than 50 percent, people find ways to avoid taxes.
end note.]
There is a "myth" that the economy of the United States chugged along at least in part due to higher taxes on the wealthy in the past. First, this myth, like so many about creating prosperity, ignores that U.S. growth came after two world wars wiped out most of our competitors. Second, the implication is that "the rich" were actually paying 90 percent taxes at some point in history. That's never been the case.
The U.S. tax system uses an "Effective Marginal Tax Rate" model. The EMTR is applied on ranges of earned taxable income. Each taxpayer pays roughly the same amount on his or her income within these ranges. According to the IRS, the EMTR schedule for 2011 is:
Everyone paying income taxes pays the same 10% on his or her first $8,500. So, to calculate a person's "Composite Real Rate" you must average (in a manner of speaking) what he or she pays in overall taxes on earned taxable income. For example, if you earn $80,000 in taxable income in 2011, your taxes are $16,125.10. That's a Real Rate of 20 percent. Yes, the marginal rate is 25%, but the Real Rate of tax is weighted towards the 15% bracket.
An income of $150,000 a year? The Real Rate is 24 percent. And that's not the "real rate" as most of us would think of a "real" tax rate. Why is that? Because taxable income is not even close to what most people actual earn. Earned income and taxable income are two different things in government speak.
So, let's get more complicated. When there was a 94% top rate in 1944-45, there were so many deductions and exclusions that the taxable income was not comparable to someone's entire income. First, the top rate started at $200,000, which today is equal to $2,413,059.90 — so the maximum EMTR would apply only to incomes of $2.5 million. But, that's still taxable income, not earned income.
In 1944, you could deduct business meals, all business travel, all forms of interest payments, and much more. You could even deduct spousal travel expenses on a business trip! (Why travel alone?) Companies could also "loan" or "provide" almost anything to an employee, from an apartment to standard benefits. It was possible to shelter tens of thousands of dollars from taxable income. Three-martini lunches and expense accounts were important realities, skewing tax calculations.
As a result of deductions and exclusions, even the theoretical maximum Real Rate of taxation at 60% in 1944 overstates taxation dramatically. The reality? On earned income, the richest U.S. taxpayers paid close to 40 percent of their earned incomes in taxes in 1944. We simply didn't count much of the compensation as taxable income.
Allow me to introduce you to Hauser's Law. Published in 1993 by William Kurt Hauser, a San Francisco investment economist, Hauser's Law suggests, "No matter what the tax rates have been, in postwar America tax revenues have remained at about 19.5% of GDP." This theory was published in The Wall Street Journal, March 25, 1993. For a variety of reasons, we seem to balance tax collections within a narrow range.
Since 1945, U.S. federal tax receipts have been fairly constant in terms of Gross Domestic Product (GDP), with taxes ranging from 15 to 20 percent of GDP. The graph is as follows:
When people demand higher taxes on the rich, usually phrased as paying a "fair share," they are ignoring how our tax system has functioned historically. We could create more brackets, to tax the top 1% at a higher rate once again, but the net increase in tax revenues wouldn't be dramatic. Why not? Because government spending is near historical highs: we are spending at near-WWII levels. It would be nearly impossible to tax enough to pay the federal bills, and doing so would likely crush the economy.
So, how could we address income inequality if not through increasing taxes? That's really what people are asking when they demand fairness. The real complaint is the gap between rich and poor. I'll address that issue in an upcoming blog entry.
The marginal and effective U.S. Tax rates mentioned in this 2011 post have been supported by research conducted by Thomas Piketty (Paris School of Economics), Emmanuel Saez (UC Berkeley and NBER), and Gabriel Zucman (UC Berkeley and NBER). These economic researchers are well-respected by progressives. Data are data, though we differ on interpretations. "Income" vs. "Wealth" presents much of the challenge, as wealth accumulates but is not taxed in the United States. Distributional National Accounts: Methods and Estimates for the United States published July 6, 2017, includes the following table:
As the table shows, the effective tax rate for the top 1 percent peaked at 45 percent of income in 1944-45. Unfortunately, the overall revenue intake of the United States kept growing and the burden has been falling most on the bottom 50 percent. Tax increases on the middle and lower classes reduce potential economic growth since these individuals spend more of their income.
This column is on the misunderstanding of higher federal tax rates, which are marginal and not effective rates. There is a theory, and one that seems to hold in European nations as well as in the United States, that the high-income taxpayers will pay no more than 50 percent of their income to taxes, in various forms. Higher than 50 percent, people find ways to avoid taxes.
Taxes on the Rich Were Not That Much Higher in the 1950sAugust 4, 2017Scott GreenbergThere is a common misconception that high-income Americans are not paying much in taxes compared to what they used to. Proponents of this view often point to the 1950s, when the top federal income tax rate was 91 percent for most of the decade. However, despite these high marginal rates, the top 1 percent of taxpayers in the 1950s only paid about 42 percent of their income in taxes. As a result, the tax burden on high-income households today is only slightly lower than what these households faced in the 1950s.
end note.]
There is a "myth" that the economy of the United States chugged along at least in part due to higher taxes on the wealthy in the past. First, this myth, like so many about creating prosperity, ignores that U.S. growth came after two world wars wiped out most of our competitors. Second, the implication is that "the rich" were actually paying 90 percent taxes at some point in history. That's never been the case.
The U.S. tax system uses an "Effective Marginal Tax Rate" model. The EMTR is applied on ranges of earned taxable income. Each taxpayer pays roughly the same amount on his or her income within these ranges. According to the IRS, the EMTR schedule for 2011 is:
| Tax Rate | Income Range | Taxed |
|---|---|---|
| 10% |
$0 – $8,500
|
$8,500
|
| 15% |
$8,501 – $34,500
|
$25,999
|
| 25% |
$34,501 – $83,600
|
$49,099
|
| 28% |
$83,601 – $174,400
|
$90,799
|
| 33% |
$174,401 – $379,150
|
$204,749
|
| 35% |
Over $379,150
|
N/A
|
Everyone paying income taxes pays the same 10% on his or her first $8,500. So, to calculate a person's "Composite Real Rate" you must average (in a manner of speaking) what he or she pays in overall taxes on earned taxable income. For example, if you earn $80,000 in taxable income in 2011, your taxes are $16,125.10. That's a Real Rate of 20 percent. Yes, the marginal rate is 25%, but the Real Rate of tax is weighted towards the 15% bracket.
An income of $150,000 a year? The Real Rate is 24 percent. And that's not the "real rate" as most of us would think of a "real" tax rate. Why is that? Because taxable income is not even close to what most people actual earn. Earned income and taxable income are two different things in government speak.
So, let's get more complicated. When there was a 94% top rate in 1944-45, there were so many deductions and exclusions that the taxable income was not comparable to someone's entire income. First, the top rate started at $200,000, which today is equal to $2,413,059.90 — so the maximum EMTR would apply only to incomes of $2.5 million. But, that's still taxable income, not earned income.
In 1944, you could deduct business meals, all business travel, all forms of interest payments, and much more. You could even deduct spousal travel expenses on a business trip! (Why travel alone?) Companies could also "loan" or "provide" almost anything to an employee, from an apartment to standard benefits. It was possible to shelter tens of thousands of dollars from taxable income. Three-martini lunches and expense accounts were important realities, skewing tax calculations.
