The Burden of Higher Taxes?

I keep hearing about taxes being more progressive than they used to be because the rich pay a larger share of total taxes.

For this example, assume taxes on the Poor are 10% and taxes on the Rich are 30%.

Scenario A: GDP is 1000. Rich (a small number of people) receive 600, Poor (a large number of people) receive 400.

Taxes: Rich pay 180, poor pay 40, total is 220, Rich share is 180/220 = 82%

Now do nothing more than redistribute income from Poor to Rich:

Scenario B:  GDP is 1000. Rich (a small number of people) receive 800, Poor (a large number of people) receive 200.

Taxes: Rich pay 240, Poor pay 20, total is 260, Rich share is 240/260 = 92%

Some people have found a way to argue that because the share of taxes paid by the wealthy is higher under B, 92% instead of 82%, and because the Rich pay more, 240 instead of 180, the burden on the Rich has risen. I'll take that burden if they don't want it.

It's also possible to cut taxes. Starting from scenario A once again, let taxes fall to 25% for the Rich and 5% for the Poor, and redistribute income in the same way as in B:

Scenario C:  GDP is 1000. Rich (a small number of people) receive 800, Poor (a large number of people) receive 200.

Taxes: Rich pay 200, Poor pay 10, total is 210, Rich share is 200/210 = 95%

Now the Rich pay an even larger share of total taxes even their tax rate has fallen, they pay 95% instead of 92% under scenario B. Their "burden" has increased since taxes increased from 180 under scenario A to 200 under scenario C while the taxes of the Poor fell from 40 to 10, and the percentage of total taxes paid by the Rich increased from 82% to 95%. Once again, if the Rich feel burdened by this deal, I'll take the extra income and pay the lower tax rate. No problem.

Comments

[Barry Ritholtz]

Front page of today's WSJ:

Their Income Up, U.S. Rich Yield A Tax Windfall
http://online.wsj.com/article/SB114808744841958607.html

[ilsm]

A rich person does not sweat to make anything.

A manager does not add to production.

A stock trade is just buying and selling emotional value.

So why should the rich shoulder 92% of the burden of making the workers productive? They do not produce so why pay?

And besides the rich do not send their kids off to war to keep the container ships and tankers filled and safely floating around the world.

It is patriotic to toil and sweat for the rich.

[James Kroeger]

Excellent, Mark! A nice, easy-to-understand mathematical illumination of the kind of obfuscation that the Republicans have been able to employ with great success. With your illustration in hand, we can start a campaign to reduce the onerous taxation burden that the wealthy are currently shouldering by raising their tax rates. Beautiful!

Remind me to ask you if you think it would be helpful, politically, to point out that steeply-progressive, no-loophole income taxes actually impose no real sacrifice on the wealthy, in terms of lost purchasing power. (If you don't know what I'm talking about, then read this.)

[pgl]

In scenario B, taxes/GDP = 40% which I presume is government spending/GDP. In scenario C, have we left government spending/GDP at 40% and simply converted a bunch of current taxes to deferred taxes? After all, we are talking about Bush43's fiscal policy - right?

[spencer]

The proper response to someone claiming the tax burden on the rich has gone up is say OK, we'll solve that problem by going back to the old tax rates.

[No Name]

Just curious but what would people on this board think are fair tax rates?

[hj]

fair tax rates????

I would start with a 50% tax on all income over one million dollars; 70% on all income over 2 million; and 90% on all income over three million. Adjusted for inflation, of course.

[Blissex]

«Just curious but what would people on this board think are fair tax rates»

That's not really an important issue, as income tax rates don't matter that much, even if they are highly visible because of the dreaded annual return.

It is usually much better to broaden the tax base by reducing or abolishing loopholes or exemptions, like capital gains ones, and then reduce or abolish less visible but very damaging consumption and employment taxes; than to tweak the income tax system.

But it is very politically expedient instead to do the opposite, because less visible taxes are a lot easier to reduce for your campaign donors and raise for the electoral base of your opponents.

An interesting side: I once read that many USA states impose a fairly significant tax on phone charges, and that as a rule the laws establishing the tax explicitly forbid phone companies from itemizing the tax on phone bills or mentioning the tax in any way in their customer literature.

«I would start with a 50% tax on all income over one million dollars; 70% on all income over 2 million; and 90% on all income over three million. Adjusted for inflation, of course.»

Guessing wildly, this sounds like motivated by the idea that the rich do not really deserve the money they earn, because 90% is really more like confiscation than taxation.

Whatever, I personally disagree with that -- and I reckon that taxes are a necessary evil, and that legally obtained high incomes should not be subjected to punitive rates of taxation amounting to confiscation.

Apart from that, having very high tax rates on very few people would not raise that much either.

There are excellent reasons for a rather progressive tax system, for example the diminishing marginal utility of income (buying that 3rd Ferrari is not as satisfying as the 1st) to the much greater stake the rich have in a functioning state and social peace (much more to lose :->).

However levels of taxation like 90% tend to be unjustifiable except on punitive grounds.

[BuckyDent]

I'll take the extra incomeDude. You have to EARN that "extra income". Once you tackle that succssfully, you can complain about how other people react to the tax structure.

[spencer]

If you want to see a "good" tax act go look at the Reagan tax reform of 1986. One thing it did was lower marginal tax rates, but more importantly what it did was simply the tax rules and eliminated many,many tax shelters. When marginal tax rates were in the 70%- 90%
what the rich did was spend a lot of time and effort devising ways to shelter income. As a consequence you had many people investing in cattle futures and other esoteric shelters that only made sense because of the tax deductions. I'm less worried about the rate then having a broad, simple base. The 1986 act was passed when we could still get people working across the political isle to get good legislation that was maybe the best for the system as a whole rather then something set up to benefit one segment at the expense of others. Government and taxes do not have to be a zero sum game.

