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Taxation without Discrimination
Posted by: Jon Henke on Tuesday, November 28, 2006

Ben Stein writes a widely linked New York Times piece on tax policy, along the way making some good points (tax cuts themselves have not resulted in increased revenue, a point that has been acknowledged by the Bush Administration's economists and the Treasury Department) and some disturbing points ("increased spending is locked in").

However, Stein's anecdotal idea that the rich pay "less in tax as a percentage of [their] income than" the less well-off is variously wrong and misguided.
Put simply, the rich pay a lot of taxes as a total percentage of taxes collected, but they don’t pay a lot of taxes as a percentage of what they can afford to pay, or as a percentage of what the government needs to close the deficit gap.
First, a few reasonable points that have been made elsewhere:

  • Larry Kudlow at RealClearPolitics: "...Buffett made all his money from the 15 percent marginal tax rate on dividends and capital gains. Very few Americans live and work like this."

  • Jonah Goldberg at The Corner: "soaking the hyper-rich won't raise that much money. You'd have to raise taxes on the (upper) middle class, including small businessmen."

  • James Joyner at Outside The Beltway: "My guess is that [Buffett has a lower effective tax rate] because he’s giving oodles of it away to charity or because his capital gains are being turned over and thus aren’t “income” in any meaningful sense."

To expand on James Joyner's point, Warren Buffet gave away approximately $1.5 billion in 2006. Buffet is perennially ranked among the most generous philanthropists in the world, and Business Week has estimated his 2001-2005 charitable donations at more than $2.6 billion.

That sort of thing might tend to reduce Buffet's tax bill.
Taxes on capital are much less efficient and far more distortive than taxes on labor
Now, granted, there are substantial differences between income and investment tax rates, but it's worth remembering that there are very good reasons for this. Taxes on capital are much less efficient and far more distortive than taxes on labor. In fact, according to a report from the National Bureau of Economic Research, "Capital can easily escape taxation by going abroad, so that domestic workers, rather than capital, end up bearing taxes imposed on capital." Capital income taxes, wrote Robert Gordon, "have large efficiency costs, collect little revenue, and have no obvious distributional gains." [depending on the structure of the economy, some minor gains can obtain, but they are small]
domestic workers, rather than capital, end up bearing taxes imposed on capital


Simply comparing Buffet's tax rate to his secretary's tax rate is deeply misleading. Actually doing something about it by raising capital income taxes would be likely to harm both of them.

But let's talk about this whole 'progressivity' thing. There's a widespread notion that, when everything is accounted for, our federal tax system isn't really progressive. let's talk about this whole 'progressivity' thing That's not the case. Excepting a very few people at the top — who, I might add, are tax sensitive and globally mobile — our tax system is progressive at every level. Here are the Congressional Budget Office numbers/projections for Effective Federal Tax Rates.

Total Effective Federal Tax Rates
Income Category Total Effective Federal Tax Rate
Bottom Quintile 5.5%
2nd Quintile 12.0%
3rd Quintile 15.6%
4th Quintile 19.6%
Top Quintile 26.3%


Top 10% 17.8%
Top 5% 29.0%
Top 1% 31.1%

These are projections, so the actual numbers will differ very slightly. More recent numbers and historical data can be found here and here.

Bear in mind, these numbers represent "effective" federal taxes...meaning these are the total federal taxes actually paid by the earners in each quintile. It's also important to note that they cover "comprehensive household income" which includes not just wages and salaries, but also "rents, taxable and nontaxable interest, dividends, realized capital gains" and more.

It's progressive, all the way up.

A well-constructed Flat Tax could broaden the tax base, eliminate loopholes altogether, minimize tax distortions and remain effectively progressive
The common (generally Democratic) objection is that a few people are able to find loopholes and non-taxable uses for their money (e.g., philanthropy). There is a solution, though. A well-constructed Flat Tax could broaden the tax base, eliminate loopholes altogether, minimize tax distortions and remain effectively progressive. I've outlined exactly such a flat tax in the past.

Combining the Hall-Rabushka flat tax with Dale Jorgenson's Efficient Taxation of Income ideas, we could have a simpler, less distortionary system of taxation that would minimize inefficiency, inextricably link spending and taxation to prevent unsustainable spending or tax cuts, and virtually eliminate the present objections of Republicans and Democrats.

