In 2013, the Top 1% Will Pay Their Highest Total Tax Rate Since 1979 - Business - The Atlantic

The most popular (and unpopular) post on Almost Classical is on the 90 Percent Tax Rate Myth. In that post, I attempt to explain the obvious:

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.
— http://almostclassical.blogspot.com/2011/03/90-tax-rate-myth.html

Well, today we are closer to the 1944 effective tax rate than at any time since. We are somewhere between an effective rate of 35 and 40 percent, including all forms of taxes and "contributions" collected by the federal government.

Today, The Atlantic Monthly explains, once again, that effective tax rates are more important than top marginal rates. The new income tax rates will result in the highest effective taxes on higher income earners in at least 30 years. Think about that and then try to claim that "the rich" aren't paying their fair share. The highest wage earners are paying more than they have in 30 years. Now, if we want to argue "wealthy" versus "wage earners" that is a different debate and one I've written about several times.

The new tax rates affect wage earner, not the investor class. On that issue, we do need a serious discussion.

In 2013, the Top 1% Will Pay Their Highest Total Tax Rate Since 1979

By Jordan Weissmann
The Atlantic

After all the months of agonizing, will-they-or-won't-they negotiations, the fiscal cliff deal mostly turned out to be something straightforward: A tax hike on the top 1 percent.

Thanks to the expiration of the payroll tax holiday, all Americans are going to be paying a bigger tab to the IRS this year. But as my colleague Matt O'Brien noted earlier today, the biggest increases are hitting filers with more than $500,000 of pre-tax income, which is roughly the threshold for making 99th percentile of American households.

In fact, it looks like the top 1 percent could end up paying more overall in federal taxes next year than at any time since at least 1979, as shown on the graph below. The country's richest households will be paying a bit more than 36 percent of their income to Washington -- higher than the most recent peak of 35.3 percent in 1995, or 35.1 percent in 1979. 

This chart shows the federal effective tax rate, which is Washington's actual cut of your income. Effective rates matter more than marginal rates. In 1979, for instance, the top marginal tax rate was 70 percent, but it affected very little income, so the average total tax rate for the 1 percent was about half that figure.

The fiscal cliff deal may not have pleased a number of liberals. But at the very least, they can say America's richest families will likely be taxed more than any time since Jimmy Carter was president.

This article available online at:
http://www.theatlantic.com/business/archive/2013/01/in-2013-the-top-1-will-pay-their-highest-total-tax-rate-since-1979/266764/

The excerpt and chart are copyrighted © 2013 by The Atlantic Monthly Group. All Rights Reserved.

Again, I suggest my post the 90 Percent Tax Rate Myth to readers.

Let's pretend the highest earner (not wealthiest person, remember) has an annual income of $100,000. Now, let's set a top marginal tax rate of 90 percent. We will set that marginal rate at $95,000. That means only $5,000 of income will be taxed at the (entirely unreasonable) rate of 90 percent. Everything earned up to $94,999.99 will be taxed at a mix of other, significantly lower, marginal rates. 

Here is my mythical "90 Percent Top Rate" example:

• First $29,999, let us assume a 0.0% marginal rate. No taxes.
• From $30,000 to $49,999, assume a 15% marginal rate. That's approximately $3,000 in taxes.
• From $50,000 to $94,999, assume a 25% marginal rate.  That's approximately $11,250 in taxes.
• Finally, we have the last $5,000 at a 90% marginal rate. That raises $4,500 in taxes.
• Total taxes collected: $18,750, or "only" an effective rate of 19% on the example earner. 

A 90 percent rate results in a 19 percent effective rate? Yes. 

Now it should be clear that a 90 percent top marginal rate has minimal effect on tax revenues. Why? Because most "rich" people earn only a small, small amount of their total income in the top margin. Most of our example earner's income, 95 percent of it, is taxed a lower rates. That's by design, since anything else would penalize earning and encourage people to cheat the system (more than some people do). If you know crossing from $94,999 to $95,0000 would have horrible consequences, you would not want to earn that extra $1. That's why we have a marginal rate tax model in most Western nations: it does not penalize your earnings retroactively. 

Most of the high income earners in the United States are within the $200,000 to $500,000 range. So, a higher tax rate that affects $400,000 or more is only going to collect more taxes on the last few thousand dollars these households earn. 

We'll soon see if higher tax rates make any difference to the economy. It might actually help the stock market and the investor class, while hurting wage earners. Stocks will be extremely attractive because investment income is not taxed at higher rates. 

People with $1 million or more of income tend to earn dividend and investment capital gains, not wages. Dividends and gains are not going to be taxed at the higher rate. So, the wealthy will avoid the higher tax rates, but the highest wage earners will be penalized. If I'm a high earner, this is one more reason to ask for stock options and other forms of compensation that are not considered normal wages. 

On a slightly different, yet related, topic: 

If the highest income earners are paying more, and they are in fact paying the greatest share of tax revenues in nearly 60 years, then supposedly low tax rates (a relative myth, anyway) cannot and do not explain the widening wealth gap. Increasing taxes on the wealthy will not equalize incomes — or we'd have less disparity. Many other factors are at play, causing the wealth gap. I have written about the social and technical factors contributing to the wealth gap and will be writing many more posts on why it exists and what we might be able to do about stagnation (and decline) at the lower income levels.