News Can Income Tax Rate Hikes Close the Deficit? (interesting article)

[CAC1001]

AUTHOR: William Ahern, Director of Policy and Communications, The Tax Foundation

Ed. Note: Our Fiscal Future has invited distinguished guest bloggers to share their views about how to get the nation on a sustainable fiscal path. The views presented are their own, and do not necessarily represent the views of the Committee on the Fiscal Future of the United States or any of the organizations sponsoring this website. We welcome and encourage constructive conversation about the fiscal issues facing America, and hope you’ll join the conversation.

When David Walker was head of the General Accounting Office, he changed the agency’s middle name from Accounting to Accountability, but the concept doesn’t seem to have caught on in Washington., available at TaxFoundation.org.

 

[phyzguy]

I find it interesting that during the 1950s, a period when the US experienced a previously unheard-of level of prosperity and economic growth, that the top US income tax rate stood between 84& and 91%, as compared to 35% today. (see reference below). US tax rates are both among the lowest in the industrialized world and lower than they have been during most of US history. While it may not completely close the deficit, we definitely need to pay more taxes.

http://en.wikipedia.org/wiki/Income_tax_in_the_United_States

 

[Ronnin]

There is a big difference between what bracket you fit in and what you actually pay. Also, those are marginal rates not average tax rates so be carefull when doing comparisons. I personally have no problem paying additional taxes when ALL cost cutting measures with regards to spending have been considered first. I have yet to see that prerequisite adequately considered.

 

[CAC1001]

Evo very sorry about that, I should have known better. Here is a link to the entire article: http://www.ourfiscalfuture.org/can-income-tax-rate-hikes-close-the-deficit/

 

[russ_watters]

I find it interesting that during the 1950s, a period when the US experienced a previously unheard-of level of prosperity and economic growth, that the top US income tax rate stood between 84& and 91%, as compared to 35% today. (see reference below).

And at the same time, the fraction paying zero or negative income tax is the highest in recent memory, by a large margin:

By historic standards, today's situation is an aberration. Between 1950 and 1990, the number of owe-no-money federal tax returns averaged 21 percent, dipping to 18 percent in 1986, according to Tax Foundation data. In the 1990s, the owe-no-money percentage hovered around 25 percent of taxpayers.

http://www.cbsnews.com/stories/2009/04/15/politics/otherpeoplesmoney/main4945874.shtml

The article says 43% for 2009 - it was 47% in 2010. That's a really big problem.

While it may not completely close the deficit, we definitely need to pay more taxes.

I agree and I think our deficit situation demands it. So to me, the natural thing to do is to start with that 25% of our population that used to pay income taxes and make them pay income taxes again. To put it in perspective, if that quarter of our society that now freeloads but didn't used to is made to pay an average of $3000 a year, that would add $100 billion dollars to the federal coffers.

 

[drankin]

I find it interesting that during the 1950s, a period when the US experienced a previously unheard-of level of prosperity and economic growth, that the top US income tax rate stood between 84& and 91%, as compared to 35% today. (see reference below). US tax rates are both among the lowest in the industrialized world and lower than they have been during most of US history. While it may not completely close the deficit, we definitely need to pay more taxes.

http://en.wikipedia.org/wiki/Income_tax_in_the_United_States

Hey wait, don't these other countries that pay higher taxes still have enormous deficits? I don't think paying more taxes is going to solve the problem.

 

[Ygggdrasil]

if that quarter of our society that now freeloads

I take issue with the idea that these people are freeloading. While these people may not owe any federal income tax, income tax is not the only federal tax. For example:

Focusing on the statistical middle class — the middle 20 percent of households, as ranked by income — underlines this point. Households in this group made $35,400 to $52,100 in 2006, the last year for which the Congressional Budget Office has released data. That would describe a household with one full-time worker earning about $17 to $25 an hour. Such hourly pay is typical for firefighters, preschool teachers, computer support specialists, farmers, members of the clergy, mail carriers, secretaries and truck drivers, according to the Bureau of Labor Statistics.

Taking into account both taxes and tax credits, the average household in this group paid a total income tax rate of just 3 percent. A good number of people, in fact, paid no net income taxes. They are among the alleged free riders.

But the picture starts to change when you look not just at income taxes but at all taxes. This average household would have paid 0.8 percent of its income in corporate taxes (through the stocks it owned), 0.9 percent in gas and other federal excise taxes, and 9.5 percent in payroll taxes. Add these up, and the family’s total federal tax rate was 14.2 percent.

(source)

Indeed, since the 1960s, the decreases in income tax for the lower and mid tax brackets have been offset by increases in the payroll tax (see fig 1 from ref 1, attached. Note that the x-axes are not linearly scaled). While it may be the case that the income tax rate on these individuals may be too low, it is certainly not the case that they are freeloading.

Furthermore, interpreting the statistic that 47% of households owe no federal income tax (compared to ~21% from 1950 to 1990) can be a bit tricky. I agree with russ that this statistic is a sign of big trouble, but for different reasons.

While it is true that tax rates for the lower-middle class have fallen since the 1960s (average federal tax rates for the second quintile decreased from 13.9% in 1960 to 13.0% in 2000 to 9.4% in 2004)(1), it is also true that the ability of this group to pay taxes has decreased as well. Indeed, since the 1960s, income inequality has risen in the US. For example, share of aggregate household income controlled by the lowest income quintile has decreased from 4.1 percent in 1969 to 3.6 percent in 1997, while the share to the highest quintile increased from 43.0 percent to 49.4 percent. If you look at the top 5% of households, the increase is from 16.6 percent to 21.7 percent (2). More strikingly, the top 0.1% of households went from earning 2.5% of the total share of income in the 1970s to 9% in 2000 (1). Therefore, since the 1960s, we have seen a redistribution of wealth toward the rich.

Since the rich now account for more of the income than they did in the 1960s, it is natural to expect a greater tax burden to fall on the rich. Therefore, the decreases in tax rates for the top earners are particularly troubling. Indeed, in 1960, the top 0.1% of earners earned ~3% of the total income and accounted for ~8% of taxes paid. In 2004, the top 0.1% of earners more than doubled their share to the total income to ~7% but accounted for only ~11% of taxes paid (1).

However, it is also important to consider whether increasing the tax rates on the wealthy is a realistic option? Unlike in the 1960s, it is much easier for wealthy individuals and corporations to move offshore to evade such taxes, so it seems unlikely that we'll be able to achieve the high tax rates used in the 1960s. While taxes on the wealthy must definitely increase, taxes other individuals will probably need to shoulder a greater tax burden than they have historically, despite being less able to pay these taxes than in the 1960s. Furthermore, these limitations mean that it is even more important to keep government spending in check. Finally, the high income inequality seems to be an underlying problem contributing to all these issues, and therefore, any policy that wants to be effective in the long term must address this issue.