But for this to happen the right would have to give up their fanasty world of pure spin that tax cuts are the solution for everything and that it will achieve miracles. I'm not sure what I would ask the left to put on the table.

My own prefered solution is to elimate the corporate income tax and treat all income equally. I oppose the idea of shifting the tax burden from income to consumption.

[James Kroeger]

«I would start with a 50% tax on all income over one million dollars; 70% on all income over 2 million; and 90% on all income over three million. Adjusted for inflation, of course.»

Guessing wildly, this sounds like motivated by the idea that the rich do not really deserve the money they earn, because 90% is really more like confiscation than taxation.

My motivation in seeking steeply progressive income tax rates is simple: if the government imposes them, none of the rich would actually have to give up ANYTHING in terms of lost purchasing power. Their lower disposable incomes would buy them just as much as they would be able to obtain if they paid no income tax at all. There is nothing "punitive" about a tax code that guarantees that none of the wealthiest taxpayers will have to suffer any kind of material sacrifice whatsoever.

With a no-loophole progressive income tax, taxpayers are deprived of disposable income in a way that preserves each income earner’s comparative 'bidding position' within the hierarchy of national income/wealth distribution. When this is done, we can be confident that prices in those markets that serve the rich will drop to levels that they can afford. We know this will happen because 1) there will not be enough dollars in the hands of buyers to sell everything at the higher pre-tax-hike prices, and 2) markets work. Sellers would be forced to reduce their prices in order to sell their product; those who end up with more disposable income after taxes than others will be able to outbid those who ended up with less. The same amount of real wealth will be produced and consumed, only it will be purchased at lower prices.

Caution: Yes, if we were to suddenly impose more steeply progressive income tax rates in our current political climate, it could very well cause serious supply-side disruptions. If, however, we were to phase in the higher rates gradually, over a ten-year period or so, markets will be able to adjust to the changes in a calm manner.

[No Name]

I seriously doubt there will be any major changes to the tax code.

I think we need a simplier code, but making any change will be too difficult.

[Alejandro]

All I can say is LOL!

With a no-loophole progressive income tax, taxpayers are deprived of disposable income in a way that preserves each income earner’s comparative 'bidding position' within the hierarchy of national income/wealth distribution. When this is done, we can be confident that prices in those markets that serve the rich will drop to levels that they can afford.

If your logic is correct then a flat tax rate at 99% would do no harm and collect a lot of revenue since it doesn't affect the "'bidding position' within the hierarchy of national income/wealth distribution"
WTF! Even a regressive tax would have no effect on the ordinal income/wealth ladder!

And to end this post I borrow this quote from your webpage

Wealthy citizens who are wise should be lobbying for an increase in government spending and an increase in their tax rates

It was not you lack of math knowledge that kept you from getting a Ph.D. in Economics. IT WAS YOUR LACK OF ECONOMICS!!!!

[bakho]

John Hodgman has the best explanation of the Bush tax cuts:

http://www.comedycentral.com/shows/the_daily_show/videos/john_hodgman/index.jhtml

[donna]

I don't care if the rich pay taxes at all if they'll just stop screwing up our elections and our government.

[ilsm]

Donna,

The rich run the place.

Screwing up is in the eyes of the beholder.

[James Kroeger]

If your logic is correct then a flat tax rate at 99% would do no harm and collect a lot of revenue since it doesn't affect the "'bidding position' within the hierarchy of national income/wealth distribution"
WTF! Even a regressive tax would have no effect on the ordinal income/wealth ladder!

At what point in an argument, Alejandro, do you get around to uttering something that carries any kind analytical weight? Are you actually challenging my claim that a tax---any tax---that preserves the pre-tax “bidding positions” of all taxpayers will not deprive taxpayers of any of their purchasing power? Have they taught you nothing about how markets function at the University of Chicago?

In an economy with robust inflation, Alejandro, what happens when everyone gets more money? Prices are bid up, aren’t they? And what makes them go up, Alejandro? The markets do that wonderful little trick, don’t they? When income increases are due entirely to inflation, none of those receiving the increases is actually going to experience an increase in purchasing power, now are they?

My understanding of what they teach at the University of Chicago tells me that it shouldn’t be too difficult for you to reverse this process in your mind and see why a reduction in all disposable incomes----all else equal---is going to cause a market-clearing reduction in prices. At what point do you think the markets would break down and fail to adjust prices in response to a change in disposable incomes? Want to introduce other variables? Fine, but don’t try to suggest that doing so invalidates my fundamental premise.

It was not you lack of math knowledge that kept you from getting a Ph.D. in Economics. IT WAS YOUR LACK OF ECONOMICS!!!!

I guess I have to give you credit for recognizing that (a) there aren’t really any rational counter-arguments you can muster that would reveal the folly of my arguments, and so (b) you really have no choice but to rely on a fatuous fusillade of ridicule. I’ll simply point out that in ridiculing me, you are also ridiculing Robert H. Frank, the Cornell economist who recently co-authored an economics textbook with Ben Bernanke, our current Fed chairman.

Dr. Frank said that he thought that my arguments on tax policy are among the best he’s heard. (We have a difference of opinion over the role and significance of saving levels in the economy, but I still think that I may be able to eventually change his mind.) Funny that he didn't agree with you that my arguments reveal a lack of understanding of economics.

[cm]

Alejandro: Not meaning to insult, but it is difficult for me to take your presentations seriously.

James Kroeger: Ridicule can only be delivered from a rhetorically/intellectually superior or equal position. I don't see this here.

[James Kroeger]

Thanks, cm...