As a result of deductions and exclusions, even the theoretical maximum Real Rate of taxation at 60% in 1944 overstates taxation dramatically. The reality? On earned income, the richest U.S. taxpayers paid close to 40 percent of their earned incomes in taxes in 1944. We simply didn't count much of the compensation as taxable income.
Allow me to introduce you to Hauser's Law. Published in 1993 by William Kurt Hauser, a San Francisco investment economist, Hauser's Law suggests, "No matter what the tax rates have been, in postwar America tax revenues have remained at about 19.5% of GDP." This theory was published in The Wall Street Journal, March 25, 1993. For a variety of reasons, we seem to balance tax collections within a narrow range.
Since 1945, U.S. federal tax receipts have been fairly constant in terms of Gross Domestic Product (GDP), with taxes ranging from 15 to 20 percent of GDP. The graph is as follows:
When people demand higher taxes on the rich, usually phrased as paying a "fair share," they are ignoring how our tax system has functioned historically. We could create more brackets, to tax the top 1% at a higher rate once again, but the net increase in tax revenues wouldn't be dramatic. Why not? Because government spending is near historical highs: we are spending at near-WWII levels. It would be nearly impossible to tax enough to pay the federal bills, and doing so would likely crush the economy.
So, how could we address income inequality if not through increasing taxes? That's really what people are asking when they demand fairness. The real complaint is the gap between rich and poor. I'll address that issue in an upcoming blog entry.
But if we had a tax of 90% on 2.5 million then the people that make that much money will stop making more money and leave some for others to make or invest in hiring more people which is good for every one.. Its like saying theres 100 guys in a room and theres enough food for everyone but one guy says I'm take 60% and theres nothing anyone can do about it cause thats the way the system works..
ReplyDeleteExcept money isn't like food in your example. More money is constantly being printed. Also, your example would more realistically be described as such:
Delete"100 people are in a room. All food comes from outside farms. All people are bringing in enough food to provide basic nutrition and live. One man is bring in much more than he needs. He then uses that extra food to hire other people, giving more people more food, and having services done at the same time (i.e, I fix your sink for food). If this man had 90% of his food taken, he would not be able to hire as many people, and the people who depended on working for him for food would have nothing. Even if this taken food was then redistributed, you would lose the service being provided (the fixing of the sink), and you would end up with less than if you left that man his food."
The economy is not a zero sum game, try again.
DeleteFalse analogy. The room scenario you described is a zero sum game, the economy isn't. Therefore it isn't valid to compare the two.
DeleteHey Andy,
DeleteWhen the rich dude has '90% of his food taken', it doesn't disappear. It gets spent by the gov instead of him. So instead of viewing him as a 'job creator', he's just another consumer. He may consume other peoples' labor (time/skill/effort) in creating a corporation to earn him profits, but he's not a job creator. The market demand creates jobs. Not entrepreneurs. Entrepreneurs just chase demand and buy labor in order to earn even more revenue and make profit. Entrepreneurs do not create jobs unless the demand permits them to profit. They are not responsible for job creation. It's a side effect of profit-seeking.
You and all libertarians confuse that taxes are not just 'taken'. They are not burned under the Capitol in a Pagan Orgy. They are just respent by the gov't, which again, creates jobs, and multiplies as the dollar flies around the economy. If the government destroyed each dollar it taxed, your viewpoint (shared by millions of misguided Americans) might be valid (even then, it would deflate the currency still around, so it probably wouldn't be valid). But it's not. The government spending money is a much more effective job creator and employer than rich entrepreneurs spending the same money. The question is, how can you spend a dollar that it will fly around the economy the most times. If you leave it with a rich man, he won't spend it unless there's already a good economy in which he can get a great return. But the government isn't interested in ROI for themselves, they're looking for biggest multiplier effect they can find. The latter is much more likely to move economies toward fuller deployment of capital so supply can meet demand, and fuller utilization (higher employment) can be realized.
http://en.wikipedia.org/wiki/Fiscal_multiplier
One thing that liberals and conservatives will disagree on, is whether the government spending creates demand. I think it depends on how they spend it, but I can prove to you it creates demand.
Indulge in the following thought experiment: imagine the US gov't printed money, took in war bonds, and spent all the money exactly how it did to build tanks, planes, ammunition, etc during WWII. Now imagine that instead of fighting a war, we just sent thousands of men, planes, bombs, tanks, etc to the bottom of the ocean, or out into space on a one-way trip to the sun.
Now, realize the economic effect is 100% exactly the same whether those planes/tanks/bombs/men fought a war or were sunk or fired into the sun.
T.M. -
DeleteI've written several times on this blog about the "Broken Windows Fallacy" — which economists generally agree is just that: a fallacy. Regions destroyed by natural disaster would, under this theory, experience not only a short-term boon, but an overall improvement. They don't. Instead, the capital (human/material) that could be spent on advancement is lost to rebuilding what already existed. In other words, progress is suspended to repair and rebuild. That's not a net positive, unless you are against advancement.
Your example of WWII is mistaken on several fronts because the factories and knowledge from WWII was not all destroyed or without purpose. Also, while much was destroyed, a significant amount of the items built and people trained were not destroyed.
The factories were quickly "repurposed" because the economies of the time were steel and rubber. Making a car is similar to making a Jeep. Making a battleship and making a cargo ship, also similar. Retooling after the war was relatively easy for the United States, while European industry was destroyed. The U.S. quickly became the leading exporter to nations that had no serious manufacturing ability.
Spending without purpose is not productive. The immediate effect on GDP is positive, but only because we measure GDP as short-term spending. Long-term, waste is lost opportunity, misdirecting human and material capital away from projects that might lead to innovation and discovery.
Our recovery after the war was in large part because we were relatively unscathed — running directly counter to the Broken Windows Fallacy. We benefited while Europe had to borrow and spend to buy goods from the United States. Even better, they borrowed and shifted funds from the United States, along with grant monies that circled back to the U.S.
As for spending, Japan is evidence that spending on hundreds of projects for the last decade haven't helped their economy. Plenty of articles also exist on Japanese stimulus spending and its stunning failure to stimulate, much less multiply, growth.
Government doesn't spend well, for any number of reasons. We know schools have a multiplier effect and prisons do not. (Prisons, like natural disasters or wars, have an "opportunity cost" that outlasts any initial and limited boon to a small region.) But, even knowing schools are a positive and prisons a negative, many states spend more on prisons. One only needs to look to California to see odd spending priorities and their economic effects.
Again, I've written on this blog on the various studies demonstrating problems with the Broken Windows Fallacy, the WWII myths of growth, and spending as a multiplier. The San Francisco Federal Reserve has published some of the best studies on problems of the multiplier effect: it never seems to match the predictions, and sometimes is negative.
Peter Schiff broke this theory down as well. The ignorant sheep march chanting tax the rich more. It won't help. If we do not stop government senseless regulation and spending. The balance of necessary regulation and ideological regulation needs an overhaul. The post war 90% tax on the wealthiest Americans was easily avoided through loopholes etc. To say that's what recovered the economy lacks any break research.
Delete@TomMercer "...They are just respent by the gov't, which again, creates jobs, and multiplies as the dollar flies around the economy..." Explain to me exactly how the government "creates" jobs. I did not realize the government was a corporation that creates goods that are in demand. The government does "multiply" dollars and that's called inflation.
