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Define Rich, Part III. What the tax tables of yore say.

 By Daniel Becker

Randolph Duke: Money isn’t everything, Mortimer.
Mortimer Duke: Oh, grow up.
Randolph Duke: Mother always said you were greedy.
Mortimer Duke: She meant it as a compliment.
A while ago (an understatement) I posted on the question of what is rich. The first dealt with what issues to consider in defining rich. The second was looking at the issue of getting rich if that is even what one wants to do. The “rat race”. I don’t believe most people really want to be rich. I believe most people when thinking about being rich are thinking about what it would take to remove the fears of events that would make one’s life either very difficult in a world that requires money to remove risk or drastically different from what one’s life was. I’m thinking things like losing a job, debilitating injury or illness possibly resulting in physical disability or Louis Winthorpe III.
This all ties into “The American Dream”. The “Dream” is not just an ideology of governance and social philosophy. It is also a life style and thus requires a specific level of income. I have posted on this issue also and noted just how high in income we have driven this “Dream” such that two people with bachelor’s degrees just starting life together may not be able to have it.
Now that we have entered a period where taxes are on everyone’s minds such that there is serious consensus to raising taxes, maybe we need to see what we had in the past to know what we need now. I am sure most readers are aware of Mike’s work defining what rates appear to effect economic growth the best. If I recall correctly the number for the top 1% was around 65%. I have also suggested that there is a range as to how large a share of the income the top 1% should have. That number for the top 1% is not to be above 15% and not to much below 10%.
I should also mention my postings on taxation’s purpose. Specifically I looked at taxing from the perspective of the legal profession as oppose to the economic profession. The conclusion was that there was one main reason for taxing. It is to fulfill the directive of our constitution: equality of power. It is to assure the concept of one voice one vote. If there was ever a time in our history to raise taxes in order to assure this directive it is now in the age of the Citizens United ruling. President FDR referred to the issue and those with the one voice multiple votes do to their monied power as “economic royalty”. I like that phrase and I wonder why it is not used as are retort to those who use “class warfare” as a guilt trip.
Let’s get started.

I have constructed 4 sets of data using the tax rates of 1936/37, 1945/46, 1965/67 and 2010. I chose 1936 because it is a tax rate increase after the economy had turned north based on Mikes posting. I chose 1945/46 because it is another adjustment that happens right after after WWII. I chose 1965/67 because it is the decrease often spoken of fondly. Of course 2010 is because that is where we are at.