References:
1. Piketty and Saez. 2007 "How Progressive is the U.S. Federal Tax System? A Historical and Intenational Perspective." Journal of Economic Perspectives 21: 3-24. http://elsa.berkeley.edu/~saez/piketty-saezJEP07taxprog.pdf
2. US Census Bureau. http://www.census.gov/hhes/www/income/data/inequality/middleclass.html

 

[CAC1001]

I find it interesting that during the 1950s, a period when the US experienced a previously unheard-of level of prosperity and economic growth, that the top US income tax rate stood between 84& and 91%, as compared to 35% today. (see reference below). US tax rates are both among the lowest in the industrialized world and lower than they have been during most of US history. While it may not completely close the deficit, we definitely need to pay more taxes.

http://en.wikipedia.org/wiki/Income_tax_in_the_United_States

That's probably because most of the competition to the U.S. had just been bombed out from World War II and was rebuilding. Remember the U.S. economy stalled around the end of the 1950s, and then the 1970s were fraught with inflation and rising unemployment.

Another thing I remember reading somewhere is that those top tax rates applied to those earning around $2 million. I don't know if they meant literally $2 million (which back in the 50s was probably like $30 million today) or the inflation-adjusted equivalent of $2 million, but either way, that's still a lot higher than what the top marginal income tax rates apply to today.

 

[CAC1001]

Indeed, since the 1960s, income inequality has risen in the US. For example, share of aggregate household income controlled by the lowest income quintile has decreased from 4.1 percent in 1969 to 3.6 percent in 1997, while the share to the highest quintile increased from 43.0 percent to 49.4 percent. If you look at the top 5% of households, the increase is from 16.6 percent to 21.7 percent (2). More strikingly, the top 0.1% of households went from earning 2.5% of the total share of income in the 1970s to 9% in 2000 (1). Therefore, since the 1960s, we have seen a redistribution of wealth toward the rich.

Is it so much a redistribution of wealth though, or just that the pie has gotten larger, with the higher earners earning more of the pie as it grows larger? Just because the lower-earners may be responsible for a smaller share of the pie than they used to does not mean that their wealth and standard of living haven't continued rising, right? (because the pie grows bigger).

Sort of like a person who owns 100% of a $100 million company but then it grows to a $5 billion company of which they now own 30%. They may own a smaller share, but the pie has gotten a lot bigger.

Also, is income inequality a bad thing? A free society will always have an unequal outcome. Striving for equality of outcome just will disincentivize effort.

I have no empirical way of knowing, but I'd also think that during economic booms, it is natural for the wealth to concentrate at the top more because so many new companies are started that mint a bunch of new multimillionaires and billionaires. The 1950s, 1960s, and 1970s didn't have the levels of wealth creation, like through IPOs for example, that occurred in the 1980s, 1990s, and 2000s.

Since the rich now account for more of the income than they did in the 1960s, it is natural to expect a greater tax burden to fall on the rich. Therefore, the decreases in tax rates for the top earners are particularly troubling. Indeed, in 1960, the top 0.1% of earners earned ~3% of the total income and accounted for ~8% of taxes paid. In 2004, the top 0.1% of earners more than doubled their share to the total income to ~7% but accounted for only ~11% of taxes paid (1).

Wouldn't the top 0.1% of earners be the super-rich who earn most of their money through things like dividends, which are from corporations that are already taxed though?

 

[Office_Shredder]

The question of how much everyone pays in taxes is one of comparing relative wealth, not absolute wealth, so whether the pie is smaller or larger is irrelevant, it's the share of the pie that counts

 

[russ_watters]

Ygggdrasil, the OP is about the federal budget deficit and the only tax that affects it is the federal income tax.

 

[mheslep]

I find it interesting that during the 1950s, a period when the US experienced a previously unheard-of level of prosperity and economic growth,

Do you have a source for that?

that the top US income tax rate stood between 84& and 91%, as compared to 35% today. (see reference below).

That doesn't mean that people actually paid those rates on gross income. Income can be diverted. The historical details are probably complicated, but we can look at actual revenue received from income taxes over time and see revenues were not significantly higher in the post WWII period than now.

Federal Income tax in 2005 dollars:

Federal income tax as a % of GDP:

US tax rates are both among the lowest in the industrialized world

Note that US business tax rates are near the highest in the industrialized world.
http://upload.wikimedia.org/wikipedia/commons/3/36/Income_Taxes_By_Country.svg

and lower than they have been during most of US history.

I don't follow in what sense that can't be true, as before the 1913 income tax amendment the US had no federal income tax for the previous 124 years.

While it may not completely close the deficit, we definitely need to pay more taxes.

Why can't the answer be we need less federal spending?

It seems to me any discussion on balancing budgets with tax increases should at least include a passing reference to (1) the http://politicalbooks.files.wordpress.com/2009/07/laffer-curve1.jpg" to at least consider that there may be a point at which increasing rates actually reduces revenue, and (2) the fact that increasing tax rates depresses GDP. Obama's economics director Romer has one of the more widely cited papers addressing the latter issue.

BTW, hopefully all US citizens are aware that federal tax rates, income and others, are indeed increasing as of Jan 1, 2011, so we may get an illustration of the effects of (2) very soon.

 

[mheslep]

Ygggdrasil, the OP is about the federal budget deficit and the only tax that affects it is the federal income tax.

Not the only, not even the majority, but the largest single tax source:

[PLAIN]http://www.taxpolicycenter.org/briefing-book/background/numbers/images/Numbers_Figure-1_What-are-fed-govts-sources-of-revenue_3.gif

 

[mheslep]

The OP's reference answer's the OP's question: no.

According to the Tax Foundation’s Microsimulation Model, to erase the 2010 deficit, Congress would have to multiply each tax rate by 2.4. So the 10-percent rate would be 24 percent; the 15-percent rate would be 36 percent, etc., on up to the top rate, currently 35 percent which would have to be 85 percent. These rates are simply untenable.

http://www.ourfiscalfuture.org/can-income-tax-rate-hikes-close-the-deficit/

 

[chemisttree]

I find it interesting that during the 1950s, a period when the US experienced a previously unheard-of level of prosperity and economic growth, that the top US income tax rate stood between 84& and 91%, as compared to 35% today. (see reference below). US tax rates are both among the lowest in the industrialized world and lower than they have been during most of US history. While it may not completely close the deficit, we definitely need to pay more taxes.

http://en.wikipedia.org/wiki/Income_tax_in_the_United_States

The source for the 91% top rate is http://en.wikipedia.org/wiki/Internal_Revenue_Code_of_1954" . It is interesting to note that the upper bracket that paid 91% started at 7.5 million in 2008 dollars.

I wouldn't mind going back to that tax rate but then again I'm certainly not in that income group.

 

[mheslep]

The source for the 91% top rate is http://en.wikipedia.org/wiki/Internal_Revenue_Code_of_1954" . It is interesting to note that the upper bracket that paid 91% started at 7.5 million in 2008 dollars.

I wouldn't mind going back to that tax rate but then again I'm certainly not in that income group.

I expect an extreme federal top rate would eventually end up doing the same thing it does when the states try it: cause people to leave (or just close the doors).

[Gov] Christie [NJ]: [...]You know, we have had in the last four years under Governor Corzine, study came out, that $70 billion in wealth left the state of New Jersey. And it left it because we are the most overtaxed people in America. So there will be plenty of democrats down if Trenton saying, just raise taxes a little bit more, Governor, just a little bit to get us through this crisis. We've done enough of that already. It is time to get tough and to say no.

http://www.state.nj.us/governor/news/news/552010/approved/20100218a.htmlMaryland acted similarly with a high top rate and found net revenues actually fell, and with those people gone, probably irretrievably so.