DeleteIt doesnt work like that, your analogy is wrong.
DeleteYou are comparing a limited resource to an almost infinite resource. The difference is, you can make as much money as you want, you just need to know how to get it.
Hate the game, not the player.
Tom Mercer,
DeleteSteve Jobs created thousands of jobs at Apple and other related businesses because he realized the iphone would fill a need he saw in the market place. He created the demand for the product not the reverse! Government could never do that.
How does the government produce useful wealth? Well, first of all, the US Forest Service builds roads and infrastructure which allow the extraction of timber from federal land. NASA's scientists and engineers make discoveries and design equipment which has significant benefits to the economy (for example, if not for the Apollo program and then ARPANET, the Internet as you know it would probably not exist). Even welfare allows people to be more productive, because it lets them implement economies of scale in their daily lives. But gov't regulation also produces value, albeit indirectly: if the EPA did not prevent pollution, that pollution would generate more costs to society than the value of the manufacturing process which created the pollution (because the manufacturer does not have to pay the cost of the pollution, in what's called a negative externality).
Delete@William:
DeleteActually, that's not the definition of "production" of wealth. Those are enabling externalities. Schools do not "produce wealth" but they have a known multiplier effect for each dollar invested (a median of $1.25 per dollar, with some urban schools negative and some schools nearing a $2.00 multiplier). Investments in the commons (roads, sewers, etc) relies on the producers agreeing to being taxed, assuming a democracy with the freedom of movement.
If I want to move to a city that has high taxes, but a good quality of life, Minneapolis is a good example. Voters approved higher taxes to support more spending on parks, schools, and the arts. Those investments in life are not "productive" but are external factors that attract other well-educated workers.
As for the NASA trope, I've actually written about some of the falsehoods involved. I worked for a DARPA funded lab, and I can tell you that generally what NASA or the military approve is years, many years, out of date. And that yes, others might make the investment. However, the "military-industrial" complex is like the old Railroad Barons: cut deal with the government, help remove your competition. This still happens with NASA contracts, with getting a launch facility built or rights to laugh being blocked time and time again by agencies with too-close relationships to some contractors.
Negative externalities, like air pollution, go back to the idea that putting a cost on a social negative makes that negative "real" to the companies or agencies involved. Anyone who reads the EPA Superfund list should be stunned at how many of the sites are former military sites. Why? Because the government doesn't face the same penalties for being a polluter. Just look to the projects of China or the old USSR to see what happens without cost-enforced negative externalities.
Again, these are choices people make in democracies. That's a fine thing, even according to most libertarians. What we do not want are small handfuls of people (usually in the revolving door of lobbying and public/private employment) setting regulations without some democratic input and checks/balances on the power of government to penalize or reward some businesses over others.
My main example of this is methanol, but we could also point to VW, the controlling votes belonging to a mix of labor unions and Saxony. Apparently, being a social-democratic enterprise didn't alter VW's concerns for others. Why? Same reason the environment didn't matter to most socialist nations: in the end, politicians running companies were as bad as CEOs running them.
Most complaints are unreal. The wealthy should pay a higher tax rate than the middle class and the lower class. It's just common sense. Food and taxes are like comparing gay and straight. Nothing in common.
DeleteThe problems with today's tax laws are really simple.
There should be NO LOOP HOLES OR DEDUCTIONS FOR ANY PERSON OR ENTITY. Gross income should be taxed.
For 70 or more years the wealthy have not paid equally on SS/Medicare.
The system was set up in the beginning as a cheat the middle class game.
Although years ago the benchmark was lower, today every person has to pay SS/Med on all of their taxable income up to @ $125,000.
Now most, say 90% have taxable income at or under this amount (largely due to those crooked DEDUCTIONS I noted above).
BUT:
all of the money earned above this @ $125,000 goes un-taxed for SS/Med.
Think about the Billions of dollars that go un-taxed? This is just not fair if as Republicans and Democrats say 'we all pay taxes at the same rate'. It's just fudging words.
If from day one 100% of earned income (regardless of the type of income it was) was taxed just like all the middle class had to do, there would be an enormous surplus of money in SS/Med.
Lets say 100 billion times 70 years equals 7 plus trillion dollars (correct me if I am wrong please). At 15% which is what we middle class people pay this would be $10,500,000,000.00 more in the system.
It may not solve the countries spend spend control control problems but it would help SS/Med stay out of the problem. We also need to be harder on SS/Med fraud and actually put people in prison for a minimum of 10 years for first offense, but we don't. We fine them and let them back out to do it again.
We need means testing for receiving SS/Med. It was not meant for everyone to receive even though everyone would have to put into it. It was a safety net.
A millionaire that has gotten away with paying no tax on the earnings over the base line of @ $125,000.00 should not be asking for anything, he has already gotten his share and the shares of many others.
Just make the system fair and those that need it will be happy and those that want something for nothing will hate it.
Simple economics.
@TomMercer >>> Total bullshit u wrote there my friend. Sorry... How come that the government is more effective at creating jobs or just creating wealth ? Just how... Total nonsense right there dude...
DeleteC.S. Wyatt
DeleteYeah i hear that argument all the time - that the reason why our economy was so good after WWII was because our trade went up because other countries were ravaged, and needed us.
Yet with how many hundreds of times i've heard that claim.. i've yet to see one research, study, or any evidence whatsoever showing that our trade was incredibly high during that time... while all other countries were buying our products.
Care to show any numbers backing this up?
This also ignores the fact that starting in 1980 - our economy has started falling apart. Middle class started shrinking in 1980, GDP has been cut in half, purchasing power has been stagnant, and average unemployment has gone up a full percentage.
So you're saying that in 1980 - every other country starting rebuilding their infrastructure? They waited 40 years, and decided to rebuild at the exact same time supply-side economics was applied to the american economy?
You're kidding yourself.
Actually, data show that Japan, Germany, and much of Europe were competing effectively starting in the late 1960s and early 1970s. The Japanese auto industry re-tooled throughout the 1970s, in far more aggressive manner than their U.S. counterparts.
DeleteNissan / Datsun went from micro trucks to mini pick-ups, to today's one-ton models and SUVs with some nimbleness (though with regular financial challenges, too). Toyota probably offers a better example, as we've seen them niche market to regions, selling much larger cars and trucks in the United States, but that process did in fact take nearly 25 years.
The build-out in Germany of infrastructure continues, as they are now testing a zero-emissions train system. They really started their expansion in the 1990s, out of necessity of reunification.
The U.S. exports to Europe continue to rise, and rise quickly. In fact, we continue to export more to Europe than we import.
The middle class has be hurt by a lot of factors. I'm not sure we have good answers, as automation is going to make things much harder for workers in the future, as even skilled work is automated.
http://www.tradingeconomics.com/united-states/exports
How are you going to complain about the deficit then turn around and say the economy is not a zero sum game and money is an infinite resource when it suits your argument?
DeleteMoney, unlike food or natural resources, is not a "fixed" quantity -- even on a standard, such as gold, the value of money does shift and change.
ReplyDeleteStudies in econometrics, both historical analyses and experiments, have shown that if you take money from the top performers within a relatively short time they rise to the top again. That's one explanation for why many entrepreneurs have one or more bankruptcies / disasters / business failings and still rise back to the top. This is also true of people moving from one system to another -- the people at the top remain at the top following transitions of government or business.
