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

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  1. Jun 27, 2010 #1
    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.
     
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  3. Jun 27, 2010 #2

    phyzguy

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    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
     

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  4. Jun 27, 2010 #3
    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.
     
  5. Jun 27, 2010 #4
    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/ [Broken]
     
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  6. Jun 27, 2010 #5

    russ_watters

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    And at the same time, the fraction paying zero or negative income tax is the highest in recent memory, by a large margin:
    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.
    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.
     
  7. Jun 27, 2010 #6
    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.
     
  8. Jun 28, 2010 #7

    Ygggdrasil

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    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:
    (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
     

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  9. Jun 28, 2010 #8
    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.
     
    Last edited: Jun 28, 2010
  10. Jun 28, 2010 #9
    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.

    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?
     
  11. Jun 28, 2010 #10

    Office_Shredder

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    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
     
  12. Jun 28, 2010 #11

    russ_watters

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    Ygggdrasil, the OP is about the federal budget deficit and the only tax that affects it is the federal income tax.
     
  13. Jun 28, 2010 #12

    mheslep

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    Do you have a source for that?

    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:
    _a_a_a_a_a_a_a_a_a_a_a_a_a_a_a_a_a_a_a_a_a_a_a_a_a_a_i_a_a_a_a_a_a_a_a_a_a_a_a_a_a_a_a_a_a_g_g_g.png

    Federal income tax as a % of GDP:
    _a_a_a_a_a_a_a_a_a_a_a_a_a_a_a_a_a_a_a_a_a_a_a_a_a_a_i_a_a_a_a_a_a_a_a_a_a_a_a_a_a_a_a_a_a_g_g_g.png

    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 [Broken]

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

    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" [Broken] 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.
     
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  14. Jun 28, 2010 #13

    mheslep

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    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 [Broken]
     
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  15. Jun 28, 2010 #14

    mheslep

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

    http://www.ourfiscalfuture.org/can-income-tax-rate-hikes-close-the-deficit/ [Broken]
     
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  16. Jun 28, 2010 #15

    chemisttree

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    The source for the 91% top rate is http://en.wikipedia.org/wiki/Internal_Revenue_Code_of_1954" [Broken]. 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.
     
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  17. Jun 28, 2010 #16

    mheslep

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    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).

    http://www.state.nj.us/governor/news/news/552010/approved/20100218a.html


    Maryland acted similarly with a high top rate and found net revenues actually fell, and with those people gone, probably irretrievably so.
     
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  18. Jun 28, 2010 #17
    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.

    According to wiki:

    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).

    As I mentioned above, ruthless spending cuts will depress GDP further. The only rational alternative is to increase taxes.
     
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  19. Jun 28, 2010 #18

    mheslep

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    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 [Broken] 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.
    Why did you choose to ignore the prior sentence referencing the Hsing paper:
    Given the very recent results in Greece, I think raising taxes as the main response to a huge budget defecit is insane.
     
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  20. Jun 28, 2010 #19

    apeiron

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    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.

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

    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.

    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?

    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.
     
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  21. Jun 28, 2010 #20
    Now come on Russ, if the Democrats ever agreed to such a thing - who would ever vote for them?:uhh:
     
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