Paul L. Caron

Monday, August 6, 2012

WSJ: Taxing the Rich -- The Facts

WSJ 1Wall Street Journal:  Taxing the Rich -- The Facts:

President Barack Obama says someone has to pay more taxes if the U.S. is to tame its budget deficit and provide the government he thinks the nation needs. He proposes that the best-off Americans pay more. It's only fair, he says.

"There are a lot of wealthy, successful Americans who agree with me because they want to give something back," he said in a speech in Roanoke, Va., that set off dueling campaign ads. "Look, if you've been successful, you didn't get there on your own."

His Republican opponent, Mitt Romney, counters that the deficit can be reduced without raising taxes if Washington is tough on spending. He thinks raising taxes on the best-off would be unwise and unfair. "President Obama attacks success, and therefore under President Obama we have less success," he said.

The contrasting comments underscore philosophical differences over the roles of the individual and society. But the most tangible disagreement is on taxing the rich.

"Who's right: Obama or Romney? Both. Or neither," says Joseph Thorndike, a tax historian. "When it comes to taxing the rich, there is no single, objectively correct answer. You can talk all you want about asking rich people to pay 'their fair' share,' but don't kid yourself. You're just trying to turn private opinions into public policy." "I'm struck" he adds, "how the facts can be used selectively by either side."

Academic tomes have been written about revamping the tax code so it finances the government while doing less damage to economic growth. But, countless congressional hearings later, the U.S. is no closer to a consensus on "fair share" than when the income tax was born 100 years ago. ...

Over the past three decades, Americans—including most of the rich—have paid less of their incomes to Washington. Top earners have received more of the income and paid more of the taxes; a growing number at the bottom have paid less or, in some cases, nothing. Whether that is fair is a question of politics and values. Facts can inform the debate. Here are a few salient ones:

  • The top 5%, top 1% and top 0.1% of Americans have been getting a bigger slice of all the income and paying a growing share of federal taxes.
  • Average tax rates have come down for everyone. On average, the tax bite on the rich is bigger—except for those whose income mainly comes from capital gains and dividends.
  • The share of taxes paid by the bottom 40% of the population has been shrinking along with their share of income.
  • The tax system narrows the gap between economic winners and losers, but not enough to stop the gap from widening.

[W]here does that leave the question of "fairness?" "It's not resolvable scientifically," says Mr. Thorndike, the historian. "It's only resolvable by a show of hands."


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Anon, your 70 to 90 percent figure may apply at middle incomes, but it's way too high for capital gains realizations, which are highly discretionary. It's also too high for anyone who has sufficient assets to retire. That rate makes unpaid leisure too attractive, not to mention that many costs of earning income, such as commuting costs, must be paid with after-tax dollars. At a 90% income tax rate holding a job could actually cost you money.

Taxing capital gains realizations at a high rate is a money-losing proposition. There's no escaping that reality other than taxing large unrealized gains, which would get very messy.

Posted by: AMTbuff | Aug 8, 2012 10:35:33 AM

TTT--serious academic attempts to estimate the inflection point of the Laffer curve suggest that it is between 70 and 90 percent, not 21 to 24%.

Right wing propagandists always talk about the how the end of the world will be upon us and Atlas will shrug if we tax the rich, but whenever it's been tried, the data suggests that pretty much nothing bad happens.

Posted by: Anon | Aug 8, 2012 8:36:30 AM

I would not rule out tax hikes forever, but I want to see spending cuts first. When I see an actual FY (not some projection of future cuts that never happens, but an actual year of restrained spending) where spending is less than 20% of GDP, then and only then will I be willing to support some tax and apsnding cuts together to meet at a balanced budget at 18% of GDP (the level we had under Clinton). But giving this administration any tax hike now, with their attitude on spending, is like giving a bottle of vodka to a drunk.

Posted by: richard40 | Aug 8, 2012 7:31:10 AM

Attempts to tax the rich too much result in the Saverin Cliff, where people like Eduardo Saverin renounce US citizenship to live in a place where he is treated better.

Maximum tax revenue is when the top marginal rate is 21-24%. Any higher, and revenue falls.

Posted by: TTT | Aug 7, 2012 4:35:37 PM

How about we equalize capital gains and ordinary income tax rates, and fold the payroll tax into the income tax.