Most importantly, as Milton Friedman has pointed out, it would make it more difficult for both parties to demagogue on tax issues it would help to "end this business of changing the whole tax system every few years" because of monied interests who "pay [politicians] to put loopholes in" and "pay [politicians] to take them out." As a bonus, both parties would have more trouble demagoguing on tax and spending issues.

It's hard to think of an objection that Republicans (efficiency, restraint, unfair marginal rates) or Democrats (progressivity, class warfare) are likely to make that could not be rectified within the basic structure of such a flat tax.
 
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One primary reason that Buffet pays little in taxes is that he does not extract much of his wealth - in the form of Berkshire stock - for his own personal income. If you read books on his investing strategy, one of the linchpins is to avoid taxable events so that gains can be re-invested and maximized. He spends very little of his wealth; not a common behavior among the super-wealthy. He lives a relatively simple life - far simpler I’d guess than almost all Americans who make 100-300k a year.
 
Written By: Unknown
URL: http://
Buffet questions why his percentage of taxes to income is lower than his employees (ignoring that he is a very special case) and calls this unfair. What I’ve yet to see him question is the level of spending of the federal government. Perhaps he has, but I’ve not seen it. He just seems to assume that whatever has been and is being spent is acceptable and that taxes need to be raised on higher earners to cover it. This is one of the smartest men on the planet?

Stein dismisses the ’reduce spending’ argument with a shallow Captain-Sarcastic-like ’it’s inevitable and there’s nothing we can do about it.’ Almost nothing is inevitable. I was under the impression that Stein was a deeper thinker than this.
 
Written By: Unknown
URL: http://
It’s hard to think of an objection that Republicans (efficiency, restraint, unfair marginal rates) or Democrats (progressivity, class warfare) are likely to make that could not be rectified within the basic structure of such a flat tax.
Loss of power would be on the top of their lists, I should think.

Oh, you meant objections they would utter publicly.
 
Written By: Mark A. Flacy
URL: http://
It’s hard to think of an objection that Republicans (efficiency, restraint, unfair marginal rates) or Democrats (progressivity, class warfare) are likely to make that could not be rectified within the basic structure of such a flat tax
You’ll just transfer the debate from what it currently is to "raise the flat tax so we can pay for XYZ social programs" and "exempt XYZ minority/social classes from paying" (Dems) vs "lower the flat tax" (Repubs)

Same old same old. I’m all for it though.
 
Written By: shark
URL: http://
Sounds good, but I have questions:
-Wouldn’t eliminaitng the deductible donations ’loophole’ affect how our society works dramatically?
-Would this also eliminate tax incentives devised to affect policy implementation?
 
Written By: Laime
URL: http://
"exempt XYZ minority/social classes from paying"

Shark brings up an important point. The issue is as much unfair progressivity as it is social engineering-oriented exemptions, deductions and credits. I am in favor of doing away with the entire Schedule A as it is the source of the most headache for me each April between mortgage deduction, childcare expenses and charitable donations. And this is without being impacted by the Alternative Minimum Tax. :-0

Likewise, do away with all allowances for oil exploration, depletion, alternative energy and any accelerated amortization of business assets outside of acceptable FASB standards. The tax code is for one purpose only; to generate revenue.
 
Written By: D
URL: http://
I don’t know where you are going with all this.

When the tax cuts expire,(and they will) tax collections might increase, and then again the economy might tank. Sure we would all like something simple like a flat tax, but it won’t happen.
Best not to monkey around with the tax code any more at all, keep it the way it is, taxes are high, but not onerous, its progressive, but not an economy killer, its got some complexity, but not as much as it used to.

leave it the hell alone.
 
Written By: kyle N
URL: http://impudent.blognation.us/blog
Good one Kyle. Ha ha. Funny.

Met Cap Sarcastic by chance? You two are birds of a feather.

Sure, we’d like something better, but we’re not going to get it, so let’s stop trying.

- OR -

It’s inevitable that things are going to get worse, so rather than resist, let’s try to make it the best ’worst’ possible.



You would have been useless during the Revolutionary War.
 
Written By: Unknown
URL: http://
Rather than the flat tax, Rep John Linder and Neil Boortz are advocating a "fair tax" approach which eliminates the IRS and is based on a 23 % federal sales tax. They argue in their book of the same name that their approach is tax neutral not a tax cut, and include a mechanism to ensure the folks at the bottom of the totem pole do not suffer unduly. An interesting idea and worth debating.
 