Behavior, human nature, is not dictated by political or economic systems. What is dictated is how some personalities find ways to "win" within whatever systems they find themselves.
When the top "stops making more" there simply is no evidence someone else enters the void. The top 1% of U.S. incomes starts at $350,000. That's no where near the "millionaires and billionaires" some decry. If you're an entrepreneur in California, $350,000 in S.F. or L.A. doesn't go very far. Plus, parts of both areas have "living wage" laws, which have increased the numbers and actually widened the earnings gap.
You could tax me more, but I'll just work harder and pay myself more to make up the difference. That risks moving more money out of the lower and middle classes, at least as income. Sure, the government might redistribute that money, but my drive and my desire to be the best of the best isn't going to vanish. My bitterness and cynicism will increase, though.
There is a reason the "wealthy" don't take much "income" each year. The super-wealthy will always find ways to compensate themselves circumventing income taxes. The income tax will, by its nature, only penalize the moderately "wealthy" and the middle class. (The poor are already exempted -- 47% or more pay no income tax.)
"But if we had a tax of 90% on 2.5 million then the people that make that much money will stop making more money and leave some for others to make or invest in hiring more people which is good for every one"
ReplyDeleteThis illustrates one of the main fallacy with leftist thinking about wealth. They assume it is something in a big pile to be distributed so if some have more they must've gotten to the pile first and taken more than their fair share. This may have had some kernel of truth in feudal and pre-industrial times when wealth was concentrated in land ownership. But even then and especially now, wealth is created by improving land, creating new inventions and processes, doing things more efficiently.
Bill Gates is not rich because he got to some mythical pile of wealth too early, but because he created a product which millions of people found useful. His wealth is just a measure of how much gross utility he provided for someone else. All non-coerced trade is by definition good for both parties or they wouldn't engage in it.
Limiting peoples income to $X either by fiat or by setting marginal tax rates so high that it is no longer worthwhile to make more than $X leaves no more wealth for others to claim. In fact, it reduces overall wealth by restricting the main creators of wealth. If such limits were imposed, there would likely be no PCs, no IPads, no cars, no trains, no planes, no washing machines, ad infinitum...
Envy is one of the most destructive of emotions, it has no positive aspects and in the end destroys what is sought. Yet it is the barely hidden support beam of almost all leftist economic thought which can be reduced to "I want what he has and if I use the government to give it to me it's not theft," except academics with good word skills make it sound more noble.
Van Gogh didn't sell a single painting in his life thus your premisse that "If such limits were imposed, there would likely be no PCs, no IPads, no cars, no trains, no planes, no washing machines, ad infinitum..." is proven wrong. Human curiosity, inventiveness, genius does not need profit to flourish and this is proven times and again in history. The greed and lust for money, on other hand, has nothing to do with progress ....
Deleteit is far more complex than Van Gogh or a few other examples. The other great minds did have patrons, commissions, and sought compensation. That there will always be people content with intrinsic motivation is a good thing, Steve Wozniak comes to mind, but the people motivated by a competitive nature are as important to the balance in society.
DeleteEconomic systems aside, there are people driven by external rewards, and people driven by intrinsic motivation. These personality traits seem to be 40 to 50 percent genetic; different socioeconomic models would have to find different ways to reward the extrinsic individuals.
Van Gogh was a drug crazed lunatic. Bad example
DeleteVan Gogh was a drug-crazed lunatic. To use this as an example to negate John Hurdock's excellent point is not accurate.
DeleteThe fundamental question here, it seems, is: to what degree does taxation destroy one's incentive to make more money? Here's one answer: numerous studies have shown that, on average, happiness does *not* increase with increased income above some level; the exact value found varies, but is consistently below $200,000/year. This implies that the desire for more wealth past that level is, in some sense, pathological. Although this means we need not concern ourselves with taxes making the wealthy unhappy, it does not resolve the original question: the desire may be pathological, but it still leads to innovation and the generation of more value/wealth in general. But the point is that if the desire is pathological, it will not be influenced by high taxes! It is not a rational calculation, like "I'm willing to do X work to earn Y money, it can earn me 2Y money, but the government taxes me 60% at that level, so I'm not going to do X work". It is more like "gimme money"!
DeleteFurthermore, since some of the wealthy must in fact become happier with more wealth, this means that (roughly) just as many actually become *less* happy as they get more money. Thus, high progressive taxes are actually saving those people from themselves!
We know that Steve Jobs accepted a $1 salary (of course, we can argue about compensation forms) and cared a lot more about his ideas than money alone. A great many wealthy have decided to give away their assets either before or upon death. But, during their lifetimes, the wealth is used to create, improve, innovate, and so on.
DeleteAlso, the happiness level is highly regionalized. Trust me, I'm from California and our move to PA changed what $200,000 means significantly. It was a rather unsettling change, and one that should be considered when comparing various regions.
I happen to be financially secure. What makes me happy is what I do with the money, not the money. I would rather fund certain charities and causes, it is a rather cool thing to know what my efforts, along with those of many others, have done in some communities.
Conservatives want to act like money's in a big limited pile when it comes to helping the poor but when it comes to rich psychopaths well they can just have whatever they want because of mental gymnastics.
DeleteGreed is one of the worst human traits and when you have enough to live you should make something beautiful and righteous or give your extra away for someone else to create.
90% taxation ushered in the largest economic growth for America because that $$$ that was made from taxation, was spent on American goods and services! .... in business, only profit is taxed, so if you didn't want to pay all 90%, you can just spend more expenses with your company! hiring more workers, or buying more goods.. what we need here in the USA now, is to close the foreign loopholes and force companies to be more local.
ReplyDeleteAt last.....someone has a brain. People are fed so many lies that companies would 'stop spending and hiring' if they were taxed more. What a load of rubbish.
DeleteExactly Danny!
DeleteExactly!
DeleteNone of the 90 percent tax rate discussion is about what businesses pay or don't pay. The United States corporate rate is among the highest in the developed world, and why companies have become so great at exploiting loopholes. High rate? Low compliance.
DeleteThe 90 percent discussion is about individual income taxes, nothing more.
As for the 90 percent tax rate even existing, that's the greater point of this blog post: it never was the real effective rate. We only tax *income* by law and there are plenty of ways to shift income into benefits, bonuses, options, and other forms of compensation. Even the mess we have with insurance (employer coverage) was the result of companies trading insurance in place of increased salaries to workers (as a result of wage and price controls). You tell people "income" is taxed, they shift the money. And, constitutionally, we only tax a person's income not his or her wealth. A wealth tax would require constitutional change in the United States.
Hauser's Law seems to apply to taxes. Raise rates, people shift taxable compensation to other places. Taxes remain constant, at about 18 percent of GDP no matter what the rate is. The literature on this is extensive and so far, Hauser's work has been upheld by newer models. Rates above 20 percent of GDP slow growth. However, tax revenues below 17 percent also do not stimulate growth -- proving that there is a narrow range of ideal overall taxation.
As I have posted previously, most economists agree the 90 percent rate, high unionization, and other factors *did not* result in the higher growth rate of the United States from 1948 until 1964. The current modeling suggests the lack of any competition -- most destroyed by war -- is what left the U.S. market so strong. As the global markets normalized, and competition entered, we saw the U.S. was actually slow to respond (1970s certainly) and struggled.