Stop taxing work at a higher rate than wealth. The tax system is blatantly unfair.

The fact that some doctors and lawyers pay taxes at a high rate doesn't make up for the fact that so heirs and heiresses and hedge fund managers pay next to nothing.

The tax system is regressive as between the upper middle class and the super rich.

The WSJ and the super rich have been hiding behind the upper middle class for too long. It's time the upper middle class got a tax cut and the super rich got a tax hike.

Posted by: Anon | Aug 7, 2012 3:02:53 PM

HIgh tax rates cause income inequality. How? High tax rates reduce the number of jobs in the economy, and with fewer jobs in the economy workers get paid less. Paying workers less mean businesses make a higher profit which is income inequality. Lower tax rates lead to more jobs in the economy which means the workers get paid better, and business profits are lower, so income inequality is lower. Ideally there are enough jobs available in the economy such that each is paid at at level of near their economic contribution and the business employing them makes less profit from their labor. At this point workers will be able to accumulate wealth for their own investments, retirement or to start a business. It means only one member of the household would need to have a job to raise a family.
This can be demonstrated visually using the Laffer curve as a basis. If the Tax revenue curve is plotted with the vertical axis being tax revenues and the horizontal axis being tax rate, the tax revenue is zero$ at zero% and zero$ at 100%. Some where between them is a tax maximizing non zero$ revenue. Dividing the revenue curve$ by the tax rate% you get a size of the taxed economy curve. It is very high on the low tax rate% and is at zero at 100% tax rate. This is a good proxy for the number of jobs in the economy curve. Plot a horizontal line across this curve, for arguments sake someplace around the revenue$ maximum point, this represents the size of the workforce. Below this size of the workforce curve there are more workers than jobs, so the jobs are poorly paid, and income inequality is high. Above this size of workforce curve there are more potential jobs than workers available to fill them, so jobs are well paid, employers must compete to hire workers and so will pay them nearly as much as the economic value they produce. This leads to a leveling on income inequality. Overall tax revenues from businesses will decline, tax revenues from workers will rise. And for businesses lower tax rates on a lower profit may net, after taxes, about the same. And best of all with workers well paid, government does not need to support and subsidize half the population.

Posted by: Dirk | Aug 7, 2012 9:55:32 AM

"I agree that the rich should pay higher percentage of tax than the poor, not because it is fairer, but because the rich receive more benefits from a stable economic environment, better opportunities to grow their wealth, better asset protection, etc."

I hear this a lot, but is it really true? It seems that it is actually in less-stable countries that the rich have a greater share of national income and wealth, much of it simply through nearly outright theft from the masses of the poor. Seems that the real beneficiaries of a more stable society are the poor. Let's not forget that "the rich" are, on average, smarter than "the poor", so any reversion to a "state of Hobbesian war of all against all", the rich are likely to win. History offers many examples of smallish bands of predators overthrowing stable societies and their wealth and then going on to become the aristocrats of the reconstructed society.

Just a thought I have been noodling on after seeing arguments like yours before.

Posted by: BS Inc. | Aug 7, 2012 9:05:17 AM

What about household size? Household size has been dropping for years, and unless the income numbers are adjusted to reflect, for example, that two single-parent families will have a lower income than one two-parent family, then the results will be skewed in a negative manner.

Per the U.S. Census Bureau, for 2009 and 2010, the percentage of married-couple families living below the poverty line was 5.8 in 2009. It ticked up to 6.2 in 2010. Whereas for a single householder, the poverty rate was 26.3 percent in 2009 and 27.3 percent in 2010. This seems to be a huge factor in this debate, yet it is not frequently noted.

Posted by: wrick | Aug 7, 2012 8:03:22 AM

Coherent tax policy arguments from both the left and the right leave something to be desired. I agree that the rich should pay higher percentage of tax than the poor, not because it is fairer, but because the rich receive more benefits from a stable economic environment, better opportunities to grow their wealth, better asset protection, etc. I also believe the poor should pay something in income taxes so that they develop and maintain a responsible fiscal attitude, especially in terms of spending (instead of the share your wealth attitude).