This posting would be hugely long if I post on all 4 periods at once, so I have broken it up. Let me first and I think most importantly note that we people today have no idea just how much we were willing to tax ourselves to have the society that we now refer to as “the good old days”. Not only did we have the tax tables of 1936, that table eventually had a 10% surcharge added to pay for the war. Yes, another reason to consider the generation that fought the 1st and 2nd world wars the greatest generation. There was a 7% surcharge for the Vietnam war, though that number became less as time passed. Still, we knew that if we wanted to do exceptional things, we had to tax ourselves exceptionally. Also, the early taxation made no distinction for single or married, never mind filing joint or separate. Everyone paid the same rate. Most interestingly, with the current table, the people who comparatively get screwed are those who are married and file separately. All the rates kick in at a lower income than even those who are single. The other thing we don’t seem to understand is that all the tax rhetoric we have been hearing since Reagan we’ve heard before virtually to the word.
Andrew Mellon, Treasury Secretary 1921 to 1932 :
Generally speaking, Mellon argued that tax burdens were too high. Steep rates, he insisted, served only to stifle incentive and foster tax evasion. “Any man of energy and initiative in this country can get what he wants out of life,” he wrote. “But when initiative is crippled by legislation or by a tax system which denies him the right to receive a reasonable share of his earnings, then he will no longer exert himself and the country will be deprived of the energy on which its continued greatness depends.”
Worse yet, Mellon argued, high rates didn’t even raise money. By encouraging both legal tax avoidance and illegal tax evasion, they eroded the tax base and reduced overall revenue. Lower rates, he said, would actually raise money by spurring economic growth and reducing the incentive for tax avoidance. “It seems difficult for some to understand,” he complained, “that high rates of taxation do not necessarily mean large revenue to the government, and that more revenue may actually be obtained by lower rates.” In particular, Mellon insisted that high rates distorted investment decisions, boosting the popularity of tax-free state and local government bonds. Indeed, Mellon made these tax-free bonds a regular target of his reform attempts, but Congress resisted his plans to eliminate them.
Atlas Shrugged wasn’t even written then!  What we don’t hear much of are the original concerns and reasoning for progressive taxation. Teddy Roosevelt:
1906…We should discriminate in the sharpest way between fortunes well-won and fortunes ill-won; between those gained as an incident to performing great services to the community as a whole, and those gained in evil fashion by keeping just within the limits of mere law-honesty.
1907 regarding an income tax:…while in addition it is a difficult tax to administer in its practical working, and great care would have to be exercised to see that it was not evaded by the very men whom it was most desirable to have taxed, for if so evaded it would, of course, be worse than no tax at all; as the least desirable of all taxes is the tax which bears heavily upon the honest as compared with the dishonest man.
No advantage comes either to the country as a whole or to the individuals inheriting the money by permitting the transmission in their entirety of the enormous fortunes which would be affected by such a tax; and as an incident to its function of revenue raising, such a tax would help to preserve a measurable equality of opportunity for the people of the generations growing to manhood. We have not the slightest sympathy with that socialistic idea which would try to put laziness, thriftlessness and inefficiency on a par with industry, thrift and efficiency; which would strive to break up not merely private property, but what is far more important, the home, the chief prop upon which our whole civilization stands. Such a theory, if ever adopted, would mean the ruin of the entire country–a ruin  which would bear heaviest upon the weakest, upon those least able to shift for themselves.
At this moment, I want to mention corporate taxes. There are lessons to be learned from it’s history. I think it is a factor in understand more completely the issue Mike is focusing on: taxation and GDP growth. Wrap your minds around the fact that from 1936 to 1943 there were 6 years that corporate tax collections were greater than personal income tax collections. 1943 was the best year for this as personal income tax collections were 68.1% of the corporate tax collections. Just one year later it flips to corporate tax collections being 75.3% of personal income tax collections. In 1944 $34,543 million in total for the two taxes was collected vs 1943 $16,062 million in total.  In fact, personal income taxes remain in the mid to high 40 percent of total revenue collections from 1944 to present. The corporate share of total revenue peaks in 1943 at 39.8% and declines to hover around the 10% level with a few ventures into the single digits. Most notably 1983 the corporate share was 6.2% and 2009 it was 6.6%.
First up is our current tax table. I used the “married filling jointly” as that would be consistent with the other tables. One big rule of this series of postings: DO NOT concern yourself or me about the deductions that exist. They do not matter for this presentation and for all intent and purposes we can consider the income to have already gone through the deduction calculator and is now ready to have the tax table applied. This is because, these tables only apply to adjusted gross income.
You will notice that the table is calculated out to $,1,000,000 of income. I did this in order to keep all the tables going to the same income level. The 1936 table actually has rates for incomes up to $8 million. That is $8 million in 1936. (Using my favorite money converter that would be $301,000,000 in unskilled labor or $573,000,000 in GDP/capita.) Going to $1,000,000 in income also allows one to see what happens at the top when the rate no longer rises.
A very important concept to understand is that not every dollar is taxed at the single percentage rate as you go up the income ladder. Thus, there are two columns in my charts. The “Marginal Tax” is the additional money paid at the top of the bracket for the corresponding rate. The “Total tax” is the actual money paid up to that level. It is the “effective rate”. In simple terms, if you are at the 35% level, you 
are not paying 35% on all that you earn. Instead you are paying the amount based on your income being divided up into the number of brackets that exist. For 2010, there are 6 brackets, thus you have six different incomes so to speak.
This is what it looks like as a graph.
When the rate maxed out, I divided the range to $1 million into even parts so that the tax paid for each additional income level is the same. For the 1945/46 and 1965/67 data sets I converted the net income to 2010 dollars. I used the “unskilled labor” and GDP/cap as those are the 2 factors suggested as being the best for knowing what income equivalents are over time. The 1936 data set is converted to 1967 dollar because the numbers just get crazy. For example, a net income of $3840 is $145,000 in unskilled labor and $275,000 in GDP/cap. Though it is only $60,400 via the CPI. Which doesn’t say much for today’s median family income. It also gives us a clue as to just how much money is considered “rich”.
Next posting, I will start presenting the historical data sets. I’m still thinking about the best way to do it as what is important is the comparison among the data sets.  Maybe post just the data charts and later the graphs or maybe one data set and it’s graphs at a time. 

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Taxing wealthy to pay for health care

by divorced one like Bush

As we are talking about taxes and health care this is The Real News Network article regarding raising taxes on the wealthy to pay for health care. (The Real News Network is a global online video news network that listens to and is dependent on its audience. No ads. No government subsidies, no corporate sponsorship. Check out our site.)

Make sure you catch Presidents Obama’s response to the obligatory question framed as “punishing the rich”. The article interviews Professor Richard Wolff, economist, U of Massachusetts.

If President Obama and Professor Wolff have piked your interest, or you would like to understand why they talked about taxing the rich as they did, you can read my series on taxation starting here, moving to the second one, moving to the final post.
Then you can go here and read Linda Beale’s appeal for support of eduction regarding tax literacy.

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A Response to Megan McArdle, Again (by cactus)

by cactus

Megan McArdle responds to a post I wrote:

So Obama doesn’t count because he’s not really a Democrat. But Bill Clinton was. But Richard Nixon–the chap who implemented price controls and massively expanded Social Security and Medicare–was definitely a Republican. Jimmy Carter, who deregulated like mad: definitely a Democrat.

What are these policies that neatly define Democrats to exclude only the ones who happen to have crappy growth? On what metric does Barack Obama register as farther to the right than Bill Clinton? Because from what I remember of the 1990s, I spent most of the decade listening to my genuinely left-wing friends weep that he’d betrayed them. Remember Edelman’s resigning in protest of welfare reform?

I thought it was unnecessary at this point to explain the one thing I’ve pointed out time and again differentiates Republicans from Democrats. I think the first time was here. (I tend not to break out JFK from LBJ, or Nixon from Ford because JFK and Ford only served a short time, but the post that is attached is illustrative of behavior, not performance.)