To increase tax revenues, change how "investment" compensations are taxed, by classifying those as "income" in the federal code.
CSW - The real point here is that the clear historical record shows unionization and >90% top tax rates did not DESTROY or PREVENT significant sustained growth from 1944 to 1964. That's enough to decimate the specious rightwing argument that raising today's dramatically lower top rate will stifle innovation and/or cause innovators to stop innovating (or at least to stop innovating here in the US).
DeleteIf we look abroad, we can compare Germany and France, or even the U.S. and Canada. The challenge is discovering what the rates can be without negative effects on the economy. Sadly, we only know when we hit walls if there are consequences.
DeleteThe sustained growth had too many variables to easily know what role any one aspect played. We do know that in most ways our economy was a closed system, which it is not anymore. Technology and global trade have changed the dynamics. We don't know to what extent, however.
The easier evidentiary case for higher costs is to compare high cost cities to lost-cost cities. New York, San Francisco, and Los Angeles are high cost, with high local taxes, wages, etc. What has happened, curiously, is that these "progressive" enclaves now have the highest inequality measures, too. As costs increased, the middle class left the cities, leaving the poor and the rich, without much in the middle.
The tech companies moved around SF, just as film companies relocated to around LA County. This reduced costs, while still letting the successful enjoy the benefits of living in urban centers. We could see companies (Bob Evans?) move to nearby places with more favorable tax policies and clearer regulation. Simpler regulations and taxes, even at greater face cost, can actually reduce overall costs. (Hence, northern Europe is now ranked as more "economically free" than the United States by some classical liberal economists.)
Don't forget John that: Bill Gates makes multiple billions in Government funding buying his computer OS and high-end services.
ReplyDeleteThe "90%" marginal rate only applied to a handful of people, nowhere near the numbers affected by the AMT and top rates today. You can have a "90% rate" that applies to nobody — I suppose having the rate made someone feel better, but it was meaningless.
ReplyDeleteFrom CBS Marketwatch: "The AMT was designed in 1969 to ensure that wealthy taxpayers didn't use loopholes to escape paying their fair share of taxes. The original target was 155 filers with the then-exorbitant income of $200,000 who avoided paying any federal taxes."
Imagine that: 155 filers earned $200,000 at that time. Today, the AMT affects millions of tax filers, because the floor is $75,000 in taxable income. Yet, we don't seem to be any better off because there are still plenty of loopholes and exemptions for those with less "earned" income.
Bill Gates doesn't "make multiple billions" in taxable income — I guarantee he keeps most earnings as capital gains, unredeemed stock, and bonuses of various kinds (which are taxed differently). Having an income tax allowed Steve Jobs to have an income of $1/year. Technically, he wasn't in any tax bracket.
Having 155 families in the top bracket? That was the top in 1969. As rates were lowered, the brackets were also expanded. That's a very reasonable approach if we insist on an income tax instead of a consumption tax.
The *effective rate* is what will always matter. And the effective rate seems to be very constant. Therefore, the better solution is closing loopholes, making the tax code simpler and more difficult to abuse.
To clarify, it was 155 families that avoided paying income taxes, despite income of $200,000. The total filers in the top bracket was slightly more than 1000 filers. But, their effective rates were about 40% according to the data.
ReplyDeleteEffective rates still show that people top-out near the 40% range. Maybe there's a psychological threshold, because I've seen studies showing the wealthy manage a 40% rate in most of Europe — despite much higher marginal rates.
Behavioral economics do come into play. We'd have to study at which point the behaviors of the wealthy change. It seems to be 40%, but why? Is that the point at which they perceive no more return from government services?
Personally, I believe 40% is too high. But, I also don't like relying on an income tax. You can't shelter consumption as easily as income. A consumption tax is unlikely, though, and I fear if we did add one, it wouldn't be accompanied by lower income tax rates. I'd demand lower income tax rates in return for a consumption tax.
Thank-you! I heard that 90% tax rate figure, and I just couldn't believe it! It made no sense. All the rich people would move out of the U.S. if that had actually been true. Common sense just doesn't allow for it.
ReplyDeleteDon't be fooled into thinking that the rich "support us'. They can move away fro all I care and make room for honest companies and opening up jobs.
DeleteI don't understand why you continue to fight for this heavy progressive tax program. Just look at history it's been tried and it doesn't work. If your not familiar with the term war communism regaurding the Russian regim of Vladimir Lenin then get familiar. This progressive ideological thinking is straight out of the book of Marx.
ReplyDeleteI've posted recently on the 16th Amendment and the limits it places on taxation. Sadly, after 1916 we saw both the states and federal governments rush to tax income. The system is broken -- and penalizes behaviors we want while rewarding passive earnings that are not considered regular income.
ReplyDeleteAt most, I've suggest a three-tier, no-deduction, semi-flat rate approach applied to all income (wages and other income).
Right now, a farmer with a single great year (which does happen) is "wealthy" for that one tax return. We should encourage such an example farmer to save and prepare for the next bad year. Instead. Washington is considering changing investment and savings policies. I don't get it. You work hard, have a good year, and get punished for it.
Dividend and carried interest income is a different matter, but still absurd to have so many rates and gamed deductions. Three rates, almost no deductions. Right now, taxes are a jobs program for tax law specialists.
Even if they were paying *merely* 40%... that's still much higher than the 0%-13% that Mitt Romney and his buddies pay today, and it would be much better for the country.
ReplyDeleteAlso, raising the rates to 95% again would be a great thing, even if we brought back all the deductions. It incentivizes companies to put money into their businesses and employees. Either do something with your money (preferably not martini lunches, but.. housing for your employees? That's a great idea. Larger salaries, bigger benefits, more hiring in the United States, investment in infrastructure to grow the business! Finally they might live up to the hilarious "job creator" misnomer the GOP has given them)... or if you can't find something productive to do with your money.. give it to the government and they will.
Romney and Ryan wanted a 0% tax rate on the wealthy. They just want rich people to sit on their mountains of cash and not do anything with it... which is what most of them are doing today. This is the worst thing for the economy.
The highest *income earners* do pay more, both as a percentage of earnings and as a percentage of revenues, than other groups. The problem is a legal one I've written about before: the Sixteenth Amendment is clear on the nature of income taxes. We don't have "wealth taxes" at the federal level in the U.S.
DeleteFurther, higher taxes in 1940 or 1950 were never going to cause anyone to leave. Today, more than 1780 Americans renounced citizenship in 2011 alone — it is easy to move. We don't live with the same types of real or political borders as in the past.
Raise taxes on "income" and suddenly you have people with company cars, company dinning halls (the executive dining room returns?) and so forth. You can easily get the benefits of wealth without having any income at all. That's why Steve Jobs was quite happy "earning" $1/year at Apple — compensation can take many forms, many of them outside the limits of the tax structure set by the Constitution and federal code.
What does "Mitt Romney and his pals" mean? Sounds like a very bitter, envious tone. I'm not defending him, but I am defending the thousands of entrepreneurs that work hard to build something. No offense, but you also sound a little uneducated. The small "13%" tax is is capital gains tax. That's a different bracket of taxation. If you invested in the stock market, the same would be true. If he (Mitt) took a regular job, he would pay what you pay. It's not an exclusive club, it's an investment taxation category. What troubles me more is this "entitlement" tone / chip on their shoulder that people carry. Geez, all you need to do is look around the world, being poor in this country is not even close to how bad being poor in other countries is. Go get a college degree and get a job and stop envying other people's money. Even tradesmen like plumbers and electricians with no degree make a good wage, even higher than college grads many times. STOP WHINING people!
