Soaking The Really Rich

James Surowiecki thinks the tax brackets ought to be adjusted for the explosion in income inequality over the last thirty years.  He notes that the current threshold for "rich" - an annual income of $250,000 - has not captured the current environment:

This means that someone making two hundred thousand dollars a year and someone making two hundred million dollars a year pay at similar tax rates. LeBron James and LeBron James’s dentist: same difference.

Nate Silver provides some revenue estimates:

In 2007, essentially the last non-recession year (although technically the recession began in December that year), there was $1,244 billion ($1.24 trillion) in taxable income reported from 390,820 filers earning $1 million or more. However, a millionaires' tax bracket would affect marginal income only, so we have to subtract out the income below $1 million earned by these filers, which is $391 billion. That leaves a pool of $853 billion per year from which to draw taxes. If you taxed it at 3 percent, you'd bring in $26 billion per year, or $256 billion over ten years. If you taxed income above $1 million at 5 percent, you'd produce $43 billion per year, or $427 billion every ten years.

And yes, he duly notes the possibility of productivity losses:

Let's say we go with the plan of taxing marginal income above $1 million at 3 percent, and marginal income above $5 million at an additional 3 percent. That would produce a theoretical $39 billion per year. However, there would be some productivity losses, and perhaps some additional offsets resulting from people finding ways to transfer their income into more tax-advantageous activities, so perhaps revenues on the order of $35 billion per year, or $350 billion per decade, are more realisti.

Comments

[Danube of Thought]

A week or so ago Arthur Laffer demonstrated pretty thorougly in the WSJ that, over a long history, increasing the top marginal rates has resulted in a reduction of their tax payments as a percentage of GDP. I'll try to find it and link to it.

[Thomas Collins]

Is anyone aware of a reliable study (in other words, one conducted by non-Paul Krugman types) that looked at the estimated revenue increase from various state and federal tax hikes, and what actually happened? My suspicion is that in substantially all of the cases, revenue gain, if any, was significantly below estimates. But I haven't seen a study that analyzed a group of these tax hikes.

With those of means currently playing it safe, it would seem to me that increasing marginal tax rates at the moment could charitably be described as insane (unless everyone plans to work for ObamaGreenCareCorp, ObamaHealthCareCorp or ObamaMotorCorp).

[Harrison Bergeron]

This won't end well.

Trust me.

[matt]

There used to be demagogues who would rant and rave about these kinds of programs. Now it is becoming more and more administration policy.There is a consistent leftist agitation component to this administrations message. Soon they'll be organizing community watch groups to make sure we adhere to Obamivarian principles of Dear Leader.

Perhaps we should just start calling him Hugo Obama.

[Kurtis Fechtmeyer]

Putting morality aside for a moment, the core economic question is: does that marginal X million dollars create more additional wealth and growth in LeBron Jame's hands or in the hands of the federal government ? More likely than not, LeBron can only spend so much on bling, and the marginal money would otherwise sit with his money manager who would invest it in an enterprise that promises an economic return. With the federal government, the money ends up in transfer payments or bureaucracy expansion, which would not add to wealth. Certainly, some projects, such as a fourth bore on the Caldecott tunnel would add to societal wealth by freeing up more time for commuters to do other things -- but rarely are federal dollars judged on such return criteria. We know private sector investments always are.

[PaulY]

Bush's tax cuts reduced tax revenues from lower 95% of tax payers and increased revenue from upper 5% as top tier realized more taxable income as studies of percentages of taxes paid by upper 5% have shown.

[MarkO]

Harrison, are you on the level?

[Ignatz]

--Is anyone aware of a reliable study (in other words, one conducted by non-Paul Krugman types) that looked at the estimated revenue increase from various state and federal tax hikes, and what actually happened?--

Haven't got time to look up a study TC, but you might take a look at Clinton's tax hike in 93. I recall they projected massive new revenues for the top brackets and received a tiny fraction of what they projected. IIRC Stephen Moore at the time had the figures but it's been a long time.
Googling some combo of those names and dates might come up with something.