Written By: alan phillips
URL: http://
First, I don’t know why Hall-Rabushka insist on calling their tax a flat tax, it’s not flat.*

Second, what makes them think that corporations will have paid any corporate level income tax to the U.S. treasury that will justify eliminating the tax on dividends and capital gains? Do they repeal the U.S. anti-deferral regimes or leave them in place?

Third, what makes anyone think Congress will magically implement a flat-tax with (almost) no deductions and then stop its tinkering with everything?

Fourth, you will pry the mortgage interest deduction from the cold, dead, hands of middle class families. Similarly the charitable deduction from those same dead hands and the hands of churches, universities, and the rich.

*Note that I have only read this post and Jon’s link to his post that "outlined exactly such a flat tax" in the past. Please ignore me if these questions are answered.
 
Written By: Ugh
URL: http://
Rather than the flat tax, Rep John Linder and Neil Boortz are advocating a "fair tax" approach
...and while we’re at it, a free pony for everybody.

The "Fair Tax" is wonderful in every respect, except that it cannot possibly work. At tax rates of 23% (excluding State sales taxes, which would bring it near 30%), evasion and avoidance would be enormous, requiring higher rates. Which would increase evasion/avoidance. Etc.

We’ve covered the Fair Tax extensively on QandO. It’s tempting, but utterly impossible. There’s a reason that every country that has tried an NST has ditched it for a VAT.
-Wouldn’t eliminaitng the deductible donations ’loophole’ affect how our society works dramatically?
I’m not sure it would be a good idea to eliminate the deduction for charitable donations.
-Would this also eliminate tax incentives devised to affect policy implementation?
I hope so. Tax policy tinkering is the reason we have to have tax reform every couple decades.
 
Written By: Jon Henke
URL: http://QandO.net
Unfortunately the more I listen to Boortz talk about the difference between people saying that the Fair Tax is 30% not 23%, the more I am coming to believe that it will be collected as a VAT where the customer never sees what they are paying.

Despite Will Roger’s statement, "Be thankful you’re not getting as much government as you pay for", I’m all for the purported transparency of the Fair Tax. Just exactly how much bartering and under the table retail sales can take place for evasion? The mechanisms are in place for sales taxes anyway and we might be collecting taxes on the drug money that’s being spent. I think that might be the only justifiable use of the term "obscene" profit.

BTW I prefer the Shetland over the Welsh. For the pony that is.

I’ve been a Libertarian since the party was formed, I like your neo-classification as I had been constantly saying that the world had grown too small for isolationism. I was dismayed by Harry’s take on 9/11 and actually voted for Bush in 2004. I’m saying this as a way of saying if anyone shouldn’t give up on lost causes, it would have to be those knights in shining tinfoil that call themselves Libertarian or neo.
 
Written By: Richard
URL: http://soslies.blogspot.com
Run a limited, small federal government with a low flat tax.

Leave most social welfare programs and government policies/planning to the individual states — with states being able to experiment and learn from each other. I would also get rid of the current national military and defense spending, and shift that burden to the states, who could spend what they want on military and then engage in voluntary cooperation for national defense.

Nothing against the constitution, but in my heart of hearts I think the articles of confederation weren’t that bad.
 
Written By: Scott Erb
URL: http://faculty.umf.maine.edu/~erb/blog.htm
"they don’t pay a lot of taxes as a percentage of what they can afford to pay, or as a percentage of what the government needs to close the deficit gap."

Who cares? The rich pay much more into the system than they ever take out of it, and they certainly pay more than the non-rich do, so what difference does it make what the percentage is? Those who oppose higher taxes are often accused of being greedy. Well, jealousy and envy are also moral failings.


""fair tax" approach which eliminates the IRS"

Who will count the money? Who will conduct audits to make sure all the taxes are being forwarded to the treasury? You can shuffle the desks any way you want, like the Dept. of Homeland Security, but the desks will still be there.
 
Written By: timactual
URL: http://
Nothing against the constitution, but in my heart of hearts I think the articles of confederation weren’t that bad.
And yet, after actually living under them for several years, the Founders of the Republic felt otherwise.

How terribly odd.
 
Written By: Dale Franks
URL: http://www.qando.net
Nothing against the constitution, but in my heart of hearts I think the articles of confederation weren’t that bad.
And yet, after actually living under them for several years, the Founders of the Republic felt otherwise.
And given the realities of the time, the articles of confederation were probably unrealistic and potentially divisive. Also, the central government had no powers of taxation, which was untenable. Still, I think the Articles get less respect than they deserve as a major document, and one that would have set up a very interesting political system if it had worked out.
 