The difference is the tax burden – that is, the percentage of people’s income that gets collected in taxes. Not the marginal rate – the amount people actually pay divided by the amount they make. And there is a difference, a big difference. As an example: George Herbert Walker Bush famously raised marginal rates. It might have cost him an election. But GHW Bush also quietly lowered the tax burden. He did it through the people he appointed to the IRS, through the degree of compliance he sought, through the way his IRS interpreted existing rules and regulations and through how the body of tax rules and regulations changed while he was in office.

Going back to 1952 at least, every Democrat, every single one, has increased the tax burden. Every single Republican raised lowered [h/t Bruce Webb] them. The data in the attached post is from the IRS and goes back only to 1952, but one can wander over to the BEA’s NIPA Table 2.1 and compute the tax burden ourselves with National Income data going back to 1929, and whaddaya know, the rule also works for Hoover, FDR, and Truman. Just barely for Truman… but then he is the exception on performance too, right?

Now, I doubt you could find a single person on the right of the political spectrum who would tell you that taxes don’t affect economic growth. They all believe taxes affect growth. Of course, the story they tell is that cutting taxes produces faster economic growth. The fact is, however, the Presidents who cut tax burdens tended to produce slower economic growth than those who raised taxes. (I’ve discussed why in a number of other posts, and I don’t feel like rehashing or looking for those posts now. I also note this isn’t just true of Presidents. My fellow Angry Bear, Spencer, once pointed out that there are a lot of people out there who seem to think we’d all be better off if the country was Alabama than if it was Massachussetts.)

Unfortunately, tax burden data, like any other bit of real world data, fluctuates somewhat from year to year, so its really going to be a while before we know what direction they’re really headed over O’s administration. As in, several years. And most of us are impatient. So we’d like to have some leading indicators, so to speak, of what Obama is going to do, of where he’s going to fall on the one R v. D divide that really matters. And right now, he’s behaving like the folks who have cut tax burdens in the past. He’s also talking like them. His bail-out is identical to GW’s, and when he talks about taxes, it doesn’t sound like Clinton, it sounds like GW. So its reasonable to wonder whether he’s going to stick to the R v. D rule. And the next test coming up is healthcare; a D would be putting his political capital on the public option right now. An R wouldn’t. What’s it gonna be, we’ll soon see.

More below the fold.

Now, in Megan’s post, she refers to “Cactus and his merry band of madmen.” I’m not sure the merry band of madmen over here truly have a leader, much less that I’m the one (Dan is the official grand poobah in charge of the blog, after all!!) but I’m guessing you aren’t a part of that merry band of madmen if any of the following apply to you:

  1. You do not believe that since 1929 at least, every single D has increased the tax burden and every single R has decreased the tax burden, despite the fact that the data shows precisely this, and despite the fact that it fits the caricature of Ds and Rs to a T, so to speak.
  2. You do not believe that since 1929, Ds have generally outperformed Rs when it comes to real economic growth, despite the fact that the data shows precisely this.
  3. You do not believe that administrations that cut the tax burden have also generally been the administrations that grew more rapidly, despite 1. and 2.
  4. You do not believe that the tax burden could possibly have anything to do with growth.

If you do believe these things, if you believe what the data shows , I’m sorry to say but you’re one of us, one of the merry band of madmen. On the other hand, if you fit these rules, there are a whole lot of folks out there, Megan McArdle included, who would consider you sane.

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The Advantage to Sin Taxes is Relatively Low IED

My Loyal Reader notes that the economic survival of Zimbabwe’s current government is now largely dependent on sin taxes:

As he presented his revised 2009 budget to parliament, Finance Minister Tendai Biti noted that “indirect taxes made up of customs and excise duty have contributed 88 percent of government revenue, which means that the government has been literally sustained by beer and cigarettes.”

Those who are planning to “go Galt” will need also to Sin No More.

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Dep’t of Man Bites Dog: Tax Foundation Working Paper is More Honest than Tax Foundation News Release

In honor of Economy Day at the DNC, the Tax Foundation sent me an e-mail trying to convince me that the corporate income tax is terribly unfair to average Americans. The pitch is based on a tax incidence study that claims that in the lower quintile of cash incomes, personal income taxes averaged $171 in 2004, whereas the effective bite of corporate income taxes was $271. Including payroll and excise taxes, they figure that the bottom 20 percent paid on average $1,684. All other figures in the post are from the Tax Foundation.

As an aside, at least the estate tax burden for the bottom quintile was estimated to be $0. For the second quintile, the estate tax burden was $0. At the median, the burden was $0. In the fourth quintile (i.e. up to the 80th income percentile), the average estate tax burden, according to the Tax Foundation, was $0. By advanced mathematics, the maximum estate tax burden for the bottom 80% of the U.S. income distribution was — you guessed it — $0. That goes to show the power of marketing.

Before you start wringing your hands about the corporate income tax shafting the poor, a working paper [PDF] that serves as the source of the statistics is honest enough to note that the net fiscal incidence is the difference between government spending and tax payments. The news item only gives the payment side, but the paper actually provides the benefits and allows calculation of the net incidence.

It turns out that by the Tax Foundation economists’ calculations, that diabolical tax system took that $1,684 only to return $24,860 in spending to bottom-quintile earners, including expenditures on what the authors tally as public goods. Average net benefits don’t turn negative until the fourth income quintile, and the top quintile, with the largest net “burden,” faced an effective total (average) tax rate of 34.55 percent (24.25% federal). That includes income, payroll, excise, property, and estate taxes at all levels, again in the account the Tax Foundation is peddling.