 

[vertices]

Why can't the answer be we need less federal spending?

No. Because at times like these, you need to get the economy moving - you need to stimulate it, and the only way to do this is to increase spending. Less spending means less jobs and basic economics will tell you this leads to deflation.

(1) the http://politicalbooks.files.wordpress.com/2009/07/laffer-curve1.jpg" to at least consider that there may be a point at which increasing rates actually reduces revenue, and

According to wiki:

Pecorino (1995) argued that the peak occurred at tax rates around 65%.

Perhaps the solution is to increase the tax rate of highish earners and create new tax brackets for very high earners (perhaps at 50%) and the ultra wealthy (perhaps at 65%). Given the wealth distribution in the US, I am sure this would work... (maybe it would even be possible to get rid of the 10% tax rate too with this arrangement - it's crazy to tax people who are living below the poverty line).

(2) the fact that increasing tax rates depresses GDP. Obama's economics director Romer has one of the more widely cited papers addressing the latter issue.

As I mentioned above, ruthless spending cuts will depress GDP further. The only rational alternative is to increase taxes.

 

[mheslep]

No. Because at times like these, you need to get the economy moving - you need to stimulate it, and the only way to do this is to increase spending. Less spending means less jobs and basic economics will tell you this leads to deflation.

The US stimulus I and II totaled over one trillion dollars. Visibly it hasn't stimulated much. In any case the link between Keynesian government spending and increased GDP is weak; the detrimental link between increasing taxes and depressing GDP is strong in the literature. I'll provide Romer's reference in a moment.
Edit:
"[URL MACROECONOMIC EFFECTS OF TAX CHANGES:
ESTIMATES BASED ON A NEW MEASURE OF FISCAL SHOCKS[/URL]
Christine Romer, David Romer (C Romer is the Obama administration's chief economic adviser)

Concludes a dollar of tax cuts yields about three dollars of GDP increase; the reverse is also true.

According to wiki:

Why did you choose to ignore the prior sentence referencing the Hsing paper:

One study of the United States between 1959 and 1991 placed the revenue-maximizing tax rate (the point at which another marginal tax rate increase would decrease tax revenue) between 32.67% and 35.21%

As I mentioned above, ruthless spending cuts will depress GDP further.

The only rational alternative is to increase taxes.

Given the very recent results in Greece, I think raising taxes as the main response to a huge budget defecit is insane.

 

[apeiron]

The US economic realities are that it has borrowed recklessly to stave off financial collapse and now has the new problem that it must earn more just to pay its interest charges.

if current trends continue, the U.S. will be transferring approximately seven percent of its total economic output abroad simply to service its foreign debt.

Currently, it is in the interest of the US's creditors to offer unnaturally favourable terms on this debt. But that could change.

The dollar’s “extraordinary privilege” as the primary unit of international trade allows the U.S. to borrow at relatively low rates of interest. However, the emerging scale of U.S.
Government borrowing creates uncertainty about both our ability to repay the ever growing debt and the future value of the dollar. Moreover, “any sudden stop in lending…would drive the dollar down, push inflation and interest rates up, and perhaps bring on a hard landing for the United States...”

The US needs to find more tax dollars, yet also needs to feed its growth. The question is at what stage does a "kick-start" stimulus become a continuous life-support machine?

The choice was made to borrow trillions (and hope the rest of the world, China in particular, would forgive the debt rather than demand payment).

The rest of the world, China in particular, probably will expect something in return for keeping the patient alive (apart from a continuing market of avid US consumption).

What could this be I wonder? China has said it needs another 10/20 years to build up its internal markets, industrialised its countryside, complete the transfer of technology and world political power from West to East.

At some stage in this journey, it will cease to make sense to prop up the US. The life support machine of dollar-based debt can be switched off.

The US can debate whether to tax its poor or its rich. That debate will be looking sadly academic.

The foregoing issues of trade imbalance and government debt have historic precedents
that bode ill for future force planners. Habsburg Spain defaulted on its debt some
14 times in 150 years and was staggered by high inflation until its overseas empire
collapsed. Bourbon France became so beset by debt due to its many wars and
extravagances that by 1788 the contributing social stresses resulted in its overthrow by
revolution. Interest ate up 44% of the British Government budget during the interwar
years 1919-1939, inhibiting its ability to rearm against a resurgent Germany.19 Unless current trends are reversed, the U.S. will face similar challenges, anticipating an ever-growing percentage of the U.S. government budget going to pay interest on the money borrowed to finance our deficit spending.

Oh, who is the source of all these alarmist quotes?

http://www.peakoil.net/files/JOE2010.pdf

And what do all those federal dollars actually get spent on?

In 1962 defense spending accounted for some 49% of total government expenditures, but by 2008 had dropped to 20% of total government spending. Following current trend lines, by 2028 the defense budget will likely consume between 2.6 percent and 3.1 percent of GDP – significantly lower than the 1990s average of 3.8%. Indeed, the Department of Defense may shrink to less than ten percent of the total Federal budget.

So forget fiscal kickstarts or even life support machines, the debt situation has more the look of a managed death.

Of course, there are bigger forces at work than merely global economic competition, or even the global projection of military power and the economic fruits that follow in terms of colonisation. Climate change, peak oil and over-population.

The ratchetting down correction is likely to be general to the planet, rather than particular to the US. The death will be that of bubble economics and nation-level power struggles. Which won't be so tragic if some new era economic thinking manages to takes its place.

 

[WhoWee]

So to me, the natural thing to do is to start with that 25% of our population that used to pay income taxes and make them pay income taxes again. To put it in perspective, if that quarter of our society that now freeloads but didn't used to is made to pay an average of $3000 a year, that would add $100 billion dollars to the federal coffers.

Now come on Russ, if the Democrats ever agreed to such a thing - who would ever vote for them?

 

[CAC1001]

No. Because at times like these, you need to get the economy moving - you need to stimulate it, and the only way to do this is to increase spending. Less spending means less jobs and basic economics will tell you this leads to deflation.

That's Keynesian economics, which itself is debatable (government could do no stimulus whatsoever and the economy recover fine on its own, historically the Keynesians claim we have never spent enough on stimulus and yet our economy has always recovered from recessions), which calls for trying to increase aggregate demand, and there are a few ways to do that:

1) Direct fiscal stimulus by the government, which is very debatable. Japan tried spending more than $2 trillion on their $5.5 trillion economy between 1991 and 1995 and it did virtually nothing. In fact, certain economists say that Japan spent more than enough and if anything, all that spending has hampered the Japanese economy by raising up the debt, crowding out private-sector investment, and making too much of the Japanese economy dependent on the government.

Some economists also say that the reason why stimulus did not work in Japan is that the Japanese did not flood their economy with the stimulus all at once, but instead spread it out over a few years.

Well we are spending a tiny fraction proportionally on stimulus of what the Japanese spent, and we didn't flood the economy with it, it too is being spread out. The one good thing the Japanese did get however was that a lot of the spending went into infrastructure development. That's what was intended here, however from what I understand, it hasn't quite happened.

To match Japan, the United States would need to spend probably around $6 trillion in fiscal stimulus and have to have a way to make sure it goes into infrastructure. This money would also need to flood the economy all at once, not be spread out.

