An organization that is called: American Institute of Certified Tax Coaches has put up a summary graphic of the various tax proposals ofthe GOP candidates. It not only notes the major points of their plans, but what their plans would cost.
It is presented in a sort of game board race layout. The Institute introduces it thusly:
The US tax code is so complexeven those who write the law don’t understand all of it. Infact, few members of Congress prepare their annual tax returnsaccording to a survey by the congressional newspaper, “The Hill.” Politicians cite the complexity of the tax code as the primary reasonleading them to turn to professionals for help. Even theCommissioner of the IRS can’t prepare his own tax returns!
Ask most taxpayers and theyagree our current system is too complicated and unfair. So there’sno easier way for a politician to gain approval than to say thecurrent system should be eliminated.
It’s no surprise theRepublican presidential candidates have come out with somewide-ranging tax proposals. Even deciphering the content ofthese plans can be a challenge, so we took it upon ourselves toidentify how the GOP hopefuls’ differ and just what is in them.
When I left this series in September, I had introduced the idea of looking at past tax tables as a means of understanding how We the People define rich. One specific note from history was a surcharge on top of themarginal tax rates to pay for the Great One (WWII). Obviously, that aspect of our moral character has gone right out the window.
But before you get to excited aboutthis suggesting or, that I am saying that the poor need to pay moretaxes and the rich are over taxed consider the tax table from 1936,its lowest income tax bracket is 4%. This is on an income up to$4000. Let’s bring that forward to 2010 using my favorite money converter. CPI states that $4000 is now $60,400. Today’s rate for $16,750 to $68,000 is 15% instead of 4%. Of course,I like the unskilled labor and nominal GDP/capita numbers of $145,000and $275,000 respectfully.
Alright, I’ll be fair. The lowest rate in1967 is 14% for up to $1000. That figures to 2010 of $6540 CPI,$6670 unskilled and $11200 nominal GDP/capita. Though, the $4000 in1936 is $9640 in 1967 which puts one in the 22% bracket ofthat year. Using the $12000 for the top of that 1967 bracket brings us to$78,300 CPI adjusted gross income for 2010. $78,300 puts one in the25% bracket for 2010. Obviously another issue we have here when itcomes to setting up marginal rates based on historical records is howmuch the base (adjusted gross income) is effected by how the CPI iscalculated. Any way you figure it, we have been pushing the marginalrate higher and deeper into the lower end of the income pool.
This piece offers an understandable comparison between wages and dividend income and neatly summarizes the cost to wage earners. (h/t Mike Kimel)
by Peter S. Meyers
Myers Urbatsch PC
A Warm Wind At the Backs of Some, Generated Off the Backs of Others Yesterday, I learned in this Mother Jones article that workers have increased their contribution to government revenue disproportionately since 1980. In other words, payroll tax (paid by workers) is a larger portion of government revenue than it used to be. That’s a macroeconomic analysis, which still doesn’t answer the question of whether rich people are being treated “unfairly” by the current tax system.
So to elaborate a little, let’s take two people who make exactly the same amount: $100,000 in taxable income (after the standard deduction – let’s not get complicated). “Worker Taxpayer” earns her money by working (getting compensation by way of a W2) and “Investor Taxpayer” earns her money from dividends in a $4 million stock portfolio she holds (its about 2.5% in yield – about right). Let’s say they are both unmarried. Investor taxpayer does not work and has no compensation income. They are otherwise “equal,” right? (except that investor taxpayer fits the description of those who vituperate about lazy welfare recipients who sit on the couch all day and watch TV, right?) I’ll keep the rhetoric down, because the facts are outrageous enough to speak for themselves.
Worker taxpayer will pay $7650 in payroll tax, plus $21,617 in income tax (2011 brackets), for a total tax burden of $29,267.
Let’s look at investor taxpayer. You would think they would be taxed at the same rate as worker, right? Wrong. Because investor taxpayer receives all of her income from qualified dividends, they get a “special” tax treatment. Bear with me, we’re almost done. Generally, the maximum tax rate for qualified dividends is 15%, BUT HERE it is actually 0% because investor’s other income (remember she doesn’t work) is taxed at the 10% or 15% rate.
To refresh: worker making $100K pays about $30K in tax. Investor making $100K in qualified dividends pays $0 – no – tax. Huh? Yup.
What this means is that rich people – who are incented by tax policy to remain on their couches (too much earned income would otherwise trip them into the 15% dividend tax bracket) – are now getting off their couches and going to tea-party rallies to maintain this unfair redistribution of wealth in their favor. For if they work, they risk having their dividends taxed at 15% (still half of what, say, worker taxpayer paid in taxes, but confiscatory in their view). Perverse incentive? Yup. Does it sound like the rhetoric of the right wingers about unemployed persons and welfare recipients laying on couches and not incented to work? Hm. . . .
