Can We Afford to Raise Taxes On High Incomes? Can We Afford Not To?


Another tax related post.  It appears that taxes, in particular, taxes on the top income bracket will be a major topic of debate propaganda for the next year and  a half until the next presidential election.  Part of the reason is because the tax deal done last December (2010) between Republicans and Obama last December (2010) perpetuated the Bush-era tax cuts until Dec. 31, 2012, just after the election.  Another reason is because the Republicans in Congress, led by Congressman Paul Ryan have passed a proposed budget that will cut the top individual federal marginal income tax rate to 25%, ten points below the even the Bush-era 35%!  (source: Reuters)

The Republicans and Tea Partiers basically offer three arguments for cutting the top tax rates on high-income folks. None of the arguments hold up under examination.  First, they argue that the U.S. is too heavily taxed already. So, let’s compare the U.S. to other countries in the graph at the right from CBPP.  The U.S. is in fact, a relatively low tax country compared with other developed, industrialized nations.  (although to be fair, we should note that the other countries on the graph pay for healthcare for all their citizens and most of it comes from the government budgets).

So let’s move onto the second argument.  Republicans like to argue that cutting taxes for the top end, for the rich and high income brackets will create jobs.  They repeatedly call these high-end income folks the “job creators”.  Apparently out of some pique, these people refuse to “create jobs” for us lesser people whenever their tax rates exceed some number around 35%.  Unfortunately, this concept has been tried before and found wanting.  Simply put, there’s no empirical support for the idea that cutting tax rates primarily on the top end bracket will create jobs.  See here and here for more details. George Bush and the Republican Congress cut taxes and tax rates in 2001. At the end of the decade, in December 2010, the net increase in jobs (employment) in the U.S. was zero. That’s right. Not a single net new job.  No more people were employed in Dec 2010 than were employed before the tax cuts.  As I’ve discussed before, this doesn’t mean that Keynesian theory that cutting total taxes collected on from the nation has been disproven. Rather it means that how the taxes are cut matters.  Tax cuts only work to stimulate the economy and create jobs when they create new spending.  Tax cuts on the top brackets don’t create new spending, though.  They create a boom market in fixed luxury assets such as mansions in the Hamptons, Vail, or outside the country.  Tax cuts on the top brackets help fuel investments in off-shore funds and overseas entities, but they don’t really drive much spending here at home, at least not the kind of spending that drives good jobs and middle-class incomes.  Let us not make a mistake, while the Bush-era tax cuts included some minor cuts for lower income brackets, the overwhelming benefit accrued to the top bracket, as shown below (again from CBPP).  For more details and to see the real empirical record of tax rates vs job creation/economic growth, see Presimetrics, a site and book well worth the read.

Now let’s consider the third argument often provided as to why we need to cut tax rates for the top bracket.  Strange as it may sound, but the argument is offered that it’s the fair thing to do.  I know when you look at comparable average tax rates by income bracket like I did here and here, that it seems like the tax code is already quite fair to people earning a million dollars or more.  Yet their argument goes that it’s the richest people who pay for most of the government’s total taxes paid.  They cite the fact that the top income bracket people pay the majority of all tax dollars collected by the government.  That’s true.  But they neglect to say that it’s because the top bracket gets the dominant share of income in the U.S, not because the tax rate is too high.  Indeed, the top bracket payers are the only ones who have really benefitted in the last 30 years and seen their incomes grow substantially.  See the accompanying CBPP chart to see how the top 1% has seen it’s income rise 281% since 1979 (as it’s tax rates have been on a long down-hill slide), while the lower 80% barely grew 25% income.  The reality is that the top bracket pays the majority of tax dollars because they get the majority of the nation’s income.  Yes, the income distribution numbers are that out of whack.  The top 1% of households by income get a whopping 17.9% of all national income.  That’s just the top 1%!  Their share was only 7.5% 30 years ago.  (source: CBPP)So, actually the fair thing would be for the top bracket to pay a little more since they’ve benefitted the most from the current tax regime.