All-in-all, Japan has spent more than $6 trillion thus far and has the largest public debt of any country in the industrialized world.

The United States cannot afford to take a risk like that. We enact $6 trillion in fiscal stimulus, that is out right dangerous.

Here is a good article that gives more details: http://www.nytimes.com/2009/02/06/world/asia/06japan.html

2) Demand-side tax cuts - these are tax cuts meant to do the same thing as direct government spending, just instead of having the government take on debt and find ways to spend the money, they give tax cuts to people in the hopes that they will spend the additional money.

3) Helicopter money - this is kind of the same thing as the demand-side tax cut, but instead of per se giving tax cuts, the government takes on debt but instead of spending the money itself, it mails a bunch of checks out to the citizens (to create the effect of helicopters dropping money all over).

The stimulus President Obama signed I believe is a combination of tax cuts and fiscal stimulus.

One can also try to stimulate the economy via supply-side tax cuts, which are meant to stimulate investment and business growth (hence jobs). These taxes usually apply to the upper-income brackets (many small businesses file as individuals via S-Corporations), and corporate tax rates, and capital-gains and dividend tax rates.

Most tax cuts are usually a combination of both supply-side and demand-side, although they may lean more one way or the other. For example, I believe the JFK tax cuts, which were meant to be demand-side, also included some supply-side. The Bush tax cuts also were a combination of demand and supply-side.

As I mentioned above, ruthless spending cuts will depress GDP further. The only rational alternative is to increase taxes.

Increasing taxes will likely depress GDP, not cutting spending of fiscal stimulus that hasn't done much as is and on paper is not near large enough anyhow. If anything, cutting spending will encourage economic growth because investors will stop being as concerned about the debt and deficit (although such spending would have to apply not just to the stimulus but also to government overall.

 

[CAC1001]

BTW, hopefully all US citizens are aware that federal tax rates, income and others, are indeed increasing as of Jan 1, 2011, so we may get an illustration of the effects of (2) very soon.

Here is an interesting article addressing just that; according to Mr. Laffer, the mild amount of economic recovery being seen now is a result of the expected tax increases on the horizon. Time will tell: http://online.wsj.com/article/SB100...386610.html?mod=WSJ_latestheadlines#printMode

The OP's reference answer's the OP's question: no

Well it wasn't per se a question of mine, that is the title of the article.

 

[Al68]

No. Because at times like these, you need to get the economy moving - you need to stimulate it, and the only way to do this is to increase spending. Less spending means less jobs and basic economics will tell you this leads to deflation.

No, less government spending means fewer government-created jobs. Big difference. Most should realize that any money spent by government is taken out of the economy one way or another.

And I don't think we're in any current danger of the U.S. government reducing spending enough for deflation to be our biggest worry.

As I mentioned above, ruthless spending cuts will depress GDP further.

Baloney. Government spending depresses GDP. Government spending is a drain on the economy, despite the illogical nonsense claimed to the contrary by power hungry politicians.

 

[Ygggdrasil]

Is it so much a redistribution of wealth though, or just that the pie has gotten larger, with the higher earners earning more of the pie as it grows larger? Just because the lower-earners may be responsible for a smaller share of the pie than they used to does not mean that their wealth and standard of living haven't continued rising, right? (because the pie grows bigger).

The pie has gotten larger, but most of the growth in wealth has gone to the more wealthy:

In 2004, according to the Congressional Budget Office’s latest official analysis, households in the lowest quintile of the country were making only 2 percent more (adjusted for inflation) than they were in 1979. Those in the next quintile managed only an 11 percent rise. And the middle group was up 15 percent. Do you sense a pattern? The income of families in the fourth quintile — upper-middle-class folks with an average yearly income of $82,000 — rose by 23 percent. Only when you get to the top quintile were the gains truly big — 63 percent.

(source)

This modest growth of household incomes comes despite most households moving from consisting of only one wage earner to two wage earners. Perhaps it is misleading to label this as a redistribution of wealth (income increases in the upper segments of the economy did not come from decreasing income in the lower segments of the economy), but clearly the distribution of wealth in the US has changed significantly. Much of the growth in the US economy has gone toward the wealthy and relatively little has trickled down to the lower segments of the economy.​

Also, is income inequality a bad thing? A free society will always have an unequal outcome. Striving for equality of outcome just will disincentivize effort.

I agree; we should not strive for complete equality of outcomes. However, very unequal distribution of wealth (e.g. one person owns all the wealth, everyone else has nothing) is clearly bad for society as is a very equal distribution of wealth (communism). There is likely some optimum distribution of wealth between these two extremes. I argue that we are not at this optimum and are too far toward the unequal side of the continuum. This inequality is especially troubling from an economic point of view because most of the US economy is built on domestic consumption.​

Wouldn't the top 0.1% of earners be the super-rich who earn most of their money through things like dividends, which are from corporations that are already taxed though?

That was true in the 1960's but not so much today. From the Piketty and Saez paper I referenced in my earlier post:

In the 1960s, top incomes were primarily composed of capital income: mostly dividends and capital gains. The surge in top incomes since the 1970s has been driven in large part by a steep increase in the labor income component, due in large part to the explosion of executive compensation. As a result, labor income now represents a substantial fraction of income at the top. This change in composition is important to keep in mind, because the corporate and estate taxes that had such a strong effect on creating progressivity in the 1960s would have relatively little effect on labor income.

(source)

In this light, the declines in income tax rates on the top earners look even more problematic.​

2) Demand-side tax cuts - these are tax cuts meant to do the same thing as direct government spending, just instead of having the government take on debt and find ways to spend the money, they give tax cuts to people in the hopes that they will spend the additional money.

Correct me if I'm wrong, but wouldn't increasing expenditures by spending a trillion dollars on direct stimulus or decreasing revenues by giving a trillion dollar tax cut have the same effect on the budget deficit (i.e. increasing the debt by a trillion dollars)? The only difference would be that direct stimulus increases this year's deficit while tax cuts increase the next year's deficit.​

 

[CAC1001]

The pie has gotten larger, but most of the growth in wealth has gone to the more wealthy:
(source)

But isn't that to be expected? The big creations of wealth are for example when entrepreneurs start businesses. While this creates wealth for everybody, the owner of the business will get a huge amount for themselves.

For example, if I start a company and grow it to where it is valued at $1 billion, well I am then a billionaire. Yes I have increased the wealth of society by creating jobs for all of my employees, but I created $1 billion for myself, even though I'm one guy.

This modest growth of household incomes comes despite most households moving from consisting of only one wage earner to two wage earners. Perhaps it is misleading to label this as a redistribution of wealth (income increases in the upper segments of the economy did not come from decreasing income in the lower segments of the economy), but clearly the distribution of wealth in the US has changed significantly. Much of the growth in the US economy has gone toward the wealthy and relatively little has trickled down to the lower segments of the economy

Well from what I understand, going by household incomes can be misleading. What one wants to look at are per capita incomes. Here is a link:

http://tv.nationalreview.com/uncommonknowledge/post/?q=ZGQ4ZGM3MjYzNDc2MjA1NzBmMzEyYWQ2OTJjYzYyNjY=

This link also is informative I think:
http://www.creators.com/opinion/thomas-sowell/income-confusion.html

Also remember that income and wealth are two different things.