DeleteWhat does "Mitt Romney and his pals" mean? Sounds like a very bitter, envious tone. I'm not defending him, but I am defending the thousands of entrepreneurs that work hard to build something. No offense, but you also sound a little uneducated. The small "13%" tax is is capital gains tax. That's a different bracket of taxation. If you invested in the stock market, the same would be true. If he (Mitt) took a regular job, he would pay what you pay. It's not an exclusive club, it's an investment taxation category. What troubles me more is this "entitlement" tone / chip on their shoulder that people carry. Geez, all you need to do is look around the world, being poor in this country is not even close to how bad being poor in other countries is. Go get a college degree and get a job and stop envying other people's money. Even tradesmen like plumbers and electricians with no degree make a good wage, even higher than college grads many times. STOP WHINING people!
DeleteThats because the wealthy write the laws in their favor. You really knew this anyway didn't you?
DeleteFrom an earlier post:
ReplyDeleteWith a $3.5 trillion annual budget, all the wealth of Bill Gates ($45B) would fund 1.3% (4.7 days) of the U.S. government. That's it. Not even one week. The 400 richest Americans, all their wealth, would fund the system for 100 days. There are 403 billionaires in the U.S., with a total net worth of $1.28 trillion.
http://almostclassical.blogspot.com/2010_11_01_archive.html
The numbers haven't changed much. You might get 180 days by taking (not even taxing) all the money of the One Percent. Better to grow the economy for everyone than to merely seek some sort of "fairness" through taxes. Then what? The rich would be poor… and the nation, still broke.
let's do that first and then we will grow the economy together. It is not fair to ask the poor to grow the economy while the rich enjoy good life. We don't buy this argument
DeleteDid anyone else notice that the scale used to demonstrate "federal tax receipts have been fairly constant" is deceptively larger than needed to show the actual fluctuation? If you look at the actual scale and compare it to the economy during those periods, you'll see that relative high tax periods align well with more prosperous times and low relative low tax periods align with less prosperous times.
ReplyDeleteI also like the matter of fact comments that the economy is "NOT" a zero sum game. Okay, if you do not believe that, advocate for the treasury to print one hundred trillion dollars and pay off all our nation’s bills. That wouldn't work you say? Could the reason be that if money is created continuously, it devalues the rest of the currency by an equivalent amount (AKA inflation). When one person gains usually multiple people lose a fraction of their wealth. It may not appear to be a zero sum game because of the scale of the small losses but it most certainly is. The object of the treasury department is to print as much money as it can without making inflation (the measure of the zero sum game effect) too unacceptable to the population, especially the influential rich.
I appreciate the author’s contortionistic logic basically claiming, "high taxes will not help the economy because the rich never really paid high taxes to begin with because of all of the tax deductions so we should not charge the rich any higher taxes because they would not pay them anyway and it would be wrong to say that it would help the economy because history says so" type of logic.
I love the “Bill Gates wealth would fund the government for 4.7 days" trope. Why not tax him fairly like we ask of our poorest people. A worker pays 10% of their wages in payroll taxes. Bill Gates pays less than a fraction of .01%. There are no deductions for payroll taxes and yet people like this author do not usually consider them taxes at all until someone suggests eliminating the cap, suddenly it becomes the biggest federal tax increase in history. Payroll taxes, sales taxes, state & local taxes and permits & licensing all unfairly burden the working class more than the wealthy. If I have a billion dollars in the bank, it is only fair that I pay a slightly higher percentage of my income than someone making just enough to live on especially since the wealthy person is probably the one paying barely livable wages in the first place (I'm talking to you Walton family)
All income should be treated as income. Taxes should increase as income increases making it more difficult for people to accumulate ridiculous amounts of wealth. If one percent of the population owns 80% of the stock market and 60% of all off the wealth in this country, we have a problem. With that much wealth, undue political influence creates concentrated into the hands of the few lessons our democracy and allows our nations sovereignty to become questionable. If you think that is crazy conspiracy talk, please explain our US Attorney General admitting that some banks are too big to prosecute.
Even if taxes on income over 2.5 million dollars were to be taxed at 90%, rich people would still want to make that extra $100,000 for every million earned; especially if it is earned by what Adam Smith called "Rent". That is money earned without actual work. Basically, investments are renting money. This money should be taxed like a tractor pull weight. The farther you get in a tractor pull, the more the weight gets and the harder it is to pull. The rules are the same for everyone so it is fair and you still want to pull the farthest even if it is more difficult. Taxes are money that goes back to the United States to keep this country great and it builds parks and roads and military necessities and provides jobs so that people can buy products that create more jobs and so on... That is the way the economy grows, not by stashing trillions of dollars overseas in secret tax shelters.
If you read the blog posts, you will find that I oppose any "tax expenditures" that favor one group over another. Your criticism is too broad for one post on the myth of effective tax rates, which is a complex topic on its own. The highest marginal rates do not align with the most prosperous times, but the higher effective rates did, until the economic collapse of 2008-09.
DeleteI've also written about the penalty of fees, licensing, minimal corporate taxes, and other burdens that regressively hinder small business. Large companies have no problem with set-rate and set-minimum taxes, which are almost always unfairly burdensome on smaller business and individuals.
Again, your response does not take into account the entire blog… only one post, on one issue. I do address the other issues on a regular basis.
Quantity Theory of Money --- MV=PT --- was "debunked" by the author, Irving Fisher. He stated that this theory would apply only to a fictional static economy, not to a dynamic market economy, where an increase in the money supply normally causes growth, jobs, production.
DeleteThe exception is if the economy were in a condition where jobs or other resources are already totally maxed out, no more growth possible.
The US economy only came CLOSE to that condition a few times, World War One in particular. There was some rationing and calls for self-rationing. The Govt sold "War Bonds". Did those bonds "pay for" the War? Or did those bonds reduce the consumption power of current workers, saving that for after the war?
That "inflation tax" is a myth that says we have no other choice but to purposely cause mass unemployment and poverty.
How high should unemployment be for a capitalist economy to be "most productive" or "most efficient"?
Obviously a stupid question. Unemployment isn't productive. Human sacrifice doesn't cause rain or good crop yields either.
That's one reason MMT was joking about Quantitative Easing as "Aztec Economics", the magical belief that swapping Bonds out and Dollars in to banks' reserve accts at the Fed would magically spur economic recovery via bank lending . One problem: banks don't lend out reserves nor lend out other customers' deposits --- the process is called "balance sheet expansion".
There is a danger of what the great American economist, Irving Fisher called “debt deflation”: falling prices raise the real burden of [private] debt, making any economic contraction worse.
In the Great Depression, as the song goes, "potatoes are cheaper, tomatoes are cheaper, now's the time to fall in love". Austrians say that price deflation is a wonderful and natural thing.
Well not so great for the farmer who has creditors to repay based on expectations not only on crop and livestock yields, but economic yields, who now has to dump products for the same or less than his costs.