Written By: Scott Erb
URL: http://faculty.umf.maine.edu/~erb/blog.htm
Just exactly how much bartering and under the table retail sales can take place for evasion?
A great deal. Remember, tax avoidance (legal) and evasion (illegal) are not merely matters of explicit black markets and bartering. We might see a dramatic uptick in personal corporations, as individuals seek to make virtually all of their purchases "business related". We might see a huge downturn in new car purchases, as individuals turn to low-cost used cars. Or to "transfers". There’s a million ways this can be done. (and it would have to end the tax free status of the internet)

The new activity wouldn’t necessarily be bad, but it would have a hell of an effect on revenue neutrality.
Run a limited, small federal government with a low flat tax.

Leave most social welfare programs and government policies/planning to the individual states — with states being able to experiment and learn from each other. I would also get rid of the current national military and defense spending, and shift that burden to the states, who could spend what they want on military and then engage in voluntary cooperation for national defense.
The first part is music to my ears, Scott. The latter is an intriguing idea, but (a) I’m not sure how the "here to there" could be accomplished, and (b) I suspect it would quickly evolve back into a de facto federal responsibility, as State’s acknowledged the value of a unitary foreign and military policy and created a series of agreements that re-centralized it.

In retrospect, you’re right, though. The Constitution didn’t do enough to emphasize the primacy of the States.

 
Written By: Jon Henke
URL: http://www.QandO.net
We already have a type of flat tax, it’s called the AMT.
 
Written By: Paul
URL: http://
Jon,
I agree that the "business use" provision is idiotic. Any "end user" should pay the tax, business use or not. If I were doing it, part of your sales tax reporting would include a credit for the sales tax you paid for what you sold (either on gross inventory accounting or specific items at a certain price level). Thus you would only get a credit if you were reporting collections.
Since no tax would be due on a used item, you can’t collect, and you don’t get to enter a credit higher than collections (over some specified period of time).
 
Written By: Richard
URL: http://soslies.blogspot.com
The first part is music to my ears, Scott. The latter is an intriguing idea, but (a) I’m not sure how the "here to there" could be accomplished, and (b) I suspect it would quickly evolve back into a de facto federal responsibility, as State’s acknowledged the value of a unitary foreign and military policy and created a series of agreements that re-centralized it.

In retrospect, you’re right, though. The Constitution didn’t do enough to emphasize the primacy of the States.
Yeah, getting here to there is virtually impossible, it is fantasy — my thought experiment of what kind of system would be best.

I have long thought about how to avoid on one hand dominance by big governments, which bureaucratize and stagnate (communism/socialism), or big business, which commodifies, massifies, alienates, and ultimately partners/enables big government (our democratic capitalism). Both Hayek and the Marxian Frankfurt School (critical theory) were right, socialists and libertarians each recognize problems with each others’ project.

My only possible solution I can imagine is small governing units, closer to the people, transparent, and easily held accountable. The main regulation on business would be that businesses of a certain size have to be completely transparent as well. I’m not sure if that would work either, but centralization of power, be it governmental or private, seems to me to be the big problem.
 
Written By: Scott Erb
URL: http://faculty.umf.maine.edu/~erb/blog.htm
"My only possible solution I can imagine is small governing units, closer to the people, transparent, and easily held accountable."
So why don’t we have this now? How did we get where we are today? My hunch is thst a major shift in attitude about government is required to get to your solution (which I favor).
 
Written By: Unknown
URL: http://
Wow, I feel honored, Ben Stein agrees with me, and I’ve been mentioned 3 times in blog subject that I haven’t even posted on.

Buffett is not some exception to the rule, Buffett is just one example of the income extreme, the top of the top that pays less in federal taxes (as a percentage) than almost any group down to the median wage earners.

Our poorest workers are getting a reasonable deal, they pay no income taxes, and the payroll taxes are manageable.

The group that really gets hammered are the working families that earn more than the median, but all in wages, paying near the top of income tax rates, having fewer deductions that a business owner would have (been there done that, it’s a sweet deal) and paying the max in payroll taxes, but having little income above the SS cap.