[Old Lurker]

I'll just stay on Nantucket and let the girls spend it all. If Mel gets back to me about how, exactly, to bribe the HDC so we can build our house...we will certainly spend it all.

First week of August is always cocktail party time here when we catch up with friends from summers past. No kidding...the most common subject from my geezer pals last week was exactly how their tax lawyers had, since last August, moved ownership of their Nantucket houses to the next generation in estate tax friendly ways. (We're talking $5-10M houses - theirs, not ours -, so it's a serious topic.)

There is no end to their creativity, and the use of trusts, foundations, conservation easements, life estates, low interest loans, the occasional off shore LLC, and on and on.

Which is why this thread is so amusing in that they are all so sure it is just a matter of making the rich pay their fair share.

That's the ticket!

[Jack is Back!]

Haven't we run out of other people's money already?

Listening to Karl Rove today as he took Rush's place, he noted how the $26 billion son-of-stimulus got started as a $10 billion bailout of the teacher's unions but in order to buy Maine's RINO votes it caved to their demand for a $77 million fix to their medicaid shortfall. Well, you can't do that for Maine and not do it for everyone. So, you now have an additional $16 billion to fix every states medicaid shortfall.

November can't come soon enough but by then we will be so flat broke that it is going to take a veto proof congress to begin the return to normalcy and solvency - Paul Ryan and his road map will need a set of wheels else we ain't going nowhere no-how!(I am beginning to sound like BasilMarceaux.com)

[Thomas Collins]

See LUN for what may be the article to which DOT is referring (sorry if this has already been linked; my Typepad doesn't seem to be updating all that quickly today).

[Ignatz]

Nate Silver is normally pretty thorough but where does he come up with an estimate of only losing $4 billion per year through tax avoidance and productivity losses?
Any third rate tax lawyer could shelter vastly more than he's projecting.
Without time to look into it any further, I suspect he has no statistical backing for that estimate whatsoever. On its face it's preposterous.

[Ignatz]

One last point to put things in perspective before I'm off to work on some legal crap. If Nate Silver is entirely correct and we did collect a whopping $35 billion, that means next year's deficit would be $1.434 trillion rather than $1.47 trillion. Big frickin deal.

[Danube of Thought]

"There is no end to their creativity, and the use of trusts, foundations, conservation easements, life estates, low interest loans, the occasional off shore LLC, and on and on."

All the stuff George Soros and generations of Kennedys have used.

[Danube of Thought]

Tthat's the one, TC. Not sure why he expressed things in terms of % of GDP.

[squaredance]

Utilitarian arguments for progressive taxation of any sort are in fact preforce immoral ones.
The point is that we have allowed government to have a power and a role in our lives that we should not allow it to have. We have allowed a wholly parasitic Nomenklatura to rule over us--one which differs from the Soviet one only in the cleverness in which it hides itself. Arguing how we are to pay for this immorality and outrage is beside the point. As long as we allow this there will never be enough money to steal.

It is ultimately not a matter of "policy" but one of morality. We cannot move forward to a restoration of the Republic until we see this. These great evils cannot be overcome merely at the level of "tax policy". The point is not that a sounder tax policy will raise more revenue--here Laffer is, of course, quite right and there is little room for rational debate on the matter--rather the point is that we want to broadly reduce government across the board AND have a sound tax policy, including reducing marginal rates.

The real key, however, is to prohibit the FEDs from the ability to directly tax income or property at all. Force them to pass through the State legislatures for tax money. We have stood reality on its head. It is the Federal government that should be coming around to the States hat in hand and not the other way around.

Unless some group of leaders can get out there, call things by their real names and do the hard work of getting together broad support at a grass root level then we are doomed.

It cannot be all at the national level either.

Either we collectively gather the will and the passion to turn back from this or it is just a matter of time before we are destroyed by internal or external enemies.

[squaredance]

preforce=perforce.

[Neo]

If you taxed income above $1 million at 5 100 percent, you'd produce $43 $860 billion per year

.. with a deficit of $1.4 trillion projected without this revenue next year, there would still be a $540 billion deficit.

