Paul L. Caron

Sunday, November 9, 2008

What Is the Appropriate Tax-Base for President-Elect Obama's High-Income Household Tax?

David P. Bernstein has posted What Is the Appropriate Tax-Base for President-Elect Obama's High-Income Household Tax? on SSRN. Here is the abstract:

President-elect Obama has proposed taxing high-income individuals and using the funds to improve the solvency of the Social Security and Medicare Trust funds. Existing taxes used to fund Social Security and Medicare have only been applied to wages. Current proposals have been vague about what type of tax base might be used in the new tax. This note utilizes data from the Survey of Consumer Finances to compare potential advantages and disadvantages of a wages-only tax base proposal to a broader tax base proposal. Four different tax base options, broad income over $250,000, wages over $250,000, broad income over $500,000 and wages over $500,000 are considered. The results presented here indicate the tax base (taxable income) on broadly defined household income over $500,000 could be 28 times larger than the tax base on wages over $500,000. ($737 billion compared to $26 billion.) The tax base on broadly defined household income over $250,000 is $1,134 billion compared to a tax base of $460 billion for household wages over $250,000. The broad income tax base allows for lower marginal tax rates, lower reductions in labor force participation among two-income households, and less substitution between wages and other forms of compensation than the wage-only tax base.

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The difference between wage income and gross household income is also aimed directly at the small business owner.

Most small business look for 30-40% of their income to come from dividends from the company. Until you wages are higher than $90,000 a year, this avoids paying the 15% for SS and Medicare for the dividend portion of your income, and also lowers your monthly, or quarterly withholding if done correctly.

The producing small businesses are the ones affected - those making $100,000 in gross income a year or more.

Posted by: Jim Durbin | Nov 10, 2008 4:31:58 PM

Gains on real estate are land gains.

Houses depreciate -- 1.5% per year, according to a May, 2006 FRB study -- just like cars and other machinery.

If the community had been collecting a higher land value tax over the years of ownership, the land would not have appreciate. Paying a fraction of that increase in land value doesn't seem unjust -- though I'd much prefer that it go to the local government than to the federal government.

California's Proposition 13 is the worst culprit. Too bad the smallish tax on the so-called "capital" gain (that is, the portion after the $250,000 or $500,000 exclusion, and after all the renovation and other costs the owner can think to deduct) goes not to the local commons, which created it, in part by foregoing a decent LVT.

Land rises in value for reasons which have nothing to do with the activity or inactivity of the present landholder, and therefore should accrue to the community, not the individual or corporation.

I'd much rather take rent than wage income for tax purposes. Our economy would be much healthier, and job opportunities would abound, and commutes would be shorter.

Posted by: LVTfan | Nov 9, 2008 2:20:33 PM

Look for a surtax based on gross income, making no allowance whatsoever for any special circumstances of the taxpayer.

That will increase effective tax rates on capital gains without increasing the statutory tax rate. It will also hit people who are forced to sell real estate and other appreciated assets because they are not rich enough to afford to hold on to them. Call them the "rich for a year" taxpayers.

As the article makes clear, politicians want to maximize the revenue at a given headline "income" level. The name of this game is to cleverly define "income" so that it means something different for the purpose of this tax than what people normally think of.

Posted by: AMTbuff | Nov 9, 2008 1:01:16 PM

I'm puzzled by the last row, last column of Table 3. Seems to me that it should be $550,000, not $2,050,000.

Posted by: LVTfan | Nov 9, 2008 12:31:49 PM