Some of you may think that’s unconscionable confiscation, but I prefer to think of the working well-to-do and the rich as having a glass that’s right around 2/3 full. And even without being anywhere close to the nosebleed sections of the distribution, I can tell you that if you take the pessimistic view of the tax incidence on the well-to-do and aren’t in the top fifth, I’m not trading places to free myself of that “burden.” Just saying.

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The Right-Wing Anti-Tax Machine Doesn’t Have to Buy the Cow…

EconomistMom recently defended, after a fashion, Alex Brill and Alan Viard’s notorious article claiming that the Obama tax plan would raise effective marginal tax rates on middle-class taxpayers. They’re making a mountain out of a molehill, she concludes, even incidentally distorting the Obama tax plans along the way, but to her knowledge (of the two of them) wouldn’t be deliberately dishonest. More below the fold.

Before you say “born yesterday,” she’s almost surely right at the very least in the sense that if you’re running the in-house publication of a conservative think-tank, you need only run down (say) the list of the economist supporters the McCain economic “plan” — yes, even the subset who actually read it! — to find people who earnestly believe that lack of incentives to make money is a serious problem for the U.S. economy and willing to write something up to that effect. The economists are then pure (if deluded) and the upshot, for the policy entrepreneurs, is perhaps even better than hiring obvious hacks. Among other things, real economists like Jonah Gelbach will engage those issues.

As a comments-hoisting aside, the Brill and Viard piece highlights a cost of conducting progressive policy through tax expenditures. I don’t think even center-leftists of the Obama camp are necessarily opposed to public provision of the services they’re trying to fund through the tax system, but to some extent they’ve pre-compromised on packaging them as delectable tax cuts to make them appeal to conservatives. At my old place, I’d argued that liberal think-tankers need to take a lesson from the Heritage Foundations of the world and advocate the policies they really want:

I agree with TCT [Madison’s late progressive newspaper] that CAP needs to eat its spinach [in the Popeye sense]. It comes across like a center-left-center quasi-counterbalance to the only moderately wingnutty American Enterprise Institute rather than what it arguably needs to be, which is the Heritage Foundation of the left.

The lack of boldness cited by TCT is particularly evident in a misplaced fetish of pragmatism. Why misguided? Sure, CAP policy proposals would constitute a distinct improvement over Bushism, but their chance of getting any of them enacted with Republicans in charge of the executive and legislative branches is effectively zero [this was written in 2005, but things have changed surprisingly little]. And CAP policy proposals are not likely to fire people up to elect Democrats.

There is consequently no cost to thinking bigger (abstracting from CAP’s funding sources), and in fact there are likely to be massive longer-term benefits in that incubating actual progressive ideas is an entrée to building a political coalition for their enactment… [R]ushing, or at least appearing to rush, into the vacuum left by right-running Republicans fractures the progressive vote.

And for all that, the wingnuts pay liberals back for their efforts at compromise by complaining that those tax cuts just make the tax code more complicated and screw up “incentives.”

Meanwhile the marginal rate business seems to be a meme on the other side of the fence, as Greg Mankiw heh-indeeds a Tax Foundation blog post suggesting that the top effective Federal personal tax rate would increase roughly 10-12 percentage points under Obama tax proposals. (See?) Sez Bob Carroll:

Note: These calculations work as follows: (1) 37.9 percent equals the current 35 percent top income tax rate plus the current 2.9 percent Medicare tax rate; and (2) 48 to 50 percent equals Obama’s 39.6 percent top income tax rate plus the 2.9 percent Medicare tax rate plus his additional 2-to-4 percent hike in the Social Security tax rate plus an additional roughly 4.5 percent for the phase-out of personal exemption and certain itemized deductions.

Is this calculation ingenuous and totally correct? No, it is not. Sort of like Brill and Viard, Carroll is calculating what will tend to be top inframarginal rates applying to portions of the income of the very well-to-do. They don’t do much to characterize of the general tenor of the Obama tax plans as they’d affect the median voter — other than, maybe, the feature of shifting more of the tax burden back to the rich (apparently Prof. Mankiw cares personally about those rates).

First, a regularity of upper-income tax returns is that much or most of the income comes from non-wage sources that aren’t subject to the payroll tax. According to the latest (2006) tax filing statistics, taxable returns with Adjusted Gross Income (AGI) between $500,000 and $1 million — the lower-middle class, per John McCain — reported on average $678,000 in AGI and $591,000 of taxable income, of which wages and salaries averaged only $320,000. All that non-employment income would be taxed at no more than the statutory rate for ordinary income — so the difference there is the 35% Bush-era rate vs. the 39.6% Clinton-era rate. Suggesting that the Clinton-era rates don’t provide sufficient incentives for the near-rich and rich to make more money is silly.

Another issue pertains to adding 4.5 percentage points for the exemption and deduction phaseouts to Obama’s rate. The statutory phaseout rates are 2.8% for personal exemptions and 3% for itemized deductions, or 5.8%. Nevertheless, Carroll is not being generous by charging Obama’s plans with 4.5% instead of 5.8%. For one thing, the personal exemption is, except for weird cases — married taxpayers with adjusted gross income in a narrow band around $360,000 and next to nothing in itemized deductions — already phased out before you get to the top bracket. So the effective net hit is no more than 3%, and probably a lot less if not zero. That’s because in this income range, the ordinary income tax interacts strongly with the Alternative Minimum Tax (AMT), with AMT taking away deductions given back by the phaseout of the phaseout. (If you want to view that last sentence as an argument for tax re-simplification, I wouldn’t argue.) It’s worth remembering that increased AMT incidence was a feature of the 2001 tax cuts from the perspective of reducing the law’s apparent revenue reduction and gulling the theoretically fiscally conservative into voting for them.