Capital gains taxes breaks and dividend tax breaks frost me because the argument is that they are good for the economy, ie engineering, whereas a suggesting that a more progressive tax structure with higher taxes on dividends, capital gains, and higher incomes and lower taxes on median+ plus wage earners is class warfare. I cannot fathom the logic that says that money earned with someones labor is less important to the economy therefore should be taxed at a higher rate, than money earned with money, and not only that, money earned with money is not subject at all to payroll taxes, so it taxed at far less than 50% of the rate that $90k a year family pays on their income.

I try to look at tax policy with revenue neutrality in mind, assuming we are not spending more than we are taking in, but as Ben Stein correctly asserts, spending simply does not go down, priorities change, but every new group that comes into office is more concerned about getting what they want spent rather than cutting what they don’t want spent. To think that a tiny fraction of the population that actually wants to spend less on EVERYTHING are ever going to get into positions of power is to believe in unicorns... with three heads.

So back to neutrality. As I see it, there are four possible philosophical positions on tax policies.

1. You believe that a progressive system is best, the more you make the more you pay (as a percentage)
2. You believe that every man woman or child should pay the exact same percentage of their income, whether they earn $400 or $4 billion dollars
3. You believe that every man woman and child should pay the exact same dollar amount, regardless of their income. (don’t laugh, I know a number of libertarians who espouse this precise policy... surely you have run across Michael J. America in your blog readin)
4. You believe that tax policy should be based on engineering the economy, give the best money to best rates, and tax the heck of out of less important money.

Number 2 is a nightmare for everyone who’s earning is less than the median ( 50% of Americans), Number 3 is a nightmare for the working poor and would make them virtual slaves, and number 4 requires a faith in the intelligence of government beyond any faith that government has earned.

So in my estimation, we are left with number 1, a progressive tax system that is actually progressive bottom to top, not just bottom to pretty good incomes, and then dropping down for the extremely high income earners.

Ben Stein is coming around, he disagreed with me for years, but he’s a bright guy who has not shut himself off to ideas which on the surface seem to go against his ideology, so the problem is not Ben Stein’s lack of deep thinking, it is his critics lack of a willingness to consider his argument on merits rather than manipulate the numbers until they give the answer they want. Hey, I was a supply sider until we tried it, and it failed. Doing the same thing and expecting different results is just... nuts.

Flat out bottom to top progressivity, no tricks, no games, no gimmicks, or make the argument why one of the other is the policy America should embrace.

All we have done so far is agree that progressivity is best, and pretend that’s we have. Sure we do, except for the the richest 400 to 1000 families in America that control well over a trillion dollars and earn 70% of their income from tax favored (capital gain, dividends) sources.

Yeah, if it’s class warfare, Buffett’s class is winning BIG, at least he and a few others are honest enough to admit it.

Cap
 
Written By: Captin Sarcastic
URL: http://
"the top of the top that pays less in federal taxes (as a percentage) than almost any group down to the median wage earners."

Once again, so what? What is so important about using a percentage to measure fairness? The rich pay more taxes than the non-rich. They also pay much more than they will ever get back in services, and subsidize those who consume more services than they pay for. Why is it necessary that they pay a higher percentage than everyone else?


"Number 2 is a nightmare for everyone who’s earning is less than the median ( 50% of Americans),"

Assuming you are not speaking scatologically, why?

 
Written By: timactual
URL: http://
Assuming you are not speaking scatologically, why?
Do the math!

Let’s say the average effective federal tax rate is 24%, in a revenue neutral equation, the net effective tax rate for everyone below the median would have to be 24%, up from about 0% to 6%.

These are people, who for the most part have to spend everything they earn NOW to get by, so subtract 24% from not enough and the result is NIGHTMARE.

You could have figured this out yourself.

Do you support the exact same net rate for everyone?

Do you have an unquivocal position on any of the options I shared above?

By the way, can you explain how what I said could be interpreted to be scatological? Maybe my imagination is not as vivid as yours, but I can’t see how you could relate my comment to an interest in the obscene or excrement.

As we are fond of quoting Princess Bride around here, I don’t think it means what you think it means.

Cap
 
Written By: Captin Sarcastic
URL: http://
So why don’t we have this now? How did we get where we are today? My hunch is thst a major shift in attitude about government is required to get to your solution (which I favor).
I think you’re right — it’ll be generations before we end up with system of governance that is truly libertarian. One reason I think we’ll get there is because great thinkers all tend to see that as a goal, even those whose ideas led to contrary results. Marx, for instance, saw a withering away of the state and communism as entaling perfect liberty.

Human history is young. Perhaps we’re just in the barbaric pre-history of humankind, trying to get a glimpse at what should be, even if we won’t experience it.
 