.. and I bet LeBron James and the entire NBA, MLB, NFL, NHL, PGA, and NASCAR would become mediocre.

Exit question: would "Tiger" Woods be any worse ?

[Rob Crawford]

We cannot move forward to a restoration of the Republic until we see this.

I've been listening to the audio version of a book titled "The Ides" by Stephen Dando Collins. It's about the events leading up to and following the assassination of Julius Caesar.

Most interesting thing I've learned: Cicero thought the assassins (who called themselves "Liberators") hadn't gone far enough.

Not really apropos of anything. Just your phrase tweaked that nerve.

[Thomas Collins]

See LUN for a Niskanen/Moore CATO Institute sponsored study on the impact of marginal tax rates on revenue and on overall economic activity is. Ignatz, there may be other Moore analyses out there specifically focusing on the Clinton tax increases, but this one is pretty good. It points out that the reversal of Reagan's supply side policies didn't happen with Clinton, but that Clinton carried on the reversal started by George Herbert Walker Bush.

[anduril]

I'll repost this, for the point that in formulating tax policy nominal income should not be the only consideration:

Really good article by Bob Samuelson: Taxes, Fertility and Economic Growth, elsewhere titled The Parent Trap.

Among the government's most interesting reports is one -- published by the Agriculture Department -- that estimates what parents spend on their children. The latest version finds, not surprisingly, that the costs are steep. For a middle-class husband-wife family (average pretax income in 2009: $76,250), spending per child is about $12,000 a year. Assuming modest annual inflation (2.8 percent), the report estimates that the family's spending on a child born in 2009 would total $286,050 by age 17. A two-child family would cost about $600,000. All these estimates may be understated because they do not include college costs.

These dry statistics ought to inform the deficit debate, because a budget is not just a catalogue of programs and taxes. It reflects a society's priorities and values. Our society does not -- despite rhetoric to the contrary -- put much value on raising children. Present budget policies punish parents, who are taxed heavily to support the elderly. Meanwhile, tax breaks for children are modest. If deficit reduction aggravates these biases, more Americans may choose not to have children or to have fewer children. Down that path lies economic decline.

My belief is that this becomes doubly true in recessionary times.

[anduril]

My biggest objection to the income tax is because it enable politicians to readily raise the money with which to bribe/fund interest groups who are able to aid them in re-election campaigns, which leads to constant growth in government programs.

[anduril]

Good God.

My biggest objection to the income tax is because that it enable enables politicians to readily raise the money with which to bribe/fund interest groups who are able to aid them in re-election campaigns, which leads to constant growth in government programs.

[Extraneus]

It is the Federal government that should be coming around to the States hat in hand and not the other way around.

I don't think I've ever heard one politician make that point.

[boris]

never work ... open warfare would break out between red and blue states

[Frau Edith Steingehirn]

"Without time to look into it any further, I suspect he has no statistical backing for that estimate whatsoever. On its face it's preposterous."

Nate may not fudge baseball numbers, but we know on which side of the aisle he sits.

[Danube of Thought]

I have serious doubts that Ryan's Roadmap could be enacted by any congress that the people of this country would elect. I think the die is cast, and the aggregate sense of the population is pretty much one of entitlement. Human nature in the US is not sufficiently different from human nature in Greece.

[Old Lurker]

"I think the die is cast, and the aggregate sense of the population is pretty much one of entitlement."

Ditto dat, DoT...

Which is why I am off to a party!

[boris]

"Human nature in the US is not sufficiently different from human nature in Greece."

The left is playing the part of Mickey Mouse in the Sorcerer's Apprentice. When the sorcerer comes back it could be fun to watch.

Let's play "who's the sorcerer" ...

[Ranger]

The real problem with this argument about soaking the very rich, is that by this point most of them are Dems, and they feel no shame in simply cheating to not pay any more taxes then they feel like. There is no need to look any further than the Dem caucuse in the Senate to understand that no matter what tax rate you put on the super rich, they simply won't pay it unless they feel like it.