More broadly, this focuses attention where it should not be, which is to say the plight of the rich — who don’t especially need help (beyond generally sound economic policies) staying rich or getting richer. Though it does seem, fortunately, that the Obama campaign has figured out that they have an issue there.

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Ain’t been no progressiveness since 1980

In this post, Bruno commented and posted this link to reference this statement:

In 2005, the top 1 percent of tax returns paid 39.4 percent of all federal individual income taxes and earned 21.2 percent of adjusted gross income, both of which are significantly higher than 2004 when the top 1 percent earned 19 percent of AGI and paid 36.9 percent of federal individual income taxes.

I assume that the purpose of reporting the data in this way is to invoke a natural sense of fairness to people. That being that one’s share of B should reflect their share of A. That B became “significantly higher” suggests some unfairness. Oh for the humanity of it.

The report could have reported that the top 1%’s tax burden in dollars was 20% higher, however their share of income was 21.8% higher. Now is this fair? Is this fair of the report to have noted the rise of both income and taxes paid in a manor that makes the top1% look as if they are getting unfair treatment and not show that the bottom 99% ‘s income only went up 6.2% but their dollars paid in income taxes went up 7.9%?

How fair is this? All of it? 1980 to 2005 all? Adjusted incomes all?

Well, it turns out this report had a link to an exel file of their data. Perfect! As a dutiful AB’er I took it as my charge to see what that data was really showing. Turns out since 1980, the messing with the tax rates has had some strange effects. Fairness is missing in all of it, even the vaunted Clinton era.

Look at this chart. Notice how the income for the bottom 99% is continuously falling away from the total income. Of course, you can’t miss the top 1% line. Up, up and away (in my beautiful, my beautiful balloon…)

The next chart is of total taxes paid. Notice the similarity. The rising share of total income that becomes income taxes is certainly a function of one’s rising share of total income.

But, the income going up faster than the rise in taxes paid or the taxes paid rising faster than the income is a function of the rates.

This chart may not be to impressive unless you look real close. Look between 1991 and 2000 at the bottom 99%. Do you see that it is rising? This is a period that we are suppose to be considering a symbol of progressive taxation and yet income taxes paid as a percentage of income is rising for the bottom 99% while it is descending for the top 1%. The actual percentages for the 99%’ers start in 1992 at 10.9 and peaks in 2000 at 12.1%. Where as the top 1% go from 25.05% 1992 to 28.87% 1996 to 27.45 2000.
Update, forgot these 2 paragraphs:
Is this what we are to consider progressive taxation? No it is not. The covers blown. We have not had a progressive tax adjustment since we started playing with the code with Reagan. And it hurt more knowing that it was decidedly unprogressive during a term when the president ran as a progressive. It hurts even more because Clinton’s term is being pointed to as a time to emulate. A rise of share of income to the top 1% of 6 points in 8 years and now we see that the bottom got buffaloed in the income tax department too.

The highest total of income collected as income taxes in this series of data was 1981 at 15.76%. Being that Reagan hadn’t started blowing the budget, this could reasonably be considered the amount of money we have to pay to keep the budget in good shape. (That is assuming all other taxes stay the same as 1981. They didn’t.) But NOOOOOOOOOOO. We see us paying less each year until 1990. Only 23.25% was paid to take care of our house that year. The top 1% paid 25.1% of the house needs out of 14% of the income. The rest of us paid 74.9% of the house needs out of 86% of the income.
By 2000 we are paying 15.26% of our total income for the needs of the house. The top 1% is paying 37.4% of the need out of 20.8% of the income. The rest of us are paying 62.6 % of the needs out of 79.2% of the income. Ok, I guess there was some progressiveness here.
But! In 1992 the income per capita for the top 1% was $152,743 and $11,055 for the rest. By 2000 it’s $343,357 and $15,999 respectively. Now I ask you, is this progressive? A 124.8% increase for the 1%’ers and only a 44.7% increase for the rest of us. Remember, this is during the Clinton years!
Since that time, the house has really been starving for attention. In 2005, the year the top is or is not getting screwed (I think the numbers show they are not) we collectively only paid 12.45% of our income to the house needs. We have never paid so little. Well, except for 2003 when we paid 11.9%. Which just happens to be somewhere between the 1999 and 2000 percentage for the share of income paid by the bottom 99%. Yes folks, currently we are trying to fund the house on the same percentage of income that only the bottom 99% use to pay. Or, put another way, we are funding a 304.2% (BEA table 3.1 1981 to 2005) increase in house needs on only a 234.3% increase in payments to the house while the total source has increased 319.2%. That’s 260.2% (awfully close to the house needs rise) for the bottom 99 and 970.3% for the poor souls burdened with 39% of the house needs.
Let me be blunt: This all sucks. Just plain sick and tired of having my head played sucks.