Now let’s say you didn’t work, or you worked very little, and instead you made all of your income from qualified dividends. The “magic number” (the income threshold you need to stay under to avoid paying any tax on your dividend income) is $69,000 (married), $34,500 (single or married filing separately) or $46,250 (head of household). Thus, you can actually work a little, and you have all this extra time – to attend rallies, political functions, cook your food, clean your house or do other things that people who actually earn their income from working have to: (a) pay someone else to do (which is not deductible), (b) do in the evenings or on weekends, or (c) simply let it slide.
I will now illustrate how it is almost impossible for someone who is already rich to not get richer, in fact much richer. Both working taxpayer and investor taxpayer have identical lifestyles and thus spend the exact same amount of money (not likely, given that worker has to pay for commuting expenses – again NOT deductible). Let’s assume that’s $70,000 per year. We know that worker taxpayer already paid $30K in tax, so let’s see what they have left to save: uh, nothing. Investor taxpayer paid no tax, so what do they have left over to save: $30K. Exactly the same amount that worker taxpayer paid in taxes.
The rationale for the tax policy you see illustrated above is George W. Bush’s. In 2003 he said that “double taxation is bad for our economy and falls especially hard on retired people.” He also argued that while “it’s fair to tax a company’s profits, it’s not fair to double-tax by taxing the shareholder on the same profits.”
Its odd to me that the above disparate treatment of otherwise similarly-situated earners is defended on the basis of “fairness.” Is this 1984? And I also wonder whether there is a joke in there somewhere – i.e., given that a zero-percent tax bracket would apply to someone who made all of their money from dividends and capital gains, why wouldn’t they retire? I sure as hell would. Working too much would bump all of their dividend income into the 15% tax bracket. Volunteering for the tea-party rally, or perhaps some other Republican cause, would be a far better use of one’s time.
reposted with permission of the author July 23, 2011 post
By Daniel Becker
“In 2009,there were 27.5 million businesses in the United States, according to Office of Advocacy estimates.The lastest available Census data show that there were 6.0 million firms with employees in 2007 and 21.4 million without employees in 2008. “
“You know what is missing in this discussion (a discussion happening in every town USA)? The question: Compared to what? What are we basing the above statements on? Is it simply that we have less money after the bills are paid? Well, from 1955 to 1998, GDP rose by a factor of 20. Tax burden as a percent of income rose by a factor of 26.7. But income for a family of 4, 2 people working (sound familiar) only rose by a factor of 11.5. From 1976 to 2001 the top 1 % share of income went from 8.6 % to 21%. Yes, we have less money at the end of the day. Unfortunately, not benefiting from the national wealth as we had in 1955 (when the tax burden was 18% of your pay and would be today if all was equal) is a national policy issue.”
“But, for my purposes Smithfield (an abutting town) presented the most interesting data. They had a new retail development go in, but ½ the size of that proposed for my town. It’s citizens have seen since 1999 in sequence a 9.8, 4, re-val, 5.5 and 8.7 percent rise in the tax rate. It’s commercial development has been only 10% industrial. My town only had a 6.4% total rise in the same time span.”
The Effect of Individual Income Tax Rates on the Economy, Part 2: The Great Depression and the New Deal, 1929 – 1940
by Mike Kimel
The Effect of Individual Income Tax Rates on the Economy, Part 2: The Great Depression and the New Deal, 1929 – 1940
This post is the second in a series that looks at the relationship between real economic growth and the top individual marginal tax rate.
Last week I had a post looking at the relationship between the state of the economy and the top individual marginal tax rate from 1913, the first year for which there were individual income taxes, to 1928. Because there is no official data on GDP for that period, I used recessions as a proxy for how well (or poorly) the economy was doing. I note that there was no sign whatsoever that the economy did better during periods when income taxes were non-existent (the post also looked back to 1901), or were low, or were falling, than when tax rates were high or were rising between 1901 and 1928.
This post extends the analysis to the period from 1929 to 1940, 1929 being the first year for which official real GDP data is available from the Bureau of Economic Analysis. 1940 is the end of FDR’s first eight years in office, and serves as a decent bookend to the New Deal era given America’s entry into WW2 in 1941. Top individual marginal tax rate figures used in this post come from the IRS.
The following graph shows the growth rate in real GDP from one year to the next (black line) and the top marginal tax rate (gray bars). In case you’re wondering, I’m using growth rate from one year to the next (e.g., the 1980 figure shows growth from 1980 to 1981) to avoid “what leads what” questions. If there is a causal relationship between the tax rate and the growth rate, the growth rate from 1980 to 1981 cannot be causing the 1980 tax rate.