Written By: Scott Erb
URL: http://faculty.umf.maine.edu/~erb/blog.htm
"Let’s say the average effective federal tax rate is 24%,"

Let’s say it is 1%.

" By the way, can you explain how what I said could be interpreted to be scatological? "

Lighten up. You have never heard the phrases "number two" or "number one" as euphemisms for defication and urination? I confess to making an unfunny play on words. My favourite scatological euphemism is "break wind", which makes me think of a Zen koan. I think Spinal Tap recorded a song called "Break Like the Wind", an idea I find amusing to contemplate.

"Do you have an unquivocal position on any of the options I shared above?"

Yes.

 
Written By: timactual
URL: http://
Lighten up. You have never heard the phrases "number two" or "number one" as euphemisms for defication and urination? I confess to making an unfunny play on words. My favourite scatological euphemism is "break wind", which makes me think of a Zen koan. I think Spinal Tap recorded a song called "Break Like the Wind", an idea I find amusing to contemplate.
ROTFLMAO... you got me!

It means what you think it means.
Let’s say it is 1%.
That’s a silly dodge, 24% is reasonablly close to the mark, 1% is not. Do you want to argue that it would not be a huge tax increase for the people who pay the lowest effective rates now? Go for it.

Cap
 
Written By: CaptinSarcastic
URL: http://
I cannot fathom the logic that says that money earned with someones labor is less important to the economy therefore should be taxed at a higher rate, than money earned with money,
Money earned with money, i.e., capital, is fungible and seeks the highest after-tax returns globally. While labor is mobile also, it is so to a much more limited degree. Since labor requires capital in order to produce, structuring the tax code in a way that makes investing in capital more attractive is a good thing for labor. Also, there have been numerous studies that taxes on labor are significantly less distortionary to the economy than taxes on labor.
So in my estimation, we are left with number 1, a progressive tax system that is actually progressive bottom to top, not just bottom to pretty good incomes, and then dropping down for the extremely high income earners. . .All we have done so far is agree that progressivity is best, and pretend that’s we have. Sure we do, except for the the richest 400 to 1000 families in America that control well over a trillion dollars and earn 70% of their income from tax favored (capital gain, dividends) sources.
Noticably excluded from your income sources for the ultra rich are tax-free municipal bonds - would you suggest we get rid of them altogether? - since it’s the only way to make the ultra rich pay an effecitve tax rate close to the sub-ultra rich. And as

Fairness is obviously extremely subjective, but in your view what is the minimum number of households that should be subject to a targeted tax? Is it the 400-1000 that you cite? Why not 10-20? Why not just Bill Gates and Warren Buffet? As Jon noted, taxes are progressive at least up to the 1% threshold of household incomes - how finely would you like this sliced?
 
Written By: m.jed
URL: http://
how finely would you like this sliced?
As I said, actual bottom to top progressivity, not bottom to 99% and then regressive. If we had genuine progressivity, then a revenue neutral shift would mean a tax cut for the large median plus group (sometimes considered rich) and a tax hike for those at the very, very top.

Tax free bonds are an interesting element, but Constitutionally protected, the fed can’t tax the interest on bonds from states and localities and states and localities can’t tax the interest on federal bonds. At this point, I would have to say leave these alone, and if there is a flood of money into these instruments, this would of course drive the yields down to where they are just slightly better than taxable investments, so the market will adjust for the change and the flood will be self contained.

I think (correct me if you think I am wrong) that the top 1000 families earn approximately 15% of the nations income, and they are taxed at below the effective tax rate for median wage earners. If they were adjusted to pay a progressive rate, meaning more than the tier just below them, it would allow for tax cuts for everyone else and people making 90k would no longer have to bear the largest individual burdens.

Of course this all depends on whether we are philosophically agreed that progressive taxation is the most fair. Based on the choices I outlined above, I favor progressivity.

It sounds to me like you are leaning towards this one...

4. You believe that tax policy should be based on engineering the economy, give the best money to best rates, and tax the heck of out of less important money.

And my opinion on that is that is this choice requires a faith in the intelligence of government beyond any faith that government has earned.

Cap

 
Written By: CaptinSarcastic
URL: http://
As I said, actual bottom to top progressivity, not bottom to 99% and then regressive.
My point was as long as tax-free bonds remain Constitutionally protected no matter what rate you set the capital gains and dividend tax rates to, the uber-rich can achieve a lower effective tax rate than those below them.