I agree; we should not strive for complete equality of outcomes. However, very unequal distribution of wealth (e.g. one person owns all the wealth, everyone else has nothing) is clearly bad for society as is a very equal distribution of wealth (communism). There is likely some optimum distribution of wealth between these two extremes. I argue that we are not at this optimum and are too far toward the unequal side of the continuum. This inequality is especially troubling from an economic point of view because most of the US economy is built on domestic consumption.

Well again remember, the pie is not fixed. A wide unequal distribution of wealth does not mean that a few have everything and everyone else has nothing. It just means that of the wealth created in that society, most is concentrated at the top (which is probably normal in a free-market system).

There's a difference between if I have $30 million and you have nothing and if I have $300 million and you have $30 million. Yes, wide disparity in wealth there, but by global standards, we are both wealthy.

A wide unequal distribution of wealth is not bad as long as one is in a society where wealth is being created constantly. Even the poorest American is "wealthy" by Third World standards. Eating a McDonald's Big Mac might be a cheap, crappy food to an American, to a Third World person who eats beans and/or rice once a day, that's a big luxury (and even the beans or rice can be a luxury in some areas).

So while wealth is concentrated at the top, the average American continues to get richer (which is done by the wealthy people---iPods, cellphones, laptops, Big Macs, etc...don't come from nothing).

That was true in the 1960's but not so much today. From the Piketty and Saez paper I referenced in my earlier post:
(source)

In this light, the declines in income tax rates on the top earners look even more problematic.

Well even so, why are the declines in tax rates on the top earners problematic? One should be allowed to keep their hard-earned money I would think.

Correct me if I'm wrong, but wouldn't increasing expenditures by spending a trillion dollars on direct stimulus or decreasing revenues by giving a trillion dollar tax cut have the same effect on the budget deficit (i.e. increasing the debt by a trillion dollars)? The only difference would be that direct stimulus increases this year's deficit while tax cuts increase the next year's deficit.​

In terms of the deficit, I'd think so, you spend $1 trillion or give $1 trillion in taxes, you shorted the government $1 trillion one way or another. The question is which one is more effective at creating demand.

Also, just some confusion on my part, but wouldn't tax cuts increase that year's deficit...? Or is it with tax cuts, you have to wait and see how much money is lost before calculating the deficit? So with fiscal stimulus, you known exactly how much you are blowing up the deficit that year, but with tax cuts, you have to wait and see how much revenue is lost, so it blows up next year's deficit...?

 

[apeiron]

Also remember that income and wealth are two different things.

And stats show that genuine wealth has stagnated despite steady GDP rise.

http://www.rprogress.org/sustainability_indicators/genuine_progress_indicator.htm

You have got to measure the right things to judge progress as is now being recognised.

Stiglitz commission: Report by the Commission on the Measurement of Economic Performance and Social Progress

http://www.stiglitz-sen-fitoussi.fr/documents/rapport_anglais.pdf

 

[phyzguy]

Well even so, why are the declines in tax rates on the top earners problematic? One should be allowed to keep their hard-earned money I would think.

I think most would agree that one should be allowed to keep their hard-earned money. But if we look at the wealthy, what allows them to accumulate such large amounts of money. Take a case like Bill Gates - how is he able to accumulate 10's of billions of dollars? The answer is because there is an infrastructure in place that supports him, including such things as roads, laws, police protection, the internet, the educational system, quality medical care, the stock market, etc., etc. If you don't believe this is the case, try going to Somalia and setting up a computer company. All of this is provided by state and federal governments. The question is, are the wealthy paying their fair share to support the infrastructure that allows them to get rich? I would argue that the answer is no, and there is nothing wrong with asking those who benefit the most from what government provides to pay a larger share of maintaining it.

 

[Gokul43201]

So to me, the natural thing to do is to start with that 25% of our population that used to pay income taxes and make them pay income taxes again. To put it in perspective, if that quarter of our society that now freeloads but didn't used to is made to pay an average of $3000 a year, that would add $100 billion dollars to the federal coffers.

I've read this more than a few times now and it's always baffled me. As a post-doc earning in the 2nd lowest quintile, I pay a significant tax (twice the number that you recommend above). Even as a grad student earning in the lowest quintile, I used to pay non-negligible Fed taxes. Heck, I even paid a SS tax, which as a foreigner on a temporary visa, I can't expect to benefit from. So how is it that so many people earning more than I do, get away with paying no (or negative!) Fed taxes? Does it take lots of dependents to pull that off?

 

[mheslep]

Here is an interesting article addressing just that; according to Mr. Laffer, the mild amount of economic recovery being seen now is a result of the expected tax increases on the horizon. Time will tell: http://online.wsj.com/article/SB100...386610.html?mod=WSJ_latestheadlines#printMode

From the article, full list of increases:

On or about Jan. 1, 2011, federal, state and local tax rates are scheduled to rise quite sharply. [...] the highest federal personal income tax rate will go 39.6% from 35%, the highest federal dividend tax rate pops up to 39.6% from 15%, the capital gains tax rate to 20% from 15%, and the estate tax rate to 55% from zero.

So much for no tax increases on those making less than $250k/year.

 

[CAC1001]

I think most would agree that one should be allowed to keep their hard-earned money. But if we look at the wealthy, what allows them to accumulate such large amounts of money. Take a case like Bill Gates - how is he able to accumulate 10's of billions of dollars? The answer is because there is an infrastructure in place that supports him, including such things as roads, laws, police protection, the internet, the educational system, quality medical care, the stock market, etc., etc. If you don't believe this is the case, try going to Somalia and setting up a computer company. All of this is provided by state and federal governments. The question is, are the wealthy paying their fair share to support the infrastructure that allows them to get rich? I would argue that the answer is no, and there is nothing wrong with asking those who benefit the most from what government provides to pay a larger share of maintaining it.

Of course infrastructure is needed (although healthcare IMO should be mostly private-sector, not government---the stock exchanges also are not government-owned I don't think), and I have no problem with a progressive tax rate where the higher-earners pay more than the lower earners, but I think that overall, the higher-earners pay more than their fair share.

 

[Academic]

I've read this more than a few times now and it's always baffled me. As a post-doc earning in the 2nd lowest quintile, I pay a significant tax (twice the number that you recommend above). Even as a grad student earning in the lowest quintile, I used to pay non-negligible Fed taxes. Heck, I even paid a SS tax, which as a foreigner on a temporary visa, I can't expect to benefit from. So how is it that so many people earning more than I do, get away with paying no (or negative!) Fed taxes? Does it take lots of dependents to pull that off?

I don't really know, but I have never paid federal takes ever in over a decade of working (and have gotten 'negative' tax before). I have no idea what quintile I am in, but I have never yet made over 15k a year and neither has my wife. We have no dependents or anything special like that. We expect to make more this coming year, and do now finally expect to pay taxes. I hope they arnt high!

 

[Office_Shredder]

I've read this more than a few times now and it's always baffled me. As a post-doc earning in the 2nd lowest quintile, I pay a significant tax (twice the number that you recommend above). Even as a grad student earning in the lowest quintile, I used to pay non-negligible Fed taxes. Heck, I even paid a SS tax, which as a foreigner on a temporary visa, I can't expect to benefit from. So how is it that so many people earning more than I do, get away with paying no (or negative!) Fed taxes? Does it take lots of dependents to pull that off?

