Almost Classical

History of top marginal income tax rates in the United States (Photo credit: Wikipedia ) One of more popular / infamous posts here on Almost Classical is " The 90% Tax Rate Myth ." It explores the differences between marginal and effective rates and explains that when the marginal rate was 90% or higher, the effective rate  remained relatively consistent, between 40 and 50% throughout the twentieth century. Even in most of Europe, effective rates stay close to that same range, indicating something of a natural ceiling for effective tax rates. No serious economist would propose a tax rate of five or ten percent for the highest income earners. The actual debate among economists is where tax rates produce the greatest revenues with the least detriment to risk taking and entrepreneurship. In current academic papers, the debate on the highest marginal individual tax rate ranges from 35% to 60%, with most studies finding 45% works well as an effective tax rate on the top ten...

Though I don't assume Sen. Bernie Sanders will be the Democratic Party nominee for president, I do assume the next president will respond to populist outrage against corporations (especially those in the financial sector). As a result of this populism on the left and right (Tea Party and Occupy having the same vitriol for Crony Capitalism), there is little hope for meaningful corporate tax reform. Ignorance (or feigned ignorance) on issues of economics seems to underpin the campaigns of all four leading candidates as we enter the "home stretch" of primaries. From Donald Trump swearing to raise taxes to 30 percent on companies that leave the United States to Bernie Sanders claiming that we must shift the tax burden (income taxes are already progressive, the "burden" tends to be sales and other local or state taxes that do penalize the poor, not income tax). The United States needs tax reform, of both the personal (household) income tax system and the corpor...

This campaign season in the United States is already producing some meme myths on social media. One I keep seeing is the "90% tax rate" myth. Often, the responses prove people don't understand the marginal rate system of the U.S. income tax. Another meme that does reflect marginal rates claims there was a 70 percent effective tax rate. That's not quite reality, either, though. (It is, and it isn't, as I'll try to explain.) The most popular blog posts on Almost Classical remains The 90% Tax Rate Myth , in which I explain effective rates vs. top marginal rates and the relative stability of top rates excluding outliers of less than 10 tax filers. That’s necessary because some of the “top tax rates” would have applied to… ONE PERSON . As I wrote in that old post: 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. taxpayer...

One of the paradoxes progressives use to challenge libertarian ideals and conservative tax policies is that the wealthiest communities and cities have some of the highest local tax rates in the nation. Cities like New York and San Francisco are obvious examples, as are the suburban areas around Chicago, Los Angeles, and Washington, D.C. (also known for its concentration of Super Zips). High local taxes usually correspond to school spending, which is funded in most states through property taxes. Local schools are almost private academies in many states and counties, particularly in areas without a history of private schools. My wife and I are an example of this high-tax and wealth paradox, made worse by the natural sorting that occurs among classes. And, because wealth is generationally transmitted through culture, education, and property, this also contributes to racial sorting in most nations (as seen by studies of "egalitarian" Europe). We live in a single-entrance,...

The ongoing attempts to discredit "libertarianism" and "classical liberalism" are almost laughable, if so many smart people didn't uncritically accept the rhetoric: While libertarianism as a philosophy is superficial, juvenile nonsense, particular libertarian proposals are sometimes worthwhile on their merits. — from Michael Lind at Salon.com; http://www.salon.com/2013/06/13/grow_up_libertarians/ Again, Lind conflates the Libertarian Party with libertarian and classically liberal ideals. The ideas he argues are "libertarian" are not, they are the ideas of a political party or a specific politician (Ron Paul), neither of which I consider representative of my ideals or the ideals of the thinkers I admire. First, for me "classical liberalism" means one thing: freedom from government interference in my life; freedom from the threat of force and coercion to behave according to some majority idea of what is "best" for me. My liber...

This would be "old news" if President Obama's new budget didn't include yet more tax increases on the highest income earners. I include my usual caveat: we tax income, not wealth — so the president and others talking about "the rich" or "wealthy" households are intentionally misleading audiences. The wealthy have their money. The taxes were paid (or not) already and the wealth has been safely invested. Income is what we tax. Period. And those taxes are at near-record highs, in terms of effective rates  paid to local, state, and federal coffers by the top 20 percent of income earners. Caveat two: the effective rate paid is not  the "marginal rate" applied to the last dollar someone earns. Again, the president and others mislead by citing higher marginal rates in the past — though the effective rates were much lower! See also: http://almostclassical.blogspot.com/2013/01/in-2013-top-1-will-pay-their-highest.html http://almostclassica...