[Ignatz]

--I have serious doubts that Ryan's Roadmap could be enacted by any congress that the people of this country would elect.--

That's Republican thinking DoT.
A Democrat would say, correctly, I'll bet over the next 30-50 years, whenever we're in power, we can enact about 99% of this Roadmap if we do it in bite size chunks but never take our eye off the ultimate goal. And automatically the left would be on defense and tryng to slow down the loss of the mess they've already enacted rather than thinking up new cobblestones to pave their socialist road to hell.

[bunkerbuster]

If identity conservatives were sincere in their opposition to socialistic programs, they would be trying to repeal Medicare instead of or in addition to targeting Obamacare, which is significantly less socialistic than Medicare. Of course, Republicans vowed to repeal Medicare too back when it was signed by LBJ, but mysteriously gave up on that once they were in power. You can bet your last dollar the same will happen again.

[Ignatz]

Unfortunately I confess bubu probably stumbled into the truth on that one.
It's unsustainable so it's going to be unrecognizable once it fails, but I doubt the Republicans do anything significant before then.
I hope they do but won't bet my last dollar on it.

[boris]

false premise

When the river overflows everybody in the community is expected to pitch in with shovels and sandbags. Command directed cooperative effort. When the water goes back down people return to their former market based lives.

The problem isn't "pitching in" ... it's trying to make that a permanent state. Arguments along the line "if it was a good thing during the flood ... then why can't it be for always?" are fubar.

If the market had a resonable solution to medical care for fixed (low) income retired paople something like Medicare would not be needed. Only bipartisan cooperation could bring that about and dimorats won't play. Hence the GOP is stuck with pitching in as the least bad option available.

[cathyf]

If the market had a resonable solution to medical care for fixed (low) income retired paople something like Medicare would not be needed.

What we used to have was "The Home", which the counties ran for the indigent aged, the mentally handicapped, and the mentally ill -- in many counties all warehoused together. The problem was that this system was bankrupting local governments.

[Ranger]

For all intense and purposes the Democrats have repealed Medicare in Illinois becuase they simply http://www.illinoisisbroke.com/vendors.aspx#20>don't pay the providers any more. That's what happens when a state goes broke, all the social welfare programs collapse under their own wieght. So, which is better, to rationally reform the system now, or to simply spend ourselves into bankruptcy, and let everything collapse?

[boris]

What we used to have was "The Home"

I am not opposed in principle to some "fair" (& nonpartisan) way for the productive to carry the very young and the very old. The very old, when productive, were paid in yesterday's lower wages ... but today's health care, while within the means of the currently productive, could not have been planned for realistically.

Again ... the idea that this proves "socialism is better" is fubar.

[cathyf]

...but today's health care, while within the means of the currently productive, could not have been planned for realistically.

That sort of accounting gets kind of slippery. Take this example: when we were 15, my best friend's dad had a heart attack and quadruple bypass. After a period of recuperation, he went back to his high-salary job as a partner in a Big-8 accounting firm. Where he continued to pay social security taxes, medicare taxes, and the premiums for his disability insurance and his family's health insurance.

Seven years later, he needed another bypass, and his health then deteriorated to the point where he needed to go on disability -- the private insurance which he had paid the premiums for with his earnings. He lived for another decade, and until the very end was a great emotional and financial support to his six children and dozen or so grandchildren.

Imagine that he had simply died in the ER that day he had the first heart attack. Sure, if you look strictly at direct medical bills, that would have been cheaper. But then we would have been paying social security survivors benefits to his widow and minor child (my friend.) And then there was the probably a half a million dollars in taxes that he wouldn't have paid if he were dead. And there was all of the money he earned and spent, none of which would have been earned or spent if he had died.

As productivity increases, we all become, on aggregate, richer. And things become, in real terms, cheaper. So we, on aggregate, get more. Isn't it completely rational to want to spend a disproportionate share of our increased wealth on our health? Isn't your health more valuable to you than another big screen TV or another vacation or more stuff?