In 2000, before the reduction in dividend and capital gain tax rates, income tax rates were progressive up to those households earning $2MM in AGI just as they were in 2004 after the reduction in dividend and capital gain tax rates. In 2000, households earning $2MM or above were about 0.075% of total households - so it’s progressive for 99.925% of the population, and the effective tax rates of those $2MM and above were only below those between $500,000 - $2MM, so relative to everyone else their income tax rates remained progressive.

Taxes are paid on realized capital gains, which makes them highly discretionary and easy to avoid or defer. Dividends are more difficult for those invested in public equities, but easier for those invested in private corporations. In 2000 total dividend income for those households with AGIs greater than $2MM was about $22bn, which means that having the dividend tax rate as the same as the top marginal tax rate that year generated about $5.4 bn in tax revenue that assuming exactly the same behavior regarding investment holdings, would not have been there at the lower rate. That represented about 0.5% of Individual Tax Revenues in 2000, and if instead the subsequent tax reductions were shifted from the dividend holding class to the population as a whole, the 2000 effective income tax rate for the entire population would have been reduced a whopping 0.08%.

I don’t at all believe tax policy should attempt to engineer the economy. I’m all for Milton Friedman’s plan of a flat tax with a generous deduction and a negative income tax rate below that deduction. Unlike you though, I’m willing to acknowledge that (1) capital is more mobile than labor, (2) the uber-rich have ways to avoid taxes that the rest of us don’t, (3) trying to engineer tax policy so that uber-rich pay more in taxes is a futile effort with negligible benefits and impact on what the rest of us have to pay in taxes.
 
Written By: m.jed
URL: http://
I don’t at all believe tax policy should attempt to engineer the economy. I’m all for Milton Friedman’s plan of a flat tax with a generous deduction and a negative income tax rate below that deduction. Unlike you though, I’m willing to acknowledge that (1) capital is more mobile than labor, (2) the uber-rich have ways to avoid taxes that the rest of us don’t, (3) trying to engineer tax policy so that uber-rich pay more in taxes is a futile effort with negligible benefits and impact on what the rest of us have to pay in taxes.
Good points, but... I’m willing to acknowledge that capital is more mobile than labor, I just don’t care to advantage capital over labor.

I’m willing to acknowledge that the uber-rich have ways to avoid taxes that the rest of us don’t, but I am also aware that taxes on this group have been reduced over and over again for the past 25 years. If their taxes can be lowered, I have no doubt that they can be raised. In 1950, the effective federal tax rate for the wealthiest of the wealthy was 76%, I am not suggesting that we return to these rates, but other than their political might and will to prevent it, their effective taxes CAN be increased.

I’m NOT willing to acknowledge that trying to engineer tax policy so that uber-rich pay more in taxes is a futile effort with negligible benefits and impact on what the rest of us have to pay in taxes. See paragraph above.

Cap
 
Written By: Captin Sarcastic
URL: http://
In 1950, the effective federal tax rate for the wealthiest of the wealthy was 76%,

While I haven’t been able to find a citation for this, I did find one for 1960 and thus have no reason to disbelieve you. I will point out though that in 1960, with top marginal tax rates approximately the same as (actually slightly higher than) those in 1950, the effective federal tax rate on the top 0.01% of the population was 74.6%, but the effective federal income tax rate was 31.5% - the rest came from "Estate Gift & Wealth Taxes" and "Corporate Taxes".

Capital was substantially less mobile in 1950 than it is today (find me a quote for a Brazil, Russia, India & China mutual fund from the 50’s if you don’t think this is true) and thus the "Corporate Taxes" portion will never be able to be recaptured - if Stanleyworks can redomicile to Bermuda imagine how easy it would be for Google to do the same - there goes 22% of 1960 effective taxes. And estate taxes - for the top 0.01% - they’re a joke to get around with all the trust lawyers that are out there chasing High Net Worth clients.

Oh and on this:
I think (correct me if you think I am wrong) that the top 1000 families earn approximately 15% of the nations income, and they are taxed at below the effective tax rate for median wage earners.
consider yourself corrected - in 2001 the top 0.01% of household incomes, representing about 14,400 households, had pre-tax income representing 2.8% of the nation’s income and pay a higher effective tax rate than any group below them. As Jon said - progressive at all levels.
 
