Wednesday, November 23, 2011

Higher Tax Rates Are Good?

Les Wes asked an interesting question when I posted a link to the historical tax rates while commenting on the Patriotic Millionaires post over at MN Publius.  "G2A, I realize the rate was officially 90%. What I'm asking is if any individuals ever ACTUALLY paid 90% of their income?"
Almost Classical: 90% Tax Rate
MN Publius Patriotic Millionaires

He pointed me to the Almost Classical post to help me understand his question better.  And my initial answer was as follows:
"Just one quick note from the link. "The reality? On earned income, the richest U.S. taxpayers paid close to 40 percent of their earned incomes in taxes in 1944." It looks like the author jumped back to effective tax rate for this statement...


The rich could have paid a marginal rate of 94% on income above "top rate started at $200,000, which today is equal to $2,413,059.90 ", and still had a ~40% effective rate. (ie $2.4 @ 35% & $.22 @94%) Just a thought. I'll review further...

One more note: those right offs likely included a lot of charitable giving and other spending that help keep the economy churning. Not a lot of sense re-investing if you'll only have 4% to invest after paying 94% to Uncle Sam."
Now I have not done anymore research on the topic, however I would like to get the feedback from my readers.  Since it seems to relate to the discussion we were having on G2A $1.2 Trillion.  I am thinking that Les Wes has a point, a 90% top marginal rate would definitely promote certain behaviors.  Wealthy investors may be highly motivated to:
  • avoid dividend paying stocks
  • give deeply to charities
  • buy capital goods that could be depreciated
  • spend on expenses that can be written off
  • avoid short term investments (ie regular income)
  • other
Here is the latest from MN Publius on the topic.
MN Publius 76% Optimum Tax Rate


Maybe this is why the Rockefeller's, Carnegie's, Getty's and their peers were so charitable.  I mean 90% to the government, or 100% to your preferred charity and your name on a building.  Seems like a simple choice.

And how can invest and hold be a bad thing...  It seems it would drive people and companies to make better choices.

Thoughts?   Happy Thanksgiving !!!!!

26 comments:

Anonymous said...

The Republican view for a long time has been that high marginal tax rates stifle economic growth. The startling observation to make from that era of 90% marginal tax rates is that they coincided with a period of huge economic growth and prosperity. I don't know much about the tax code as it existed then, or how it interacted with the economy generally. Among other things, there were fewer rich people, and as is true today, many rich people were rich in ways that tend to avoid income taxes. For myself, I favor a much lower, and much more mildly progressive rate structure such as we have today. But history, in both the short and long terms, pretty much proves that you can have high ecoomic growth in high tax eras, and low economic growth in low tax eras, despite a lot of rhetoric to the contrary.

--Hiram

Unknown said...

I think it would be a good idea to make the tax rate for the wealthy fall somewhere inbetween 15 and 90 percent. A fifty percent marginal rate on most sources of income seems wiser than the current tax rates to me.

Anonymous said...

Silly me. I thought the purpose of the tax system was to raise the revenues needed to fund the necessary and proper functions of government, in the simplest, fairest and most unobtrusive manner possible. Instead, some people seem to believe the purpose of the tax code is to punish those who have been successful or, at minimum, to coerce them into whatever economic choices our Lords and Masters decide to dictate as desirable. Sorry, but if you want to start talking about the correct percentage for a flat tax, or better yet a FAIR tax (consumption tax), we can have that discussion. Otherwise we are just two wolves and a sheep voting on what's for dinner.

J. Ewing

John said...

J,
Who are these "Lords and Masters" you reference? Are you sure you live in America? It sounds like you are in a country with a monarchy...

It seems to me that it is the majority of citizens that will set this social policy. Of course it is not about just collecting money, otherwise it would probably not make people so sensitive.

I like the wolves and sheep comparison though... Now which are which... rich, poor, middle class, white, minorities, etc...

The poor see the rich as the wolves, and apparently you see the poor as the wolves... Interesting

Anonymous said...

"I thought the purpose of the tax system was to raise the revenues needed to fund the necessary and proper functions of government, in the simplest, fairest and most unobtrusive manner possible."

In ways that facilitate or do the least damage to economic growth.

"Instead, some people seem to believe the purpose of the tax code is to punish those who have been successful or, at minimum,"

It isn't. Nor should it be goal of the tax system to reward people for their success. We tax people who have money, not because they have been successful, but because they have money.

--Hiram

Anonymous said...