During the 30 year time frame that the top bracket has been raking in a larger and larger share of the national income while seeing their income tax rates decline, the lower brackets, the ones with incomes below $100,000 have seen their payroll tax rates double to build a giant Social Security trust fund.

Overall, I think we can afford to raise tax rates on the high income tax bracket.  In fact, if anything, there are good reasons to raise tax rates on the high end. First, since our government persists in it’s belief that it must borrow to finance a deficit (an unnecessary self-imposed constraint) and since many politicians, including those Republicans, think it’s a good thing to reduce the deficit (opinion I do not share), then we should.  As I observed with the post on the do-nothing plan, letting the Bush-era tax cuts expire and letting the existing law take force in January 2013 to raise the top tax bracket to 39%, which it was during the Clinton low unemployment years is a good plan. Let’s see what happens when if we allow the Bush tax cuts to expire and let the top rate go back to the 90’s era 39% vs. keeping the present 35% rate.  Again, CBPP obliges.

A strong argument can be made that the top bracket benefits disproportionately from the work of the government.  It’s not the poorest households that have investments in the middle east and around the world that are protected by the U.S. global military presence. It’s the richest. Time to pay the bill.

Pity the Rich and Powerful – Won’t You Help?

Hugh Pickens at Slashdot reports how a Wisconsin Congressman has been complaining that it’s tough to make ends meet on his meager $175,000 congressional salary (complete with extensive benefits including healthcare, defined benefit pension, paid staff, etc).  But once a video got out of him complaining about his low pay (which is more than 3 times the average of the people he represents), it seems the Republican party in his home county want to recall the video and threaten anybody who shows it with copyright infringement.

“The Examiner reports that Wisconsin Republicans claim that no one else can republish a video of United States Representative Sean Duffy (R-WI) complaining about how he is ‘struggling’ to get by on his $174,000 salary without their permission, even though they originally released the video on YouTube for the whole world to see and now the GOP is trying to take legal action to stop anyone else from republishing the video. The tape caused a stir for Duffy, a first-term conservative best known for his past as a reality TV show star on MTV’s The Real World after Democrats flagged the comments about his taxpayer-funded salary which is nearly three times the median income in Wisconsin and criticisms began to flow Duffy’s way. Here’s a one-minute clip, excerpted from roughly 45 minutes of video of the public Duffy townhall, that the Polk County GOP doesn’t want anyone to see.”

In the interest of helping, some in Wisconsin are asking for donations:

Pity the Rich. It’s So Hard to Get By.

A couple of items that remind me of the discussions last year about tax cuts.  The major bone of contention in last December’s tax cut deal was over whether the Bush era tax rate cut for the top income bracket should be extended. You may remember that it the Bush tax cuts were originally scheduled to expire January 1, 2011. But Republicans in Congress refused to renew extended unemployment benefits for the unemployed unless the tax cuts for the upper income bracket was extended.  The top bracket starts taxing income above $209,000 (married, file jointly) at 33% and 35% for income above $373,000. ( source). Note only income above these limits gets taxed at these rates.  Income up to this limit pays lower rates like everybody else.  The debate was partly framed as a question about whether “the rich” should pay higher taxes.

At the time there was a lot of complaints from people who were in these brackets, making this kind of money. They complained that they were “not rich”, they certainly didn’t “feel rich”, and that they too had a “hard time making ends meet.”  What they didn’t understand is that “rich” is a relative term. It’s how much money you make (or wealth you possess) relative to everybody else.  It is not a question of whether you “have everything you want” or whether you can manage your budget to make sure expenses are less than your income.  Everybody has that problem with the possible exception of those religious types that have managed to totally transcend their human material wants.  Others claimed that somehow “living in New York/Beverly Hills/Washington means that a high income isn’t rich.  I even had a lobbyist for the insurance industry try to tell me in a televised debate that people making $250,000 in Beverly Hills were not rich.  But it is.

The plain truth is that very few people make that kind of money.   Yes, $250,000 isn’t much if you compare yourself to Wall St. execs that pay themselves more than $20 million per year. But you’re still rich compared to the entire population.