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Opus : Finale’ A Discussion On Taxation

“Taxation is in fact the most difficult function of government – and that against which their citizens are most apt to be refractory” Thomas Jefferson

First, I apologize for taking so long to get back to this. But….I needed to work on some leads/songs (it’s not really work), get a new singer up to speed (hope this one stays around, it would be a first), deal with temporarily replacing my office manager (medical leave) and of course Valentines (the other business). Oh yeah, get some tax stuff done: W2’s, fed and state reports, blah, blah, blah.

Well Jeff Beck is playing Going Down, next is Situation on a compilation CD I made so…
I left off with Mr. Avi-Yonah stating:

A society is a community with a shared culture and shared interests that transcend the interests of its individual members and extend back to its historical roots and forward into its future. Thus, it is necessary to look for affirmative reasons for taxing the rich that are rooted in a broader social and historical understanding of the vital function of taxation in maintaining such a community over time.

He list 3 common “excuses” shall we say, for answering the “why”.

A: That is where the money is. A presentation is made of the inequality numbers which I have taken every opportunity to put in front of the AB reader and then states:

While these facts demonstrate the potential for large redistributive gains by increasing taxes at the very top of the income distribution, they also illustrate the importance of the rich to the economy and thus the potential cost of taxing them. Thus, any argument for taxing the rich must depend on more than mere income or wealth distribution numbers.

I could take issue with the first sentence, but I agree, we have to depend on something more than “that’s where the money is”. Although, considering our nations debt and who has benefited from such, it makes a very strong number 2 at least if not a co-number one for the present.

B. “I Took All of It from Them”

Another argument for taxing the rich can be summarized in department store mogul Edward Filene’s explanation of why he approved of the income tax: “Why shouldn’t the American people take half my money from me? I took all of it from them.”

Getting beyond the simplicity of Edward Filene’s argument, Mr. Avi-Yonah presents this as a case of partnership between the individual’s contribution and the government’s contribution thus, taxation is the government receiving it’s share. Government also can do with it’s share as it want including giving it to others. The problems he sees with this are:

First, since it is as focused on individual taxpayers as optimal tax theory, individual taxpayers can object that the partnership does not apply to them. Second, even if one accepts the partnership model, it is still unclear that it justifies progressive taxation of the rich rather than mere proportionate taxation.

I don’t think he captures the error of the argument correctly here. Being that we are the government, we are all in a partnership. That one would argue the partnership does not apply is purely selfish want verses civic understanding and rightly should not be a serious consideration of argument. But as he notes, that still does not get us past the issue of progression over proportion.

C: “Money is the measuring rod of power.”
Mr. Avi-Yonah note it is a quote of Howard Hughes. He develops the argument that the rich go beyond acquiring money for consumption needs and wants and thus pursue wealth for it’s own sake.

Wealth confers power beyond its consumption value.74 This power is economic, social, and political. The economic power of the rich derives primarily from their ability to use their wealth to invest in enterprises that employ thousands of people and can dominate large sectors of the economy. The social element derives from the knowledge other people have of the potential ability of the rich to use their wealth to acquire goods and to contribute to charities, which leads them to court such acquisitions and contributions even without such consumption taking place. Finally, the political power of the rich stems not just from their actual donations or their ability to finance runs for political office, but, more importantly, from politicians knowing that they have the excess funds to donate.

The problem as he views it is:

As the eminent public finance economist Richard Musgrave has stated, a consumption tax is deficient because it “ assumes that consumption, current or future, is the only benefit that income provides. This overlooks the benefits derived from the accumulation and holding of wealth, whether in terms of security, power, or social standing.”

If this analysis is true, what does it imply for taxing the rich? From an optimal tax perspective, arguing that the rich derive added utility from their wealth that is not available to people for whom (because of their lesser means) money only has consumption value is an argument against taxing the rich. That is because any redistribution in the optimal tax model derives from its assumption of the declining marginal utility of money, and the “ riches mean power” model militates against this assumption.

A fine Catch 22.

I have stated that we have to ask: When is enough, enough? I ask this from a reference of consumption. Beyond that, the utility of further acquisition is no longer a need of material wants. It is a need of intangible wants. Considering my post on the World Bank’s finding that true wealth is from intangibles, a reason for progressive taxation has to address the intangible such as power.

Thus the reason for progressive taxation via some history as presented by Mr. Avi-Yonah:

The American Revolution likewise was founded on the conception that while people have natural, Lockean liberal rights to their property, undue concentrations of private power and wealth should be discouraged.81 This view found its expression in the republican creed of civic humanism, which emphasized public virtue as a balance to private rights. A virtuous republic, the Framers believed, was to be free from concentrations of economic power that characterized England in the eighteenth century.82 Therefore, from the beginning of the Republic, federal and state legislators used taxation to restrict privilege and to “ affirm communal responsibilities, deepen citizenship, and demonstrate the fiscal virtues of a republican citizenry.”

The idea of progressive taxation is part and parcel to achieving the ideals set out in our constitution in that our constitution is a formulation for assuring a disbursement of power. Though I wonder if in this “virtuous republic” we are finding the mantra of the Republican’s intrusion into one’s personal life, be it as usual a bastardized use by them.