I'll be among those to admit we need more revenues to reduce the ludicrous debt of the federal government. We also need to cut spending dramatically to have any hope of balance in the future. Personally, I'd rather see the cuts first, and then we can slowly raise taxes to reduce the annual deficit followed by paying down the debt to a reasonable maintenance level. Unrestrained government expansion comes at a price. At least John B. Judis admits as much in a recent essay on the "need" for higher taxes. Obama's Tax Hikes Won't Be Nearly Big Enough http://www.tnr.com/blog/plank/111486/obamas-tax-hikes-wont-be-nearly-big-enough The New Republic John B. Judis December 28, 2012 | 1:23 pm [There] are a set of unpleasant truths lurking behind this debate over the budget and taxes that policy-makers in Washington need to acknowledge. First, that in order to meet public demands for affordable health care, quality public education, and retirement insurance, gove...

Media chatter implies "the rich" are about to pay their "fair share" of taxes with the Fiscal Cliff agreement of early 2013. Such claims ignore reality, which is nothing new when it comes to media coverage of the intersection of economics and politics. First, "the rich" and the truly wealthy, those in the top half of one percent or so in personal net value, are unlikely to pay much more in federal taxes. Some might actually pay less with this agreement, depending on where and how they invest. How is this possible? The tax rate on earned income  is rising to 39.6% for households earning more than $450,000 annually ($400,000 for individuals). The new Medicare "supplemental" tax increase of 0.9 percent (which doesn't actually go to Medicare) is also based on household income  of $250,000 ($200,000 for individuals). But, what if your increases in personal wealth come from investing? Carried interest, dividends, and other wealth streams a...

This story only captures a small part of the new taxes households face in 2013. But, let us begin with this headline: Fiscal Cliff Deal Will Raise Taxes On 77 Percent Of Americans: Tax Policy Center Analysis By STEPHEN OHLEMACHER 01/02/13 07:49 AM ET EST Social Security is financed by a 12.4 percent tax on wages up to $113,700, with employers paying half and workers paying the other half. Obama and Congress reduced the share paid by workers from 6.2 percent to 4.2 percent for 2011 and 2012, saving a typical family about $1,000 a year. Obama pushed hard to enact the payroll tax cut for 2011 and to extend it through 2012. But it was never fully embraced by either party, and this time around, there was general agreement to let it expire. The new tax package would increase the income tax rate from 35 percent to 39.6 percent on income above $400,000 for individuals and $450,000 for married couples. Investment taxes would increase for people who fall in the new top tax bracket. H...

(This is Part Two of two. See Small Business for Part One) My previous post on the issue of taxes and small business focused on the nature of entrepreneurial risk and reward in our system. I do fear there is a tendency to punish success, viewing with suspicion those individuals who create and nurture businesses through rapid growth. Many people assume the worst of financially successful business owners, and that's ironic in a nation built on free market capitalism. A friend of mine recently commented that entertainers and athletes earning far more than most entrepreneurs seems to be excluded from such suspicions. Apparently, a $20 million film contract is okay, but earn $1 million running a business and we'll attribute the worst motives to you. President Obama and others have tried to use this public resentment and distrust of successful entrepreneurs by suggesting tax increases on "the rich" won't affect "small business" — because we all love sm...

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 ...

(Part One of Two) The most productive small businesses might be crushed as part of the "solution" to the "Fiscal Cliff" debates in Washington. For a year, our leaders have known the debt ceiling, sequestration, and other major economic nightmares — all self-inflicted wounds — were set to crash down upon us as the calendar changed. Raising taxes on "the rich" is a crusade for President Obama and many Democrats. Even more than a few Republicans have tacitly joined the march towards raising tax rates. I'd rather we simplify the tax system, before raising rates, but that's not the topic of this post. The president and some influential voices are dismissing the potential harm caused by narrowly focusing on "the rich" at a level that includes many small and growing businesses. Bloomberg News, of all places, published an editorial that conflates arguments about growing small businesses and small business in general. It is a rhetorical tr...

For all the discussions about what tax rates would be "fair" there is a simple element missing: state income and sales taxes. I've written that federal income tax rates weren't actually higher in terms of effective tax rates due to deductions ( The 90 Percent Tax Rate Myth ) and other factors. It's also easy to complain about the "400 richest families," but in the 1930s a mere three men owned 40% of all wealth in the United States (Carnegie, Morgan, and Rockefeller). If you wonder about concentrated wealth, buy The Men Who Built America from the History Channel. Yes, the wealthy are paying (slightly) less in federal taxes  than the historical norms. But, they are also paying much, much more to the states and local governments. How can we ignore the value of those contributions? Nine states have no tax on regular income (wages), as of this blog entry: Alaska Florida Nevada New Hampshire South Dakota Tennessee Texas Washington Wyoming —...