Everyone pays SS tax, including the half that pay no income taxes. It doesn't take a lot of dependents; see the end here:

http://finance.yahoo.com/news/Nearly-half-of-US-households-apf-1105567323.html?x=0&.v=1

But income tax rates were lowered at every income level. The changes made it relatively easy for families of four making $50,000 to eliminate their income tax liability.

Here's how they did it, according to Deloitte Tax:

The family was entitled to a standard deduction of $11,400 and four personal exemptions of $3,650 apiece, leaving a taxable income of $24,000. The federal income tax on $24,000 is $2,769.

With two children younger than 17, the family qualified for two $1,000 child tax credits. Its Making Work Pay credit was $800 because the parents were married filing jointly.

The $2,800 in credits exceeds the $2,769 in taxes, so the family makes a $31 profit from the federal income tax. That ought to take the sting out of April 15.

 

[CAC1001]

I've read this more than a few times now and it's always baffled me. As a post-doc earning in the 2nd lowest quintile, I pay a significant tax (twice the number that you recommend above). Even as a grad student earning in the lowest quintile, I used to pay non-negligible Fed taxes. Heck, I even paid a SS tax, which as a foreigner on a temporary visa, I can't expect to benefit from. So how is it that so many people earning more than I do, get away with paying no (or negative!) Fed taxes? Does it take lots of dependents to pull that off?

From what I understand, I think it is that there are now so many available deductions and write-offs or whatnot for say a family of four let's say, that for around 25% (or is it 40%?? I've heard that number too), while they pay Federal income taxes, they get more back in their tax return from the government so that ultimately they are not paying Fed taxes.

Part of this is from the Bush tax cuts, because Bush doubled the child tax credit among some other things.

The notion that 40% of the population "doesn't pay taxes" as some Republicans put it, is incorrect, because even if they aren't paying Fed taxes, there's still local, state, property, FICA, sales, AMT, etc...taxes.

If you're single with no dependents, then you will pay taxes.

EDIT: Okay, the previous posts explain it much better, they were posted while I was writing this.

 

[Gokul43201]

Everyone pays SS tax, including the half that pay no income taxes.

Well, if you're a US citizen that is eventually going to claim SS benefits, you ought to pay a SS tax. If you are a foreigner on a temporary visa (of the kind that does not come with an intent to emigrate, such as an F or J visa), you are essentially paying into a system that you can not expect to see any benefit from, unless you choose to pursue immigration.

It doesn't take a lot of dependents; see the end here:

http://finance.yahoo.com/news/Nearly-half-of-US-households-apf-1105567323.html?x=0&.v=1

Thanks (to CAC too)! I guess that's what does it, the dependents. Makes sense.

PS: Not saying it makes sense for some people to be paying zero or negative taxes (I don't think it does); only that it makes sense why I have been paying taxes when a large number of others with similar incomes seem not to be.

 

[SonyAD]

Economic Neoliberalism has been tried to death. Then they took its corpse and tried with it too.

How about you can't leverage with what you don't have or other people's money?

How about separating investment and commercial banks again.

How about banning credit default swaps?

How about banning mortgage repackaging and selling. You close the mortgage, you own the mortgage.

How about increasing the fractional reserve?

Etc.

 

[russ_watters]

Not the only, not even the majority, but the largest single tax source:

[PLAIN]http://www.taxpolicycenter.org/briefing-book/background/numbers/images/Numbers_Figure-1_What-are-fed-govts-sources-of-revenue_3.gif[/QUOTE]
Thanks for that - I had a misunderstanding of how the deficit was calculated: I thought it excluded entitlements because entitlements are held in a different pot due to the fact that they are essentially government mandated savings plans.

But for the purpose of my first post and my opinion on the situation, it doesn't really change anything. Entitlement spending is a separate problem and should be treated as such. It is taxed separately and the money goes back to the people who funded it (sorta). As such, it is different from the money spent on the day-to-day functioning of the government.

 

[russ_watters]

mhselp's correction to my previous post aside, I had a lot more to say about this that I didn't as I was posting from a blackberry, during a break from work. I saw a lot of people pointed out flaws, but I'd like to add my $.02:

I take issue with the idea that these people are freeloading.

Well, the term is qualatative and so is purely an opinion, so what is important is to make sure we're clear on the facts and whether the facts point to a situation that should be changed (and how).

While these people may not owe any federal income tax, income tax is not the only federal tax. For example:

(source)

The example of using the middle quintile is problematic because it represents the border (roughly) between the "freeloaders" and the rest, not the typical or average "freeloader".

In addition, as I said to mhselp, Social Security and Medicare spending is earmarked to be invested for and returned to those who paid into it (it's a crappy scheme and Madoff is now in jail for something similar, but nevertheless, that's the goal). So it is inapproprate to include those taxes in someone's "contribution". Those taxes don't go toward paying the day-to-day spending of the government: the military, national parks, FAA, border patrol, weather service, NASA, etc. People who don't pay income tax get those things for free.

I'm also not willing to quibble about the couple of percent those people pay in their share of several minor federal taxes. When comparing a couple of percent to the ~20% or so those in the upper levels pay, the difference is vast. More on this later...

This one is a huge factual error (the first phrase), already pointed out by others:

... it is also true that the ability of this group to pay taxes has decreased as well. Indeed, since the 1960s, income inequality has risen in the US.

No. The most objective measure of a group's ability to pay taxes is inflation adjusted income. Ie, an increase in inflation adjusted income means that a person has more money to spend on the things people spend money on: cars, houses, computers, etc. The fact of the matter is, household incomes for all segments of the population have increased since the 1960s. For example, from 1967 to 2008, the household income of the bottom quintile has increased by 30%. http://www.census.gov/hhes/www/income/data/historical/household/h03AR.xls

The logic behind income inequality being an irrelevancy caused by jealousy is easily demonstrated:
Suppose you get a 30% raise. You now have more money to spend on a better car, bigger house house, computer, etc. You have more ability to pay taxes while still improving your standard of living. But your neighbor is already wealthy and he gets an 86% raise (the upper quintile's increase since 1967). Now he can buy a much bigger house, much better car, etc. Getting upset at the inequality despite the fact that your situation has improved is the very definition of envy.

Finally, the high income inequality seems to be an underlying problem contributing to all these issues, and therefore, any policy that wants to be effective in the long term must address this issue.

What issues? You've merely stated that income inequality is an issue - you haven't connected it to other issues.

One thing that everyone knows but numbers are rarely attached to is the fact that in addition to paying more taxes, the poor also get more back from the government than the rich do. A person's net contribution must be the difference between what they pay and what they get back to be meaningful. And as it turns out, even if you include the entitlements linked to income (those that pay back more for the well-off), the discrepancy between the upper and lower brackets is huge. The ratios of total receipts from the government to total contributions by the government (all levels) by bracket are:

First Quintile: 8.21:1
Second Quintile: 2.51:1
Third Quintile: 1.30:1
Fourth Quintile: .77:1
Fifth Quintile: .41:1

Put another way, for every dollar a poor and wealthy person pay in taxes, the poor person gets back 20x more from the government than the wealthy person does. This data is from 1994, so no doubt the discrepancy is much larger today.

http://www.taxfoundation.org/files/wp1.pdf

 

[russ_watters]

No. Because at times like these, you need to get the economy moving - you need to stimulate it, and the only way to do this is to increase spending. Less spending means less jobs and basic economics will tell you this leads to deflation.