There is a political lesson presented in the history of how we got our income tax that I was not aware of:

There was another agenda at play as well in the early years of the federal income tax: the desire to use progressive taxation as a way to “ stave off more radical calls for industrial democracy.” 97 This explains why even some high-income Republican groups supported the Sixteenth Amendment.98 Andrew Mellon, Secretary of the Treasury in the 1920s and one of the wealthiest Americans, “ believed that keeping tax schedules graduated (albeit flatter) would mitigate radical demands for restructuring the capitalist system.” 9

Interesting. It was a time when those with the economic power were actually feeling threatened of a greater loss. This is a very important aspect of the debate that I don’t believe the citizenry appreciates. Perhaps if the citizenry knew that in the past they were able to instill the fear of greater loss, today the message of change would take on a more definitive tone than just “hope”.

Mr. Avi-Yonah summarized the need to be concerned with the inequality of income/wealth:

There are three arguments why extreme concentrations of wealth are undemocratic.
The first two are obvious: In the American system of government, great wealth can buy political favors (often at minuscule expenditures) and finance runs for office (at somewhat greater but still quite limited costs).114 The third is more subtle—that vast inequality of wealth is socially destructive because it degrades relationships among people (cultural, social, and political) and eventually undermines the sense of community on which a democratic polity must rest.115 This argument is particularly true in a country like the United States, which is not bound together by ties of ethnicity, culture, or language.116

…that extreme concentrations of power resulting from extreme concentrations of wealth in the hands of private individuals who are unaccountable to the majority is an unhealthy phenomenon in a democracy. Such private individuals exercise degrees of power and influence that run counter to the ability of the government of the people to govern the country in accordance with the people’s wishes, as expressed in democratic elections.

As to where the responsibility belongs for presenting this argument:

As Slemrod writes,

The approach of mainstream modern public finance economics to these issues has been to accept, for the sake of argument, the right of government to redistribute income through the tax system (and other means); to sidestep the ethical arguments about assessing the value of a more equal distribution of economic outcomes; and toinstead investigate the implications of various value judgments for the design of the tax system.126

Such an attitude to distributive issues may be fine for public finance economists, although it did not characterize the economics profession before the 1950s and still does not characterize some of it today.127 But it does not excuse the abdication of equity in favor of efficiency by most legal tax academics, especially in some of the elite law schools…It is time for legal tax academics to redress the balance.

As a professional, I can understand the argument to separate the two issues via 2 professions. The concept of a profession is that it is specialized. As a thinking person and a citizen, the public discussion should not allow the issue of efficiency to dominate one profession’s focus while the issue of equity dominates another profession. We have to assure both equity and efficiency are discussed and decided upon in order to stay true to the preamble of the Constitution and minimize Thomas Jefferson’s observation of the citizens response.

Part 1 is here.

In response to Dmerek question regarding what Thomas Jefferson thought:

“I approved from the first moment of… the power of taxation [in the new Constitution]. I thought at first that [it] might have been limited. A little reflection soon convinced me it ought not to be.” –Thomas Jefferson to Francis Hopkinson, 1789. ME 7:300

Being that President Jefferson believed in the will of the people and the people passed the 16th amendment, the issue becomes a question of how much for what expenditures and not whether we can tax.
There is much more on what President Jefferson had to say.

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Progressive Tax System, My A$$


Sheesh. I wake up this morning and my first thought is… what the heck was I thinking last night? I have to put a bit more thought into these things that I write at the end of the day.

We all make stupid mistakes and this qualifies as one of mine. I think its been a while since I put up something this dumb.

Sorry about that.


I’m doing a bit of work on taxes and income right now, and I found something really uncool. First, this table shows us the income limits for families for each income quintile and the top 5% of income earners. Second, Table 1A of this CBO spreadsheet gives us the total effective federal tax burden of faced by folks in the various income quintiles, and the top 10%, 5%, and 1% of income earners. (Data for 2003 and 2004 come from this update.)

With this, we can measure the progressivity (or lack of it) of the tax system. See, if the system is progressive, then the difference between the tax burden imposed on people who earn a lot and the tax burden on people who earn very little will be bigger than the difference in income earned by both groups. A person who makes 10 times what another person makes will pay more than 10 times as much in taxes. If the tax system is regressive, then the opposite is true.

Most of you can already see where this is going. If you can’t, you’re not enough of a cynic, or in denial and trying to think up an excuse. But keep reading, because there is at least one real surprise in this post.

So here’s a graph showing two curves. The first curve is the ratio of low income individuals (which I’m defining as those at the bottom quintile) to high income individuals (the top 5% of income earners). The second curve is the ratio of the tax burden imposed on the low income earners to the tax burden imposed on the high income earners.

What we see is this:

1. The ratio of incomes is lower than the ratio of tax burdens. As an example… in the year 2000, low income folks made 14.99% of the income of high income folks. (Those at the bottom made $24,000, those at the top made over $160,000) But the tax burden on low income folks was 20.65% of the tax burden on high income folks. (Those at the bottom had a 6.4% tax burden, and those at the top had a 31% tax burden.) Put another way… an increase in income leads to a less than proportional increase in the tax burden.
2. On the plus side, the system is heading in the direction of being progressive – and has continued to head in that direction even under GW! But that’s a recent phenomenon. Under Reagan, the system became a lot more regressive, especially through 1986.
3. What happened from 1996 to 2000? I suspect the booming stock market coupled with cuts in the capital gains tax rate is a big one.

But the big take-away… the tax system is regressive. Its becoming less regressive, but its still regressive.


Update… As noted at the very top of the post, I must have been hallucinating when I wrote this. Conclusions in this post are incorrect. Sorry about that.

