More on the 90 Percent Tax Myth

The marginal and effective U.S. income tax rates mentioned in my 2011 post The 90 Percent Tax Myth 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.

Taxes on the Rich Were Not That Much Higher in the 1950s
August 4, 2017
There 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.
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 most 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.

In 2016, I again addressed the confusion over top marginal rates versus effective tax rates. That blog post, 90% Tax Rates vs. Effective Rates, and the original post are the two most read and most linked-top posts on Almost Classical. People have argued with my data, but the data are now supported by economists admired by those far removed from classical liberalism and libertarian theories.

Our conclusions surely differ. I would suggest we need fewer deductions and that the top rate can be 44 to 45 percent without the loopholes now present in the federal tax code. However, I do not believe higher taxes will address inequality, while Saez does (Piketty is a bit less certain of the effectiveness of taxes to reduce inequality).

Here's the problem, in my opinion:

Technologically-driven capitalism is leaving less and less room for the unskilled workers. No tax policy alone can or will fix that widening gap between the educated, managerial knowledge workers and the fading jobs for other workers. 

We face a new problem, one that is more extreme than the Industrial Revolution. In the past, we could assume workers would seek out the skills to compete in changing markets. Largely, this happened, as the number of high school and college graduates steadily increased over the twentieth century.

But now what? Raising taxes for a safety net and some training might be insufficient to help people at the bottom of the skills-demand graph. A lack of skills is now a sentence to poverty, and we need a solution. We don't need an endless supply of engineers, either.

Statistics suggest we need more doctors and health care workers. Not everyone can become a doctor, and not everyone wants to become a doctor. That's true of many of the expanding fields: they require skills not present in the workforce.

If tax revenues have a limit, a point at which there are no more revenues possible, we need to work on spending priorities to help raise the economic fortunes of people at the bottom of the skills-demand graph. It will take generations to change our educational system and job training programs; previous attempts to revitalize education fell short.

I'm concerned with have inequality without a good solution. Raising taxes a little on the highest income earners simply cannot, will not provide the revenues necessary to fund current liabilities. By 2020, there must be a change in budget priorities.

See: Eat the Rich. We really do not have enough private income to fund what the government is spending. That's a math problem, because taking everything the top one percent has doesn't fund the government for six months. Taking everything. Ponder that.

The lower-income brackets cannot pay more, and the top bracket (based on research) won't pay more. The federal government is going to have to learn how to survive on $5 trillion a year.


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