The Top Ten Reasons I Hate Capitalism:
ReplyDelete10: Kim Kardashian
9: Vast economic inequality destroys democracy
8: Survival of the fittest (I'm definitely not among the fittest)
7: Donald Trump
6: The Attitude of the Fittest toward the Unfit
5: "Reality" TV
4: Walmart
3: Mark Zuckerberg
2: It appeals to the worst aspects of human nature
And the #1 reason I hate capitalism: I am not Bill Gates!
Envy!
Perhaps that's what it comes down to. That's what the conservatives and defenders of Capitalism would have us believe.
Or perhaps there is just something inherently unfair and unjust about it.
It's their way of class warfare.
DeleteWe don't have capitalism. We have fascism, crony capitalism. We have not had capitalism for decades. You blame a symptom , but not the disease. It starts at Washington. Until you end the corruption of lobbying and special interests you will run around blaming capitalism like some ignorant child. Government is established under the constitution for one reason. I'm curious what you want in place of capitalism? Socialism? We all know where that leads.
ReplyDeleteYou guys forget the obvious that only PROFIT is taxed in the US Business Economy... This is the flaw of conservative propaganda: When you hold it to the light of truth, they are already getting away with paying no taxes by cooking the books
ReplyDeleteOnly Profit is Taxed. ... Do the math.
ReplyDeleteActually, there are states with minimum corporate fees and taxes. For a large multi-national, not an issue, but for a California based small business that decides to incorporate, the incorporation is regressive. If you own a small business, simple things like inventory tax in some states can be significant, and those are not based on profits.
DeleteTaxes for Revenue are Obsolete!
ReplyDeleteNY Fed Chairman Beardsly Ruml, January 1946
http://huff.to/dn5bpV
Govt DOES just confiscate tax revenue. Spending is not functionally dependent on taxation, pointless for Uncle Sam's revenue, functionally just deleted.
Warren Mosler -- author of the article above, which quotes Ruml from 1946 -- has a standing $100 Million Challenge since 2010 on these and related facts. If proven wrong about how the Fed, Treasury, IRS, and monetary system operates, he will spend $100 Million from his personal wealth to "pay down the debt".
This is NOT to say that NO TAXES should be collected on anyone, just because taxes don't supply revenue. There are other purposes.
Ruml shows that Tax Policies should be pursued with regards to real economic and political outcomes.
Taxes reduce Demand when the economy is "too hot". Targeted taxes reduce economic activity we want to reduce.
We tax Liquor and Tobacco to reduce use of these "sinful" commodities. We shouldn't tax fuel unless we choose to reduce wasteful driving and inefficient cars.
If the Govt did not collect taxes, that state currency would lose intrinsic market value and would truly be "worthless fiat". But US Dollars are accepted to pay your tax bill, which can be thought of as Entrance Fee for "playing" in our wonderful USA economy. That Legal and political Power of the Govt to SPEND dollars into existence and then demand a PORTION of those dollars back from SOME Currency Users, helps drive demand and therefore value of the dollar. One important MMT principle
Ruml's article called for eliminating all corporation taxes ... per se.
We should eliminate Sales Taxes at the state level. Sales Taxes reduce Sales. Consumption Taxes reduce Consumption. Duh!
Eliminate ALL taxes on LOW END wage income, like the bottom 50% or 90% or 98% of income earners. This would be in tune with the ideals of Adam Smith and arch conservative admin of Coolidge in the words of Andrew Mellon.
Since 100% of wages of the poor goes to consumption, nothing left for long term savings, by definition, taxing the poor DIRECTLY cuts into Aggregate Demand, penny for penny, and increases poverty.
That would entail suspending FICA Payroll tax. FDR agreed with Gulick that Payroll tax was economically unnecessary, it was politically necessary to "justify" the program, to make beneficiaries FEEL entitled, and protect his program from future Tea Baggers --- NOT to literally fund it. Treasury can add Account Credits to the "Trust Fund" in the form of special T-Bonds without Payroll taxes.
What about taxes on Artificial Intelligence computers that do front-running on human traders? Ban them or tax them higher? A higher tax on such trading leaves less space for profits on"marginal" penny trades that suck the wealth out of the Market without adding anything useful or productive --- profits from a kind of "private TAX".
How about a tax on ALL forms of unproductive, unearned, parasitic gains and income that are not the result of any productive endeavor, adding nothing to human society, doing no userful work whatsoever, just "milking the system".
Everyone knows or should know that it's not Food Stamp recipients who are "milking the system" for their $200 per month per person. People milk the system for millions or tens of millions, both the Govt system and the private Economic system.. Milking the economic system is parasitic on every actual producer, worker, and honest capitalist, drains off the life-blood of real capitalism.
Michael Hudson has some lengthy explanations on this "Free Lunch" grabbed by the Super-Wealthy, usually tax-free. TAX THAT. Stop taxing productive endeavor.
High taxes on untaxed income is pointless.
ReplyDeleteAlso, as stated previously,
Taxes for Revenue are Obsolete!
NY Fed Chairman B. Ruml, January 1946
http://huff.to/dn5bpV
Taxes are for desired economic and social policy, NOT for revenue. If a high TOP END marginal tax encourages job creation vs corp salaries, dividends, bonuses, that can't be bad.
I've read about schemes where corps "sell" their own cherished Logos and symbols to some shell corp located in a tax haven, then lease the use of their logo back, reducing their domestic income and tax liability. Then the only remaining issue is the capital is stored offshore.
Michael Hudson spoke about offshore tax havens, narcotics, terrorism, organized crime, etc. with an interviewer named Standard Shearer (?) on Counterpunch. He did not favor high tax RATES because 99% of nothing is nothing.
But the Govt itself has no need for tax revenue or "balanced budgets" except in the feeble imagination of pro-poverty politicians.
What many people fail to realise about the period when the tax rate was 90% was that the capital gains tax was 25%.
ReplyDeleteWhat actually happened during that period was that "rich people" simply stopped engaging in business; stopped paying themselves large incomes, and instead concentrated on being investors (paying just 25%).
The reason is that most of these people were already rich having inherited (or married) large sums in stocks, bonds and real estate so they concentrated on that; afterall, why would you go to work and pay 90% to the government when you can play golf, go sailing and attend dinner parties, manage your stock portfolio and pay 25% on any gains?
If you want to check I think you will find the richest families a century ago were heavily involved in business - 60 years ago they were not (except as fairly passive investors).
They did not leave the US in droves - a common fear today - but rather lived lives as an idle rich (perhaps sitting on a Board or two to do something with themselves when it was too wet to golf).
There are millions of people in America who have large amounts of investments; perhaps worth less than in 2007, but asset rich none the less; by all means rack their incomes taxes up to 90% and they will quit 'work' and sit back collecting dividends (low taxes) and capital gains (low taxes).
If you go back 60 years the number of people earning $200,000 in 'income' and paying 90% in taxes was ...zero; the numbers playing the stock market, pocketing $200,000 in capital gains and paying 25% in taxes was....very large.
