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.

More on Tax Fairness – We Pretty Much Have Flat Taxes Now

In the last couple of days I’ve posted a couple times on taxes. In one post, I observed how hedge fund managers have radically lower tax rates than the most of us because of a loophole introduced in the Bush-era tax cuts.  Yesterday, I showed  graphically how average income tax rates are actually lower than most people think.  In that last post, I introduced the idea that comparing income tax rates alone isn’t adequate. Since incomes below $106,150 are fully taxed for payroll taxes (Social Security/Medicare) but income over that threshold is payroll tax-free, the gap in average tax burdern between high income and median income is much smaller than most think.  But you may be asking what about other taxes? What about property taxes and sales taxes and state income taxes?

Well it’s a big task to do this analysis, but the folks at  Citizens for Tax Justice  used 2008 data for all federal, state and local taxes combined to do the analysis.  Here’s their analysis (via New York Times – warning paywall):

It found that the average effective tax rate is 29.8 percent, and that including state and local taxes makes the tax curve look much  less steep:

INSERT DESCRIPTION
Source: Citizens for Tax Justice Horizontal axis shows the income group. Vertical axis shows the percentage of income that the average member of that group pays in taxes. Taxes include all federal, state and local taxes (personal and corporate income, payroll, property, sales, excise, estate, etc.). Incomes include cash income, employer-paid FICA taxes and corporate profits net of taxable dividends.

So what do we learn from this?  It shows us that if we look at the overall tax system in the U.S., the complex patchwork system of federal-state-local income taxes, payroll taxes, property taxes, sales taxes, etc., we are pretty close to having a flat tax system.  The poorest, lowest income folks pay 18.7% of income as some type of tax while the the richest 5% do pay more, but they only pay 32.2%.

What is really stunning is how the top 1%, the really-really rich multi-millionaires actually pay less average tax rate than the those who are only rich enough to make the top 5%.  It must really be nice to be so rich that Congress tweaks the tax code just for you.

So the system is very, very mildly progressive.  A progressive tax system is one where the higher your income, the higher your average rate is.  To make a system progressive, you must have higher marginal tax rates for higher income brackets.  A regressive system is one where the effective average tax rate goes down as your income goes up.  In general, sales taxes and payroll taxes are regressive.  That’s why the overall system is relatively flat.  While the federal income tax system is somewhat progressive (although much less so since the Reagan & Bush cuts), that progressivity is offset by a regressive payroll tax and the  regressive sales taxes of various states.

CEO’s Pay Grows, Average Worker Pay Stagnates

The top end of the income distribution has recovered from any ill effects of the Great Recession, but the average worker has not.  CEO’s in particular saw their compensation increase 27% in 2010, while the workers at the corporations these CEO’s “lead” has barely moved.  Wonkroom notes:

Households across the country are still feeling the effects of the Great Recession, with unemployment falling very slowly, while foreclosuresarestillincreasing, along with poverty rates and oil prices. Family wealth is currently down $12.8 trillion from its 2007 peak.

However, one group of Americans is doing very well — corporate CEOs, whose pay is returning to pre-recession levels:

At a time most employees can barely remember their last substantial raise, median CEO pay jumped 27% in 2010 as the executives’ compensation started working its way back to prerecession levels, a USA TODAY analysis of data from GovernanceMetrics International found. Workers in private industry, meanwhile, saw their compensation grow just 2.1%in the 12 months ended December 2010, says the Bureau of Labor Statistics.

Median CEO pay last year was $9 million, the highest since 2007. The median CEO bonuswas $2.2 million. These gains come as income inequality in the U.S. is already the worst its been since 1928. “We have the recipe for controversy over CEO pay: big increases in CEO pay that show up following run-ups in stock prices coupled with high unemployment rates,” said Kevin Murphy, professor of finance at the University of Southern California…

But raising taxes on millionaires is not, in fact, the same as raising taxes on job creators. According to a recent Wall Street Journal-NBC poll, an overwhelming majority of Americans (81 percent) say that adding a surtax on millionaires is an acceptable way to reduce the budget deficit. …

Rep. Jan Schakowsky (D-IL) recently released a bill that would implement a graduated income tax on millionaires that would raise $78 billion. Allowing the Bush tax cuts to expire for those making more than $1 million could, in one instant, reduce eight percent of the medium-term budget deficit.

If the goal is truly to reduce or eliminate the deficit (a goal I do not share), then restoring taxes on these millionaires and CEO’s must be part of the agenda.  As noted previously, if we simply do nothing and let the existing laws on the books, especially letting the Bush-era preferential tax treatments for the highest bracket taxpayers expire, we can eliminate the primary deficit.