The rich have benefited from the 15% dividend rate which was instituted to adjust for the double taxation of corporate dividends - It may be better tax policy to give corporations a partial deduction. The rich have also benefited from lower capital gains rates. In the days of high inflation, the lower capital gains rates made sense to partly compensate for taxation of phantom income due to inflation. In summary, there are legitimate tax policy reasons for the lower rates enjoyed by the rich, though they certainly could be modified.

Posted by: Joe | Aug 7, 2012 7:11:43 AM

The top 5%, 1% and 0.1% have not been 'getting a bigger slice of all the income.' There isn't some public pie out there of which upper income people have been grabbing an extra wide slice. They have been producing and thereby EARNING a greater percentage of the statistical notion of aggregate income.

This may seem like nitpicking, but it is a very important conceptual distinction.

As for fairness, it's not so terribly difficult to determine objectively. If we all have an equal say in the disposition of pooled resources (one person, one vote) we should all contribute resources equally to that pool. If my vote counts the same as the next guy I'm not thrilled that I have to pay ten times as much into the pool as he does.

The fairest tax, therefore, is a simple head tax. Everyone pays the same amount. Or more properly, every VOTER pays the same amount.

The next fairest tax system is a flat consumption tax like a national sales tax. One's tax payment is directly proportional to one's 'footprint' in the world, and one has discretion to reduce the footprint and therefore the tax obligation at any time.

The least fair tax system is the progressive income tax. It punishes the creation of value with the most prolific creators punished the most.

Posted by: Dark Helmet | Aug 7, 2012 6:56:58 AM

> The fairest economy is the one that's expanding the fastest and thus providing the greatest opportunity for the most number of people

There are folks who think that "expanding the fastest" doesn't lead to "providing the greatest opportunity to the most number of people".

There are also folks who think that it's more "fair" to have lower growth in return for "rich people paying more"., such as candidate Obama, in his answer to the question about raising capital gains rates even if that resulted in less tax revenue.

To be honest, I don't think that Obama accepted the premse of the question. He apparently thinks that rates don't affect anything except revenues. Then again, he didn't build that.

Posted by: Andy Freeman | Aug 7, 2012 6:10:42 AM

This article omits one very revealing statistic.

It focuses on share of income and tax rates.

It does not focus on share of taxes paid.

That is when we see that the bottom half pay nothing and the "rich" pay everything as with these income and share of taxes paid numbers show.

Top 1% $343,927 36.73

Top 5% $154,643 58.66

Top 10% $112,124 70.47

Top 25% $66,193 87.30

Top 50% $32,396 97.75

Bottom 50% <$32,396 2.25

There is nothing fair in this situation.

The solution is to grow the economy by rewarding entrepreneurial risk taking rather than confiscating more income from those very job creators.

A growing economy will increase incomes and increase tax revenue.

Obama just wants to take a bigger bite of a shrinking economic pie.

Posted by: Mike Constitution | Aug 7, 2012 5:38:42 AM

"[W]here does that leave the question of "fairness?" "It's not resolvable scientifically," says Mr. Thorndike, the historian. "It's only resolvable by a show of hands."

The fairest economy is the one that's expanding the fastest and thus providing the greatest opportunity for the most number of people. If there's a fairer scheme, I'd love to hear it.

Posted by: Ben | Aug 7, 2012 5:30:16 AM

"The tax system narrows the gap between economic winners and losers..."

There's nothing factual in the notion of "economic winners and losers." That is pure leftist dogma.

If you're a young kid getting an entry level job, you're setting yourself up for success later on, even though you don't make very much. You haven't "lost" anything. Likewise, if you're 50 and pulling in your peak earnings, you didn't suddenly win some game; you've been working hard for 30 years and it's been steadily paying off.

Posted by: Ben | Aug 7, 2012 5:26:19 AM

A show of hands would reveal that a sizable minority on the left would favor higher rates on the rich even if they reduced tax revenue. For this minority, leveling outcomes is the primary function of the income tax. Raising revenue is secondary to making a statement about the country's values.

Confiscatory tax rates on the rich cause the rest of us to pick up the slack. If people want to make redistribution the top priority, I wish they'd find a way to do so without increasing the tax burden on regular folks. Confiscatory tax rates on the rich cause the rest of us to pick up the slack.

Posted by: AMTbuff | Aug 6, 2012 2:05:27 PM

The title would be more accurate if the wsj editors called it "Some Facts."

Posted by: David | Aug 6, 2012 1:27:31 PM