The confusion still exists. Ezra Klein of the Washington Post points out:

Even in New York City, $250,000 is rich

income_distribution_in_new_york_city.png

Arguments over income taxes tend to get bogged down in arguments about who is really “rich.” And what you hear then is that rich in Ohio and rich in New York City are different. But how different?

According to the Census Bureau, only 6.3 percent of New York City’s households pulled in more than $200,000. So if you’re a household making $250,000 or more, you’re easily in the top 5 percent — even in New York City.

Now, it’s true that those people might not “feel” rich. There’s lots of stuff to buy in New York City. It’s pretty easy to construct a lifestyle where you spend $250,000 a year. In Columbus, Ohio, only 1.3 percent of households make more than $200,000, so there’s less stuff for them to buy and fewer rich people for them to try to keep up with. But what you buy and whether you try to keep up with the people in the penthouse is a personal decision, not an objective economic necessity. The fact of the matter is that a household making $250,000 in New York City is making more than pretty much anyone else in the city. Being rich is more than just a feeling.

Yes, even in New York City. A joint household income of over $250,000 is rich. It puts you in the top 5%. That means for every household with more money, there are 19 with less.  A lot less.  Nationwide, such an income puts you in even more rarified company because more rich people live in New York.  There was no reason to cut taxes for these people.

Note: No I am not hypocritical or simply jealous.  My spouse and I, both being college professors, easily make a combined income that reaches into very low 6 figures. That makes me rich.  We’re in the top 10% or so and we know it.

 

 

 

Empty Threats

One argument often provided for against raising the state taxes on rich individuals and large corporations is the belief that higher taxes will simply cause them to move to low-tax states.  Now there’s data on how serious the threat to move is: not very. Yves Smith at naked capitalism writes of a study by Young and Varner. In a nutshell, using New Jersey as a test case since it raised taxes to very high levels for the rich yet is very close to neighboring states which makes moving plausible, they found the tax increase worked. A less than 0.1 response of people moving and net the tax raised a billion dollars and reduced income inequality modestly. Even stronger evidence was provided by a study of Swiss cantons. See complete comments at the link.

Quelle Surprise! Tax Increases on Rich Do Not Lead to Exodus

A solid paper by Cristobal Young and Charles Varner, “Millionaire Migration and State Taxation of Top Incomes” (hat tip Matt) helps debunk the idea that high income individuals will pull up stakes if their taxes go up. The case study is an interesting one: New Jersey’s tax increases on top earners. New Jersey made the biggest increase of all US states, and also has the distinction of having a low income tax state (Connecticut) nearby, meaning that tax-sensitive residents had an option of moving not all that far to escape the increase, which presumably would allow them to maintain family ties.

Screen shot 2011-02-09 at 3.16.11 AM

The study results might be labeled “Millionaires are People Too.” Economists and lobbyists love to stress often base their arguments upon economic rationality and contend that everyone is out to maximize his personal bottom line. But moving is a hassle and costly, and most people’s social lives are grounded in their community and their workplace. Relocating is likely to result in a longer commute for those still employed, would cause disruption to any children still in school and would weaken many existing social relationships. ..

…The general conclusion of the paper is plausible: that moderate tax increases on the rich, even if no neighboring jurisdictions follow suit, is unlikely to lead to much in the way of emigration and will thus be a net plus in terms of tax receipts.

Seems the Rich Default Even More

Well, so much for the idea that the foreclosure crisis is /was due to those “irresponsible low-income people buying stuff they can’t afford”.  It seems the rich are even less responsible:

the rich have stopped paying the mortgage at a rate that greatly exceeds the rest of the population.

More than one in seven homeowners with loans in excess of a million dollars are seriously delinquent, according to data compiled for The New York Times by the real estate analytics firm CoreLogic.

By contrast, homeowners with less lavish housing are much more likely to keep writing checks to their lender. About one in 12 mortgages below the million-dollar mark is delinquent.

Though it is hard to prove, the CoreLogic data suggest that many of the well-to-do are purposely dumping their financially draining properties, just as they would any sour investment.

“The rich are different: they are more ruthless,” said Sam Khater, CoreLogic’s senior economist.

From the New York Times.