"Who are these "Lords and Masters" you reference? "

I'm talking about those who write all of this nonsense into the 74,000 pages of the US tax code. It is estimated that roughly 70% of the lobbyists in Washington are not there to lobby on legislation. It is far easier to influence politicians (aka bribe) to "tinker" with the tax code for favorable treatment. It's far easier for politicians to effect their desired changes to economic behavior by tinkering with the tax code than by specific legislation. Every time they "reform" tax law it gets longer. It is utterly impossible for something that complicated to be fair, nor is it possible for something that complicated to have the desired effect. Rich people can afford to hire tax accountants to find the loopholes, middle class people can't; our only hope is simplification.

hiram is correct that we tax the rich because that is where the money is, but let's not pretend that our current system is at all "fair" because the rich pay more (ironically, the rich pay a higher percentage of total tax revenues AFTER the Bush "tax cuts for the rich" than they did before). The only truly fair tax is a flat tax in which everybody pays an equal amount-- we're all equal citizens. We'll never get to that point because of hiram's point. We can, however, get to the point where everybody pays the same percentage, and most conservative tax reformers are even willing to base that on disposable rather than total income. Or better yet, on consumption exceeding basic necessity. Until then, any talk of jiggling rates or deductions is simply more complexity on a system that is already counterproductive of its stated aims and of its fundamental purpose.

J. Ewing

Anonymous said...

Fairness isn't a big thing with me. It's just too vague a concept. But I don't think it's unfair to ask those who have benefited most from living in America to pay more in taxes.

--Hiram

Anonymous said...

I will argue with that. I don't think it fair to ask one citizen to pay any more than any other citizen. We're all equal here, and we all supposedly have the equal opportunity to get rich as Croesus. We should not have to pay for having done what is our right to do. On the other hand, you cannot get much tax from poor people (not even rich people can get rich from poor people), so an equal percentage is not unreasonable, especially an equal percentage above some poverty level of income (if income is what you tax). Right now the system is so skewed towards punishing the rich that it's become counterproductive, and it's set to get worse, for everybody, thanks to stupid Democrats. And you can tell them I said so.

J. Ewing

Anonymous said...

We're all equal here,

But not all of us benefit equally.

--Hiram

John said...

Now I understand that having a top bracket that is very low by historical standards is good for the wealthy.

However, I am very interested in ensuring that the USA stays the most vibrant, stable and high performing economy in the world. I would like my daughters to have the same benefits that I have had.

Going too far Socialist seems to be a very bad idea, since it promotes the rise of free loaders. I mean why work if things will be given to you?

Going to far Capitalist seems to be a bad idea, since it causes extreme political strife and class warfare. Why work if there is no hope of getting ahead because the rich rule the game?

So let's say that we do create a 50% top bracket that starts at $1 million? And a 65% bracket that starts at $3 million? And 80% bracket that starts at $5 million?

What would be the positive consequences from your perspective?

What would be the negative consequences from your perspective?

Unknown said...

John, you are too preoccupied with socialism and freeloaders. What about the public good, which includes adequate infrastructure? I started our reading some very good Steve Denning (Forbes) columns and ended up reading Barry Ritholtz columns in the WaPo. In one from last month he explains how we need to spend over $2 trillion to upgrade various forms of infrastructure.

Repairing infrastructure can help repair economy

Being able to fund most or all of these infrastructure needs would be a positive consequence of significantly higher taxes (notice the grade of "D" for the quality of our schools.)

I think taking somewhat of a break from news and politics this fall has been wise for me. Reading these guys columns definitely puts me in a ticked off mood.

Anonymous said...

"I am very interested in ensuring that the USA stays the most vibrant, stable and high performing economy in the world."

Curiously, that was a more apt description of the United States when we had much higher top marginal rates. We are not a more vibrant, with as high a performing economy as were were even at the end of the Clinton administration. And it's obvious enough that we are becoming an increasingly unstable country. While we claim to despise socialism, even conservative politicians hold up socialist countries and systems like China's as models for us to follow.

--Hiram

Anonymous said...

There is no such thing as "public good" unless all of the public (not just the half who pay no taxes) perceives the government expenditure as benefitting them as much or more than other goods they might need or want. Public "infrastructure" is the one place where government can actually be said to be making an "investment," but it is an investment ON BEHALF OF THE PEOPLE WHO WILL BENEFIT. A road which will save thousands of people days of travel time over a year is that sort of investment. I would even argue that so is an art Museum, if it uplifts the overall culture of an area (such as the one the Occupy protesters object to down in Arkansas, being built by one of the Walmart heirs). But these infrastructure and public investments ought to be done when the money is available, "within reason" and ONLY for reasons of the public good. It is very hard to rationalize building a Central Corridor Light Rail line for $1 billion when for the same money we could run a fleet of eco-friendly hybrid busses up and down that same line, 2 min. apart,for the next 700 years!

The fundamental principle of government economics ought to be that the government can only spend the people's money when it can do so at least as wisely as people can spend it for themselves.