There are two problems with this view:

First is the implicit assumption that government spending is free. It isn't. Extra spending now that increases the GDP must be paid back later and will decrease the GDP. The net primary result is a wash. Secondary effects are tougher, but any permanent jobs saved would have to be weighed against interest on the debt.

Second is the implicit assumption that government spending is equivalent to private sector spending. But the reality is that government employees are paid more for less production than their civilian counterparts and government projects are typically more wasteful than private ones (because they aren't required to profit). Most people know these things, but many ignore them.

http://www.downsizinggovernment.org/overpaid-federal-workers

(maybe it would even be possible to get rid of the 10% tax rate too with this arrangement - it's crazy to tax people who are living below the poverty line).

As discussed earlier, there is a full 25% of the population above the poverty line who does not pay federal income tax.

 

[Gokul43201]

There's another aspect to the tax cuts vs. govt spending debate that hasn't been touched upon: whether or not certain forms of govt spending are needed/beneficial in the long term.

Resurfacing a road you drive on (for instance) can reduce your fuel consumption, extend vehicle life and reduce maintenance expenses, reduce commute times and related inefficiencies, reduce hospital visits from accidents, etc. Fixing levees near a hurricane plagued population center, to pick another example, could save tens or hundreds of billions of dollars in emergency relief expenditures. Fixing bridges, installing energy saving improvements, building nuclear power plants, improving public transit systems ... all have plenty of long term benefits that rarely get figured in the "how many jobs did you create this month" or "what was the seasonally adjusted GDP growth over this past quarter" calculations.

My complaint against govt spending is not based on a belief that it is, by definition, inherently harmful to the GDP, (and setting aside the issue of debt widening) but rather, that petty politicking often takes it along directions that are not very helpful.

 

[Ygggdrasil]

But for the purpose of my first post and my opinion on the situation, it doesn't really change anything. Entitlement spending is a separate problem and should be treated as such. It is taxed separately and the money goes back to the people who funded it (sorta). As such, it is different from the money spent on the day-to-day functioning of the government.

In addition, as I said to mhselp, Social Security and Medicare spending is earmarked to be invested for and returned to those who paid into it (it's a crappy scheme and Madoff is now in jail for something similar, but nevertheless, that's the goal). So it is inapproprate to include those taxes in someone's "contribution". Those taxes don't go toward paying the day-to-day spending of the government: the military, national parks, FAA, border patrol, weather service, NASA, etc. People who don't pay income tax get those things for free.

Because this discussion is about the federal budget deficit, you can't ignore social security and medicare spending as a separate issue. It is the issue. In 2007, entitlements (social security and medicare) accounted for 53% of spending in the federal budget (discretionary spending, including defense spending, accounted for 38% of spending and interest payments accounted for the remaining 9% of spending) (1). Because of the demographics of the US (the baby boomer generation is getting ready to retire), the situation will only get much worse. In 2020, entitlements are estimated to account for 57% of spending (1). Indeed, if you examine the trends over time for entitlements (mandatory spending) and discretionary spending, you'll see that discretionary spending has been decreasing while mandatory spending has been increasing (2).

I do concede the points that these people are getting the benefits of discretionary spending for free and that the poor receive more benefits relative to the taxes they pay than the wealthy. Of course, this is an issue of practicality. The poor cannot afford to pay for these services and we, as a society, have decided thorough our tax laws that instead of taxing them further into poverty, the rich will pay higher taxes to compensate. I will note that the the rich indirectly benefit from this scheme because combating poverty helps lower crime, improve their communities, and provides them with a (hopefully) educated workforce.

Furthermore, it is also somewhat problematic to discuss federal tax policy without considering state tax policy. Because sales taxes are a major source of state revenues (3), the federal taxes must necessarily be overly progressive in order to correct for the regressive nature of the sales tax. Indeed, when you take state and federal taxes into account, a family of four earning $50,000 pays exactly the same share of its income (30 percent) on taxes as one earning $150,000 (4, based on 2003 data). Thus, over a fairly broad range of incomes, overall tax rates are fairly flat. Only at the extremes does the progressive nature of the tax system manifest itself.

Anyway, my main point is that one explanation for the fact that the lower segment of the economy seem to contribute a lower share of tax revenue than before is the fact that the lower segments of the economy receive a lower share of the total income than before. While you seem to suggest that the tax burden (which I'll define as share of taxes paid/share of income earned) of the poor has decreased since the 1970's, I argue that this is not the case. As I mentioned in my previous post: in 1960 the top 0.1% of earners earned ~3% of the total income and accounted for ~8% of taxes paid. In 2004, the top 0.1% of earners more than doubled their share to the total income to ~7% but accounted for only ~11% of taxes paid (5).

As for my point on income inequality, I think it is problematic because the US economy is currently dependent on domestic consumption. An economic system where most of the profits go to a few at the top but depends heavily on spending by the many in the bottom and middle seems unsustainable. Is it fair that the few at the top get most of the profits? Yes. Market forces have largely dictates this shift as most of the economic growth in the past few decades has been in areas that require significant education and highly skilled workers. However, are we willing to make a trade-off between fairness and increased economic efficiency (which I believe would result from lesser economic inequality, although others may believe otherwise)? This is, of course, a value judgment, but I believe we would be wise to make that trade-off (how to achieve such a trade-off, however, is a complicated issue).

References:
1. Congressional Budget Office. 2010. http://cbo.gov/ftpdocs/108xx/doc10879/MandatorySpending5-12-10.pdf
2. Hale Stewart. 2010. "An In-Depth Look At the Federal Budget." http://www.fivethirtyeight.com/2010/02/in-depth-look-at-federal-budget.html
3. Roberton Williams. 2008. http://www.taxpolicycenter.org/briefing-book/state-local/revenues/state_revenue.cfm
4. Kevin A. Hassett. 2007. American Enterprise Institute. http://www.aei.org/issue/26125
5. Piketty and Saez. 2007 "How Progressive is the U.S. Federal Tax System? A Historical and Intenational Perspective." Journal of Economic Perspectives 21: 3-24. http://elsa.berkeley.edu/~saez/piketty-saezJEP07taxprog.pdf

 

[CRGreathouse]

While [russ_watters seems] to suggest that the tax burden (which I'll define as share of taxes paid/share of income earned) of the poor has decreased since the 1970's, I argue that this is not the case. As I mentioned in my previous post: in 1960 the top 0.1% of earners earned ~3% of the total income and accounted for ~8% of taxes paid. In 2004, the top 0.1% of earners more than doubled their share to the total income to ~7% but accounted for only ~11% of taxes paid (5).

I'm curious as to how well-off the poor are, tax-wise, in absolute rather than relative terms. (I might prefer a narrower definition of poor as well -- bottom 50%, say, rather than bottom 99.9%.) What do they pay for entitlement programs (FICA, etc.), what do they receive in entitlement (SS, EIC, etc.), and what do they pay in general (non-entitlement) taxes.