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More Stupid Tax Code messing around

A few commenters of my last post suggested that picking at the tax code can create big problems if you don’t know what you’re talking about. I agree. Why mess with what is working as evident in the data continuously collected and reported concerning the economy. But, in 1981 they did mess with it and in a very big way and it hasn’t stopped. As the saying goes “everything changed”. Even under Clinton the share of income to the top 1% rose 6 points.
To recall, my point is that it’s not just the rates that are the problem, it’s the code.
One comment got me looking further.

Save the Rust Belt
“In general, the attempts by Congress in various bills to limit the deductibility of executive compensation caused the flood of executive stock options, and created a much bigger mess “
From a review by Peat, Marwick, Mitchell & Co.

The Economic Recovery Tax Act of 1981 is the most comprehensive tax reform
since 1954.
It affects virtually every financial planning decision. The Act creates a “new” type of stock option known as an “Incentive Stock Option” under which favorable tax treatment will be afforded to the option holder if certain conditions are met. Under current law, employer stock options are not entitled to preferential treatment.
The incentive stock option will have a significant effect on compensation planning
for all companies, and these rules may be applicable to options already exercised in 1981. Incentive stock option plans will probably become the cornerstone of executive compensation plans involving capital accumulation.

(Within this report are the changes related to the savings and loan mess. Considering today’s subprime problems, it is rather instructive as it relates to learning from history. Start on page 39 of the document.)

Thus, it was not the messing around that created stock options as a preferential means of payment. In the 1986 messing around they: eased the rules for exercise of Incentive Stock Option (ISO).

But, how was this 1981 act being portrayed by the CBO? Baseline Budget Projections for Fiscal Years 1983 – 1987 Report February 1982

The CBO baseline economic forecast shows an early end to the current recession and an acceleration of economic growth following the July tax cut.
Baseline revenue projections assume no change in current tax laws,… Under the CBO baseline economic assumptions, revenues are projected to rise from an estimated $631 billion in fiscal year 1982 to $882 billion in 1987. This represents an average growth of 6.9 percent a year, compared with an assumed average growth in nominal GNP of about 10 percent a year for the projection period. As a consequence, revenues as a proportion of GNP are projected to decline from 20.6 percent in 1982 to 17.7 percent in 1987—the smallest ratio since 1965.

Under current tax laws, the greatest growth in revenues will occur in social insurance taxes and contributions… The share of total revenues raised from this source will increase from 33 percent in 1982 to 38 percent by 1987… The share of total revenues raised from individual income taxes would decline from 47.5 percent to 45percent. Corporate income taxes under current laws and CBO’s baseline economic assumptions are projected, to increase by 46 percent, … and to maintain its 8 percent relative share of total revenues. Revenues raised from excise taxes and other sources are projected to remain at about the same level during the projection period. As a result, their relative share of total revenues would fall from 11 percent in 1982 to 8 percent in 1987.

How did this all work out? THE CHANGING DISTRIBUTION OF FEDERAL TAXES: A CLOSER LOOK AT 1980 Staff Working Paper July 1988

As reported in the earlier CBO study, total effective tax rates (the ratio of taxes from all four sources to family income) rose between 1977 and 1984 for the 10 percent of families at the lowest end of the distribution and fell for the 10 percent of families at the highest. Overall, the distribution of total federal taxes became less progressive.
Between 1977 and 1980, the total effective tax rate for all four taxes combined declined for the 20 percent of families in the bottom of the income distribution and generally rose for the 50 percent of families in the upper end, except for the 10 percent of families with the highest incomes. Total effective tax rates for other family income classes changed little between 1977 and 1980.

Between 1980 and 1984, the total effective tax rate for all families taken together dropped noticeably, from 23.3 percent in 1980 to 21.7 percent in 1984. The decline was not uniform across all income classes, however. Effective tax rates rose for the 30 percent of families at the lowest end of the income distribution and fell for the 70 percent of families in the upper end, with the size of the reduction increasing with family income. The 10 percent of families at the highest end of the distribution had both the largest percentage and the largest absolute decrease in effective tax rates.

The changes in effective rates under the individual income tax resulted largely from the Economic Recovery Tax Act of 1981 (ERTA). ERTA substantially cut statutory tax rates and increased allowable deductions, but it failed to offset the effect on low-income families of an inflation-induced decline in the real value of personal exemptions, zero bracket amounts (standard deductions), and the earned income credit.

By 1988, the distribution of combined federal taxes is projected to become more progressive than in 1984, but to remain less progressive than in either 1977 or in 1980. Although the combined effective tax rate for all families taken together is expected to drop slightly from 1980 to 1988, total effective federal tax rates are projected to be higher for families in the bottom half of the income distribution and lower for families in the top half. The largest reductions between 1980 and 1988 will be for the 1 percent of families with the highest incomes.

The question I guess is: did they know what they were doing? I suppose it depends on whether you think this results we have been living with since 1981 was intentional or not.

Just to cover the talking points:

The share of taxes paid by the 10 percent of families with the highest incomes rose by between 1.0 and 1.5 percentage points between 1980 and 1988. The increase in the share of taxes paid by this group resulted from a growth of nearly 3 percentage points in their share of pre-tax income between 1980 and 1988, more than offsetting the decline in their effective tax rate.

We changed everything.

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