I can not help but laugh with fear over the very stupid comments I'm reading , let's see. I invent something that people want , I invest my money in building a factory , and a warehouse to store and shop my products from , so I , by having the factory's built by other humans who do that kind of work, and hire people to work in the factory and warehouse and hire trucking company's to ship my product to stores who hire people to stock and sell the products ? So I did not create any jobs ? Am I getting that right. You communist left wing nut jobs
ReplyDeleteBefore planning and practicing schemes of how to reduce corporation tax, you must be clear about who all are liable to pay corporation tax. A limited company is subject to tax on its taxable profits which include profits on capital gains and trading and investment profits. In order to calculate the amount to be paid, you are required to work out on your own the tax liability and pay it. You cannot afford to commit mistakes on this as this might attract fines for the wrong amount calculated or delayed payments. For this purpose, it is recommended to hire our tax expert.
ReplyDeletehow to reduce corporation tax
So I've read your article and a lot of your commits. I've seen a whole bunch of side-stepping and deflecting. I've read from you that "There's plenty of "unanswered" questions/there's too many factors to link the economic growth to the high tax rate..." You sound like the climate change deniers. But I have yet to see a viable justification for our current tax rates. The tax rate from the medium income of america ~50k is 25%. Someone who makes 8 times that much, only see an increase of 10-14%. How can you justify this?? I understand that there are enough factors for you to deflect the FDR example of prosperity. But you can't honestly say that raising the taxes for people who make over 2 million, would have a negative economic effect.
ReplyDeleteBtw, our tax laws on capital gains are complete bullshit. Why isn't anyone talking about this?...
See the current research from Brookings, which I posted on this week:
Deletehttp://almostclassical.blogspot.com/2015/11/taxes-inequality-debt-and-deficit.html
The higher tax rates of the past simply did not collect significantly more revenue as a percentage of GDP. Short of changing the Constitution to enable "wealth taxes" as in European nations or a national VAT, there is no easy answer because income taxes are easily manipulated and avoided. (Steve Jobs' $1/year salary at Apple is a good example of tax avoidance.)
Raising "income taxes" also doesn't address the ability of wealthy investors to use tax-free municipal bonds and other tax-free investment instruments. I know my own strategies use bonds to offset and reduce tax liabilities. Also, many of the top earners are self-employed (doctors, lawyers, brokers) and can expense all manner of costs to offset taxes.
Capital gains and carried interests are a problem, but one unlikely to be resolved in any future Congress. The carried interest used by hedge funds is an egregious loophole nobody wants to close because so many leaders end up working for hedge funds and closed investment groups.
Economics isn't about what's fair, it's about what happens based on previous models. And models haven't worked well since 2001 or so. The SF Federal Reserve has tried to analyze why the models don't work, theorizing everything from globalization to the rise of automated trading that locks the economy is a bifurcated system of earnings.
Curiously, higher taxes locally in most major progressive cities have served to create more inequality and the equivalent of exclusive, nominally "public" services. We've always seen that with school districts and roads, but now we see it on city-wide levels, like San Francisco or Portland losing their middle class, while increasing local taxes for what seem like great ideas.
On a national level, this is now happening in Europe.
I always point to Canada as a good example of economic policies we might consider, from their housing market (less government involvement, actually) to their province-based healthcare models. We have no solutions in the United States, and I don't believe we will, though. We regulate ineffectively, and regulate more than most "socialist" nations.
Economically, we protect and ensure the very system that is redistributing wealth upwards right now.
I find it interesting that you negate the effective tax rate - in 1954 it was 70% - much higher than effective rates today. But you are sitting here saying it makes no difference. Nice spin you have put on it.
ReplyDeleteThe analyses of several respected economists have debunked the 70% claim, which makes the rounds on various media sites. The IRS calculated a theoretical max of 70% for a single filer that year (seriously) and later research found that the highest effective rate was 49% -- significantly less than the 70% number you are citing.
DeleteI've checked with colleagues at CMU (where I was visiting professor for two years in the economics program) and they suggest even the 49% might be overstated.
From Bloomberg:
The Internal Revenue Service reckoned that the effective rate of tax in 1954 for top earners was actually 70 percent.
Or lower.
Marc Linder, a law professor at the University of Iowa, has shown that a more comprehensive interpretation of income that includes capital gains suggests the real effective tax rate for millionaires was 49 percent in 1953. The effective rate dropped throughout the decade, reaching 31 percent by 1960.
OK, assuming your figures on that tax rate for high-income earners is factual (and I bet it's arguable given the right sources), how about the contemporaneous tax rates for lower incomes? What proportion of the tax burden (again, as a percentage of the GDP) did they carry and how does that compare to what we see today?
DeleteThe answer to your question can be found at:
Deletehttp://www.taxpolicycenter.org/taxfacts/displayafact.cfm?DocID=608&Topic2id=30&Topic3id=39
From 1958 until 1964, roughly 80 percent of federal income tax came from the 16 to 28 percent bracket. That has fallen, but rate shifts and changing brackets make it difficult to compare brackets over time.
From 1982 on, there hasn't been a 50% top bracket, for example, so those payers have been shifted to lower brackets. Even at their peak, the 50% bracket was never more than 8.3% of income tax collection, but recall that those individuals paid into all the lower marginal brackets, too.
The 1 to 15 percent bracket has held steady since 1987, when consolidation and changes to code pushed people from higher brackets into this lower bracket exclusively. Changes reduced the number of people paying across the brackets.
Since 1987, a median of 45 percent of taxes have been paid at the lower bracket. However, that has fluctuated wildly. The upper bracket(s) (25 and above) have increased from 7% of tax revenues to roughly a quarter.
The system is so absurd, changing dramatically every five to eight years, that there is no stability in the federal income stream by bracket, only by overall tax income. We keep moving the burden around, never quite content to let to let stay and adjust for inflation.
I have a backlog of posts on this that I hope to get online in 2016, since distribution will be a campaign issue. Change will happen, the system will be tweaked... and then tweaked again five to eight years later.
DeleteThe only winners might be tax professionals.
I predict if the Dems and Hillary win in November.
ReplyDeleteThe rich will start leaving the USA in droves and taking their money with them.
Similar to corporate outsourcing of the past few decades.
The fact is, this isn't 1950. And money is a global commodity with many nations competing for these people and their investment dollars. And in some cases there's a better quality of life in other countries.
Hillary Clinton is likely to be as pro-business as most mainstream candidates. I doubt she will be excellent for the economy, but certainly not horrible. Presidents run up against congressional blockades, so most change is gradual except in regulation and court decisions.
Delete"First, this myth, like so many about creating prosperity, ignores that U.S. growth came after two world wars wiped out most of our competitors."
ReplyDeleteThis is true but also it was a period of technological revolution. Air travel, highways, power grid, manufacturing, communications, etc. all created new industries and a tremendous boom in efficiency.
"It would be nearly impossible to tax enough to pay the federal bills, and doing so would likely crush the economy."
Not really, we had about this much or more debt after WWII. I do not recall my parents being crushed. In fact, the period is considered to be America's 'hay day'. The economy has more to do with peoples attitudes than printed paper itself.
As a percent of GDP, you are correct, the debt and the annual deficit haven't reached Japanese levels or anything close to what we had immediately after WWII.
DeleteI'm not sure we will have the same increase in efficiency or the same burst of new, good-paying jobs. I hope I am wrong, but I worry that technology and the knowledge economy are finally at a point to prove luddites correct: machines are taking jobs. I do hope this isn't the case and new jobs appear.
Thanks to computers (or not), I now do several tasks that required skilled experts only five years ago. That's concerning. We end up with superstars in fields creating the tools that everyone else uses.
Let us hope there is a wave of new types of work.