In the past, prior to the Reagan years, we had high marginal  tax rates for the highest income brackets.   For much of the 1950’s and 1960’s and early 1970’s, the highest marginal tax rates were between 70% and often as high as 91%. (source: Tax Foundation) Now this is marginal rates, the rate paid on income above the specified level, not the average paid on all income. Nobody pays the marginal rate on all their income.  At the time, the top bracket started at $200,000 or $250,000 for a married filing jointly return.  Given inflation, these are brackets that would be comparable to a $1,000,000 or so today.  The nation did not suffer for job creation in the 1950’s and 1960’s.  Yet, once we brought the top tax rates down into the 33-36% range during the Reagan years and ever since, we have suffered from low job formation relative to the 1950’s and 1960’s.  Even if we limit ourselves to just the 30 years since Reagan radically reduced the top marginal tax rates, we see that Clinton, who raised the top rate to 39% in 1993 had the best job creation record.  Clearly, low marginal tax rates on CEO’s and millionaires does not help create jobs. But, it does make the government deficit bigger.  Just a little food for thought as you file your taxes this year.

Taxes and Unshared Sacrifice

It’s tax time so it’s appropriate to look at the fairness of the tax code.  One of the greatest beneficiaries of the Bush-era tax cuts were hedge fund managers.  Hedge fund managers are people on Wall Street who manage other people’s money, not primarily their own.  In return, they get paid fees for managing the money. The more money they make for clients/investors, they more they get paid.  Sounds like wages or income to me, and I suspect to you, too.  But not to Congress.  In 2001, they redefined things. The compensation these hedge fund managers is only taxed at less than half the rates other people pay for income.  This is despite these incomes being at astronomical levels.  Wonkroom puts things in perspective with a nice little graph.

CEO pay pales in comparison to that of hedge fund managers:

Last year was very lucrative for some of the biggest and best-performing hedge funds’ chiefs. Wealth was so concentrated that a mere 25 people pocketed a total of $22.07 billion, according to this year’s annual ranking by AR Magazine, which tracks the hedge fund industry. At $50,000 a year, it would take the salaries of 441,400 Americans to match that sum.

Making matters worse, hedge fund managers benefit from preferential tax treatment that middle-income Americans don’t. Due to what’s known as the carried-interest loophole, the income that hedge fund managers receive if their funds make money is treated as capital gains — rather than ordinary income — and gets taxed at the capital gains rate of 15 percent. Even though the pay is performance-based compensation (just like any other performance-based bonus made by any other worker), hedge fund managers receive a tax break on that income.

This results in hedge fund managers paying less in taxes on this income than middle-class workers, who are subject to a 25 percent top marginal tax rate:

Congress has debated closing this particular loophole over and over, but has never actually followed through. At a time when vital and popular programs are being placed on the altar of deficit reduction, removing this tax break for some of the richest people in the country seems prudent.

To be fair, the graph compares only the marginal tax rate each taxpayer faces.  The marginal tax rate is the tax rate on the next dollar of income earned after you’ve reached that level.  It is not the average tax rate paid. Average rate paid would be total taxes paid divided by income.  But, even if we went by average tax rates, these hedge fund managers pay a lesser tax rate than ordinary middle class or poor individuals.  Further, since this income is not considered by Congress to be wages or labor income, they don’t pay Social Security taxes on the additional income.  

BTW, there’s another way to look at the graph.  The firefighter, the teacher, the police officer, and the doctor all perform valuable services that improve the quality of our lives.  All four may occasionally screw up, but the damage done is isolated (although granted if it’s your home that burns or your body that’s hurt, you may feel differently).  Hedge fund managers, however, have been a key part of the Wall Street environment that sought more and more risky investments and complex financial schemes in the last decade.  The kind of stuff that blew up and created the Great Global Financial Crisis. 

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.

 

 

 

News Flash: Federal Taxes Have Plummeted

David Cay Johnston reported this a few weeks ago and I almost missed it.  It’s particularly relevant, though, what with official Washington talking about how to cut spending, restrain the deficit, etc. (at least attacking the English language with euphemisms about war in Libya).

Let’s recap what Washington, especially Republicans, have been saying (from Johnston’s article):

Notice these almost identical quotes from the Sunday morning talk shows five days after the midterms:

    We don’t have a revenue problem. We have a spending problem.
— Senate Minority Leader Mitch McConnell, R-Ky.
    Washington does not have a revenue problem. It’s got a spending problem.
— House Majority Leader Eric Cantor, R-Va.
    We do not have a revenue problem. We have a spending problem.
— House Budget Committee Chair Paul Ryan, R-Wis.
    I think it’s not a revenue problem; it’s a spending problem.
— Sen. Rand Paul, R-Ky.

As framed, these advertising lines are matters of opinion, but how many Americans recognize them for what they are — opinions, not facts?

When these people talk about taxes at all, they claim that tax rate cuts actually raise tax revenues and grow the economy.  Unfortunately the facts don’t bare that out.  In fact, tax rate cuts result in lower tax revenues.  In plain terms, tax rate cuts create deficits.  If you add a recessions to the mix, you get even lower tax revenues and bigger deficits because unemployed people don’t pay much tax.