Consider comparing pre-Social Security to today. The poor pay much more, but that's all in entitlement (transfer payments) that should not have a net effect on their well-being -- ostensibly, it improves it. It's not clear to me how much we've moved in that direction compared to having the 'poor' shoulder a larger burden of nontransfer payments.

 

[russ_watters]

Furthermore, it is also somewhat problematic to discuss federal tax policy without considering state tax policy. Because sales taxes are a major source of state revenues (3), the federal taxes must necessarily be overly progressive in order to correct for the regressive nature of the sales tax. Indeed, when you take state and federal taxes into account, a family of four earning $50,000 pays exactly the same share of its income (30 percent) on taxes as one earning $150,000 (4, based on 2003 data). Thus, over a fairly broad range of incomes, overall tax rates are fairly flat. Only at the extremes does the progressive nature of the tax system manifest itself.

Again, it is misleading to include FICA in that. FICA is capped at $106,000, so if someone in an upper bracket wants to save a similar fraction of their earnings, they have to do it themselves. And that is indeed the biggest difference between the two pictures: those with a $50,000 income tend to save nothing while those with a $150,000 income tend to save about 8%.

Anyway, my main point is that one explanation for the fact that the lower segment of the economy seem to contribute a lower share of tax revenue than before is the fact that the lower segments of the economy receive a lower share of the total income than before. While you seem to suggest that the tax burden (which I'll define as share of taxes paid/share of income earned) of the poor has decreased since the 1970's, I argue that this is not the case. As I mentioned in my previous post: in 1960 the top 0.1% of earners earned ~3% of the total income and accounted for ~8% of taxes paid. In 2004, the top 0.1% of earners more than doubled their share to the total income to ~7% but accounted for only ~11% of taxes paid (5).

It isn't very useful to talk about such a tiny fraction of the population (the top .1%). What has the share for the 5 quintiles done? Your link is broken... And note, again, that SS taxes and benefits are capped, which skews the statistics or the upper groups in a misleading way when it is included in the states. And also, think about those numbers for a sec: someone in the top .1% pays 8% of the taxes. Put another way, those people are paying eighty times their share of the taxes. Imagine going to a movie theater and being charged $800 while the person next to you is charged $10 for the same ticket. That's the situation we have.

In any case, this represents a dangerous situaion (implied by someone above), where you have a small minority of the population paying most of the taxes and a large majority paying none and able to vote to continue that. It's an untenable situation.

 

[Gokul43201]

And also, think about those numbers for a sec: someone in the top .1% pays 8% of the taxes. Put another way, those people are paying eighty times their share of the taxes. Imagine going to a movie theater and being charged $800 while the person next to you is charged $10 for the same ticket.

Russ, that sounds completely wrong (unless I've misread some of your earlier posts) - perhaps one should spend a little more than a second thinking about the numbers! Or are you suggesting that a flat tax would also be unfair, and that everyone should pay the same dollar amount in taxes, irrespective of income? In any case, it's hardly obvious that we all buy the "same ticket" (all consume the same share of Federal resources, irrespective of our lifestyles).

 

[SonyAD]

As usual, everyone harpers on social programs but wilfully ignores the elephant in the sitting room.

"Defence" budget and spending, corporate welfare, handouts and bailouts, etc.

Poignant also how the right wing sees pension plans and similar schemes as generational theft, pyramid schemes, etc. Unless they're private sector.

 

[mheslep]

As usual, everyone harpers on social programs but wilfully ignores the elephant in the sitting room.

"Defence" budget and spending, corporate welfare, handouts and bailouts, etc.

Poignant also how the right wing sees pension plans and similar schemes as generational theft, pyramid schemes, etc. Unless they're private sector.

Please see the guidelines for P&WA:
https://www.physicsforums.com/showthread.php?t=113181

2) Citations of sources for any factual claims (primary sources should be used whenever possible).

 

[russ_watters]

Russ, that sounds completely wrong (unless I've misread some of your earlier posts) - perhaps one should spend a little more than a second thinking about the numbers! Or are you suggesting that a flat tax would also be unfair, and that everyone should pay the same dollar amount in taxes, irrespective of income? In any case, it's hardly obvious that we all buy the "same ticket" (all consume the same share of Federal resources, irrespective of our lifestyles).

No, I'm not suggesting a perfectly flat tax. What I have argued so far is just that the system we have now is too progressive. What I advocate is a system where those who are truly in need (mostly the truly poor and children) receive assistance and those who are not truly in need pay taxes. For those who pay taxes, the system should still be progressive, but not too much. What "too much" is is a lot tougher to define, but IMO, the bigger problem is the ~25% of people who are not under the poverty line who don't pay federal income taxes. I don't have the stats to back it up, but it is my beleif that the reason the $50-$150k groups are so flat is because the elimination of taxes for the <$50k crowd has required a heavier burden for the middle class.

Regarding the "ticket", let's examine a more real-world example: roads.

Major roads are funded primarily by user fees tied to usage (tolls, gasoline taxes, etc), so the more you drive, the more you pay. Rich people tend to drive more than poor people, so they pay more in tolls. What the exact ratio is, I'm not certain, but let's say for the sake of argument it is 2:1. So a rich person would pay twice as much, but get twice the benefit. Overall, the payment is exactly a 2:2 (reduces to 1:1) ratio of payment to usage.

But what about the federal stimulus-based fundinig? Those signs you see that tell you a specific project was funded by the ARRA. These are funded from the general federal tax fund, ie. by general federal tax revenue: the federal income tax (again, the Social Security portion is not a part of this). So in the example someone else provided earlier where a family with a $50k income pays nothing in federal income taxes, they ride that new bridge or enjoy the benefit of that repaved road for free. That would be a 0:.5 ratio of payment to usage (assuming they ride half as much as a very wealthy person). At the same time, a person who is part of the .1% group that pays 8% pays 80x a single share. Since they ride twice as much as aveage, that's an 80:2 or 40:1 ratio of payment to usage.

Now how can the government operate on such vastly different principles of operation at the same time? Consider that the next time the government wants to spend money on something that isn't really a government function (for example, building a stadium for a privately owned professional sports team), that's a redistribution of wealth from rich to poor on a vast scale.

 

[mheslep]

[...] In any case, it's hardly obvious that we all buy the "same ticket" (all consume the same share of Federal resources, irrespective of our lifestyles).

I like to point out when this point comes up from time to time, especially in this student laden forum, that higher education is far and away the most egregious example of regressive taking via (state) taxes from the less fortunate, those on their way to becoming mechanics and working construction, and giving to the middle and upper classes who score better and take advantage of the large share of the education funding. I doubt any other part of government funding and revenue collection even comes close to be so regressive.

 

[mheslep]

The pie has gotten larger, but most of the growth in wealth has gone to the more wealthy:
(source)
​

Careful there. That NYT source references income quintiles, a statistical construction, not people. People can, http://www.forbes.com/2007/06/22/billionaires-gates-winfrey-biz-cz_ts_0626rags2riches.html" , move in and out of statistical groups over time. In the US, the lowest quintile is constantly being infused with immigrants per my reading.​

 

[CAC1001]

Tax policy is a fascinating subject when you think about it.

 

[mheslep]

And stats show that genuine wealth has stagnated despite steady GDP rise.

http://www.rprogress.org/sustainability_indicators/genuine_progress_indicator.htm

The 'stats'? 'Genuine'?