Notice that tax rates fell from 77% in 1920 and 1921 to 24% in 1929, the year the Great Depression began. (As noted in the last post, the so called Roaring 20s was a period when the economy was often in recession.)
In 1932, tax rates rose to 63%, and by 1933, the economy was growing quickly. That doesn’t match with what people believe, I know. It seems these days its commonly accepted that FDR, who took office in 1933, created the Great Depression or at least made it worse, and that only WW2 saved us. In part to address that issue, the graph below shows growth only during the New Deal era, 1933 – 1940 (no WW2!!!). To put the growth in perspective, I’ve added two lines. One represents the fastest single year growth during the Reagan administration, and the other shows the average of the single year growth rates during the Reagan administration. I figured it would be a good comparison, the Reagan administration being today’s gold standard for all that is good and pure.
As the graph shows, in all but two years from 1933 to 1940, the t to t+1 growth rate was faster than in every single year of the Reagan administration. In fact, the average of the yearly growth rates during this period was about a percent and a half faster than Reagan’s best year.
And yes, there was a sharp downturn shortly after the tax hike in 1935, but its hard to credit that tax hike with the downturn when immediately after the economy continued on a rocket trajectory.
Now, whenever I point something like this out, I get told the same thing (at least by folks who are smart enough not to argue with the data): the rapid growth in the New Deal era occurred simply because the economy was slingshotting back from the Great Depression, and if anything the New Deal policies slowed the recovery. The problem with that argument, of course, is that because the unfortunate events of 2007-2009 witnessed the biggest economic decline since the end of WW2, the economy should be primed for the fastest spurt of growth in the past 60 years. After all, the policies we’ve been following before, during and since that decline have not been very New Dealish at all: top marginal tax rates are 35%, not 63% or 79%, there are no work relief programs, and Glass Steagal Act, passed as part of the New Deal, borders on irrelevant. Yet I think its safe to say just about everyone is in agreement that sort of growth isn’t going to happen anytime soon.
It is also safe to say that for the first two periods covered in this series (i.e., 1901 – 1928 and 1929 – 1940), we once again haven’t seen any sign of the purported relationship between
higher lower marginal tax rates and faster economic growth. No doubt that relationship shows up later on. Next post in the series: WW2 and the immediate post-War era.
As always, if you want my spreadsheets, drop me a line. I’m at my first name which is mike and a period and my last name which is kimel at gmail period com.
by Mike Kimel
The Effect of Individual Income Tax Rates on the Economy, Part 1: 1901 – 1928
In 1913, the 16th Amendment to the Constitution led to the income tax system we know and don’t love today. Since that time, in fact, since way before that time, people have been arguing about the effect of taxes on the economy. Over the next few posts, I will take a systematic look at the relationship between individual tax rates and the economy going as far back as the data allows in the United States.
In most of these posts, I will measure the effect of the economy using growth in real GDP per capita. However, that series only dates back to 1929. So in today’s post, which will focus on the period up to December 1928, I will look at the recessions (using official dates from the NBER and compare that to top individual marginal tax rates as published in the IRS’ statistics of income historical table 23.
The graph below shows the top marginal tax rate (black line) and periods in which the economy was in recession (gray bars) going back to January 1901. (Note – the economy was in a recession from June of 1899 to December 1900, so January 1901 is a nice “clean slate” date at which to start.)
I think the graph above lends itself to be division into three more or less discrete periods. The first is the pre-tax period from 1901 until 1912. The second is the “rising tax” period from 1913 through 1918, and the third is the “falling tax” period from 1919 to 1928.
Now, if you asked the typical economics professor or politician or conservative to rank three periods – no individual income taxes, rising individual income tax rates, and falling individual income tax rates – in terms of time spent in recession, you’d probably hear this back, “The economy will spend less time in recession when there are no income taxes, and the most time in recession when tax rates are rising.”
But that isn’t what the data shows. The time spent in recession is pretty comparable. The percentage of months under recession in the pre-tax period is 43.8%. The percentage of months under recession in the rising tax period is 40.3%. The percentage of months under recession in the falling tax period is 42.5%.
Now let’s talk some nuance. A recession is not a recession is not a recession. For instance, the recession that began in 1907 was pretty severe, and is often referred to as the Panic of 1907. The recession of 1918 was caused by the end of WW2. And then there’s one more detail worth mentioning, the elephant not in the room so to speak. The graph doesn’t show what happened in 1929, following just over a decade of tax cuts (in which time the top marginal rate fell from 77% to 24%), we had the Great Depression.
Next post in the series: The Great Depression and the New Deal