J. Ewing

Anonymous said...

hiram--

It can be argued that, right now, China is a far more capitalist country than the USA, and it shows in their economic growth.

J. Ewing

John said...

Laurie,
If I concern myself too mmuch with Socialism and Free Loaders, then you concern yourself too much with the Rich and their "Low" tax rates...

As you know by now, I am a big fan of the belief that it takes a combination of intrinsic (personal) and extrinsic motivators (carrots & sticks) to help people be "All they can be"!!!

Remember the old saying... "Why buy and board the cow when you can get the milk for free."

As for my questions, here are some answers that come to mind:

What would be the positive consequences from your perspective?
- additional revenues
- more charitable giving
- more long term investment

What would be the negative consequences from your perspective?
- may reduce motivation
- lottery cash payment real low
- reduced dividend payouts

As we have discussed... China's Success in Pictures

Anonymous said...

"It can be argued that, right now, China is a far more capitalist country than the USA, and it shows in their economic growth."

Lots of stuff can be argued. China's economic growth has a lot more to do with where they started than it's economic system.

--Hiram

Anonymous said...

Actually, China's rapid growth has nothing to do with where they started and everything to do with the fact that they essentially "freed" 50% of their economy to a capitalist model, something the USA had for a 150 years or so, until government decided it needed SOME regulations to avoid the worst excesses of raw capitalism. Then we had another 50 years or so in which government gradually strangled the golden goose, and here we are, with China growing faster than we are, because they are economically more free than we are. The only reason China ranks so low in the Index of Economic Freedom is because they tightly control some segments-- about 50% of the economy, according to the Chinese themselves-- of the economy, such as energy production. The US is 9th in those rankings, down from previous years.

Conclusion: higher tax rates hinder economic growth by replacing individual spending and investment with government spending, which is generally less effective at addressing individual needs and wants. It has to be, by its very nature.

J. Ewing

John said...

I do agree whole heartedly that government spending is "generally less effective at addressing individual needs and wants." No question about it.

However the related belief seems unsubstantiated to me. "higher tax rates hinder economic growth by replacing individual spending and investment with government spending."

My rationale is that many people will spend on what best suits their specific self interest, whereas Government spends on what "Society" believes it needs to be successful. This may actually help our society grow and prosper more than what many people see as effective personal spending. Especially seeing that so many are in debt. (oh yeah the gov't is also... oops...)

One more potential downside of higher tax rates: more welathy folks may take their bags and move to another country.

John said...

By the way, I agree that there are a lot of inefficiencies in Gov't tax collection and spending. These could make "Societies" spending less effective, but I don't think it "nature".

The company I work for is big and inefficient in many ways, yet it is world leader in many ways. Sometimes combining resources can be more effective...

As for China, I agree with Hiram. When your business model relies on $.90/hr labor. And you start to get nervous when labor goes to $1.80/hr... It seems to me that you just happened to be in the right place at the right time.

Man, what a competitive advantage.. Even at the new high wage, your personnel costs are ~10% of a similar American company.

Anonymous said...

The cost of regulatory compliance in the US is roughly $1.2 trillion annually. That is money that a country like China doesn't have to spend. It is also reflected in the cost of American made goods. It is any wonder that US companies locate manufacturing plants outside US borders? We spend a lot of time talking about tax rates while ignoring the elephant in the room of the cost of doing business in this country if you can even wade through the regulatory jungle to be able to open one. The Keystone Pipeline for example has been jumping through environmental hoops for over 10 years and now the go ahead decision has been put off for another year. We need the energy from reliable friendly sources and millions upon millions have been invited to get the project this far only to be stopped again by regulatory issues that change after one goal is met and replaced with another with a higher bar. How long before companies who would contribute to the tax base give up and taxpayers lose that funding and have to pay increased rates for energy use in their daily lives? It appears that our current government policies will strangle economic growth and restrict prosperity no matter what the tax rates are.

As far as infrastructure is concerned, diverting revenue from gas taxes collected to maintain roads and bridges to building rail projects that in addition to being expensive, require operational funds that will bankrupt government entities. We need to follow J's response with regard to raising the revenue needed to fund necessary and proper government functions. We, collectively, have lost all understanding of sensible government spending. Just my two cents, CDO

John said...

Good point, though it looks like the Keystone project has had lots of resistance from many different groups, including local citizens.

Wiki Keystone
NY Times Keystone

So if they were going to run it through your back yard, would you welcome it with open arms? I only ask because I know you both believe that in empowering local governments. If the locals say no, should the Feds force it through for the good of the country?

One more question, if this oil is such a good thing... Why don't they refine it in Canada and send us the refined fuel? Any idea...

They would get more jobs, there would be less material to transport, there would be less resistance, more jobs in Canada and they could keep the unwanted materials.