Johnston points out, using officially released data, that we’ve had an excellent test of this assertion that “tax rate cuts grow the economy and create more tax money”.  In 2001, at the beginning of the last decade, the Bush administration pushed through a very large cut in tax rates for both high-income individuals and for corporations.   I’ve already mentioned how this has allowed General Electric to avoid paying taxes despite billions in profits. But that’s just one corporation, albeit a very large one.

How have people overall done?  Are we over-taxed as the TEA Party folks claim?  Have taxes been rising?  The answer is a very clear: NO. Despite real GDP being 17.62% higher in 2010 Q4 than in 2000 Q4., total federal tax revenues are down.  That’s why we have a huge deficit.

Federal tax revenues in 2010 were much smaller than in 2000. Total individual income tax receipts fell 30 percent in real terms. Because the population kept growing, income taxes per capita plummeted.

Individual income taxes came to just $2,900 per capita in 2010, down 36 percent from more than $4,500 in 2000. Total income taxes and income taxes per capita declined even though the economy grew 16 percent overall and 6 percent per capita from 2000 through 2010.

Let me repeat that.  Individual income taxes per person in the U.S. are down 36 percent in 2010 vs. 2000.  Now you may be skeptical.  You may be thinking, I dont’ think my taxes are down.  You may be right.  That might be because you’re in the lower 1/3 or so of income earners who only pay payroll taxes (Social Security, Medicare) but don’t pay income taxes.  You can’t pay lower than zero.  The people who pay the bulk of income taxes got the rate cuts.  Did they respond with such increased effort that incomes rose and they still pay more tax dollars at the lower rate (this is what Laffer-curve oriented Republicans claim)?  No. They pay less tax now.

But it wasn’t only high income individuals who benefitted from the generosity of Bush and the Republicans in 2001 (and again by both parties in 2010), corporations also benefitted. In particular, large multi-national firms benefitted. So what happened to the tax revenue they pay?

Corporate income tax receipts fell 27 percent and declined 34 percent per capita, even though profits boomed, rising 60 percent.

Johnston does note that payroll taxes, the taxes that workers pay for Social Security and Medicare did increase during the decade.  But these are taxes paid by all workers on income up to only $106,000.  The same politicians who falsely claim that income tax rate cuts increase revenues are in fact trying to use the deficits created by too-low income tax revenues as an excuse to cut Social Security benefits for those very workers who stepped up to the plate and paid their taxes.

There’s more damning evidence against both the politicians that perpetuate these false ideas that “tax cuts raise revenue” but also against the economists and pundits who repeat it despite the facts.  I urge the interested reader to read the whole article at:

http://tax.com/taxcom/taxblog.nsf/Permalink/UBEN-8EL2Y8?OpenDocument

Republicans and Obama Raised Taxes on Poor

It totally missed this item last December when the tax “compromise” between Obama and the Republicans in Congress was passed.  Since the Obama tax cuts from 2009 did not survive the compromise, only the Bush cuts for the upper brackets did, taxes were effectively raised on the poorest 51 million Americans.  Even though the payroll tax was cut by 2%, the removal of the “Making Work Pay Tax Credit” means lower income workers take home less money, pay more taxes, and get a weaker Social Security system. But, we could borrow enough to ensure continued tax cuts and breaks for those making more than $250,000. It’s Washington’s logic, not mine.  David Cay Johnston gives the full detail in his article :

Obama and the GOP: United Against the Working Poor

Who says bipartisanship is dead?

On Capitol Hill, the Democrats and Republicans may no longer play cards and drink together, but that does not seem to stop them from working together to shift tax burdens down the income ladder even when it violates their promises on the campaign trail.

Grover Norquist calls bipartisanship the political equivalent of date rape. But there is one group that President Obama, many congressional Democrats, and all congressional Republicans ganged up on in December — the working poor.

The tax compromise passed in December has been hailed everywhere as a payroll tax cut combined with an extension of the Bush tax cuts, despite the fact that it raised taxes on a third of Americans. The killing of Obama’s Making Work Pay tax credit, which the White House called the biggest middle-income tax cut ever, and the replacement of it with the Republicans’ payroll tax cut raised taxes on single workers whose wages come to $20,000 or less and married couples with less than $40,000 in wages.

That’s 51 million taxpayers, the Tax Policy Center estimated. (See Table T10-277.)

Among the poorest fifth of tax units, whose annual cash income is less than $17,878, two-thirds got hit with a tax increase. On average, their taxes went up $134, which is 1.3 percent of this group’s total cash income.

Consider a single worker who makes $6,000. That was the average wage of the bottom third of workers in 2009, the Medicare tax database shows. Killing the Making Work Pay credit in favor of the payroll tax cut amounted to a tax increase of $252, or 4 percent of total income.   more here…