I do agree with you that when everyone gets a say and has the option to sue. Things can take a long time and get expensive. In China, the government would just do without any public hearings. Would that be better?

Unknown said...

regarding regulations, by far the biggest negative impact on the US economy stems from too little regulation of the financial sector.

Lest We Forget: Why We Had A Financial Crisis


re keystone pipeline, I joined several protests against it this fall and was pleased with the decision to delay it for further study of environmental impacts, although I predict it will eventually be approved. I won't post any links to my news sources, as it is off topic and no one reading here is likely to be persuaded on this issue.

Anonymous said...

"My rationale is that many people will spend on what best suits their specific self interest, whereas Government spends on what 'Society' believes it needs to be successful."

That sounds like one of my company's old jokes, "We lose a dollar on every unit, but we make it up in volume." How is it that "society" can benefit while every individual within the society loses? Seems to me that the only "zero-sum game" out there is government, because it cannot spend one nickel it does not first take out of the private economy. Only if what it "buys" with the money is what every individual from whom it takes the money wants or needs most can it be said to be a "benefit to society."

The fact is, much of what government buys is either unwanted or unnecessary or both, and even then it generally pays too high of a price. I've worked in defense industries and even though their products are essential there is rampant waste, much of it in unnecessary paperwork and over-inflated specifications. I've worked in retail businesses where, on every sale, the sales tax vastly exceeded the profit. And I've worked in a business that absolutely refused government contracts, to better control their own affairs, and even then found themselves not only bearing astronomical regulatory costs but PAYING for them through taxes!

Inescapable fact: The government makes decisions by a few elected or unelected bureaucrats, using their (or some imperfect rule) to decide what is best for everybody. It would be better if everybody made their own decisions. For a long time it has seemed to me that the best way to run government would be to present every citizen an itemized bill every year, saying, "For every $1000 you send in, we will spend $50 on the defense department (sub-categories follow), $250 on Medicaid, $5 on Obamacare implementation costs, $2 running the IRS, etc., etc. You may decrease or zero out any item. If you do not add that amount to another line item, it will be distributed among all other items so that the total is always $1000. You may also choose to increase any item, in which case all others will be reduced. Next year's budget will be based on the accumulation of all of these individual spending preferences." We would pretty quickly learn which government spending was perceived by the public as beneficial.

J. Ewing

Unknown said...

J-

I like your itemized bill idea. It's a bit like the receipt available from the white house website last year.

Your 2010 Federal Taxpayer Receipt

Of course, the receipt I linked to does not give one the ability to adjust payment according to one's own preferences. We'd quite likely have opposite preferences and negate each other's choices. I, for example, would reallocate significant defense dollars to health care.

CDO said...

Laurie,
I checked out the link to the president's tax computation site. It is certainly not comprehensive. It doesn't begin to address the tax rate on single folks with no children or older married couples who no longer have dependent children. One of the largest groups of taxpayers as I hear about incessantly.
My discussions on these issues are based on the fact that federal government has gone far beyond the boundaries of it's actions established in the Constitution.
In my opinion, having experienced seeking healthcare before the current level of government interference, I was able to negotiate with medical professionals to secure the level of services my family needed in our unique situation. I as a single working parent planned for the eventuality that we would need to pay for some level of urgent or emergency care and kept a savings reserve for that purpose. We had excellent care at every level from General Practitioners to Orthopedic Surgeons and hospital in patient care. My doctors had the ability to adjust their fees as necessary to accommodate patient needs and the majority of hospitals were run by charitable organizations that also recognized the need to serve the those unable to pay and provided necessary services. My experience was not unique for the times. The more government and insurance companies have inserted themselves between the doctor and patient, the more the patient has lost control of their own healthcare.

Whether it is in healthcare, land use, or environmental practices, government closest to their resident constituents governs best. Centralizing decision making inevitably increases taxes and negatively impacts personal prosperity. I don't believe that we must eliminate all taxes but many if not most of the funding needs expressed by current legislatures bodies do not comply with Constitutional principles and are decisions best made by the people most affected by them through more local representatives.

CDO

Anonymous said...

"We'd quite likely have opposite preferences and negate each other's choices."-- Laurie

naturally, I would not expect you to make the same well-reasoned choices that I would. :-/ (Sorry, couldn't resist.) Nonetheless, over the entire population and assuming that everyone actually took the time to express their preferences, we would get an excellent reading of exactly what those spending preferences would be. Couple it with the ability to actually reduce or increase total spending, and you could almost save Congress the work of putting the budget together. Of course, it is rapidly coming up on three years since Democrats in the U.S. Senate have actually proposed a budget, so this would be a great improvement.

J. Ewing