Written By: m.jed
URL: http://
"Do you want to argue that it would not be a huge tax increase for the people who pay the lowest effective rates now"

I do not understand why you restricted options, nor do I understand your fixation on tax rates. Anyway, I am in favor of a flat tax. Since the only purpose of taxation should be to raise money I see no need for a progressive tax rate for no other purpose than to penalize the rich for being rich. I see no need to exempt anyone from paying at least some tax. I see no need for a tax system which wastes untold millions of dollars annually for tax forms and their completion, enriches a parasitic class of attorneys and accountants, and distorts economic decision making and causes fear and anxiety in everyone from students with part time jobs to corporate CEOs. I see no need for a tax system so complex it requires its own specialized courts, none of whose decisions are binding on another court, so that tax crimes in one jurisdiction are legal in another. I see no need to spend a dollar to make sure noone keeps an unauthorized dime. To rephrase, keep it simple. Simple is good. Simple is efficient. Simple is fair.

I see no reason why a flat tax need be a huge tax increase for anybody, and I have seen no evidence showing otherwise.

Enough. My fingers hurt.
 
Written By: timactual
URL: http://
Written By: m.jed
I owe a response on jed’s post, not ignoring it, just have a little number crunching to do
for no other purpose than to penalize the rich for being rich.
Do you really think that is the progressive taxation? The PURPOSE?

The purpose of progressive taxation is pay the costs of running the government while causing the smallest affect on non-disposable income.

By your logic, in the name of fairness, you would take food money from the poorest taxpayer, and return it as caviar money to the highest earners. This is not about class warfare, it is simply doing the best we can to allow the most people to live the best lives possible.

There is no fair plan, because life is simply not fair, but for you to call progressive taxation a punishment on the wealthy, no, you say that it’s ONLY purpose is a punishment on the rich, while ANY non-progressive tax would necessarily tax "getting by money" from one group and you don’t even acknowledge that punishment. This would be the effect of flat income tax. Are you arguing "screw ’em in the name of fairness"? Apparently so am I, but at least in my fairness world, I am not taking food away from families.

Flat consumption tax ideas are intriguing, but whenever I see an actual proposal, it represents a MASSIVE tax increase for some group (usually the group well above the deduction limit, but far below the to) and a massive tax cut for the wealthy. Think about revenue neutrality and consider this. If a person earns $50,000,000 in a year, they might pay 15% today. Now if this person actually lives on $2,000,000 and accumulates the rest, he’ll only pay taxes on that $2,000,000. So you have eliminated $48,000,000 from the tax base. So who is going to make up this gap?

YOU ARE!

Cap
 
Written By: Captin Sarcastic
URL: http://
I cannot fathom the logic that says that money earned with someones labor is less important to the economy therefore should be taxed at a higher rate, than money earned with money
There are a number of rationales — efficiency, stimulus, competitiveness, etc — but one reason would be that investment creates jobs directly. It’s the productivity driver. Taxing it at too high a level would reduce the return on risk for everybody who invests.
So in my estimation, we are left with number 1, a progressive tax system that is actually progressive bottom to top, not just bottom to pretty good incomes, and then dropping down for the extremely high income earners.
I don’t think that’s really possible. At least, not in any utilitarian way that would be a net improvement. Oh, sure, we could do more to capture more of their income, but what will you do about capital flight? What will you do when they move to more tax-friendly environs? What do you suppose the reduction to the return on risk will do to their investment and to the economy?

Again, as I’ve shown, the system is progressive. The exception is only a very, very few high-income earners whose circumstances are substantially and categorically different.

I’d also be more sympathetic if much of their income wasn’t already taxed at the corporate level. If you want to suggest we ditch corporate taxes altogether — and they impose FAR more of a burden on the working class than the investor class — then I would be more sympathetic.
Flat consumption tax ideas are intriguing, but whenever I see an actual proposal, it represents a MASSIVE tax increase for some group (usually the group well above the deduction limit, but far below the to) and a massive tax cut for the wealthy.
I think you’re wrong about this. Think about it. If basic (survival) exemptions are built into the system — say, the first X dollars of income, health spending deductibility, food — then it will exempt the lowest levels, and a substantial portion of the income of the middle class. If the tax rate is either non-discriminatory towards income from capital, or is set at some flat, loophole-free level, then not only will you be effectively taxing the upper classes, you’ll be capturing a part of their capital income, too. (without distortive loopholes) Provided this tax rate is not so high that it causes capital flight or a significant reduction in investment, this would seem to deal with your concerns effectively.

 
Written By: Jon Henke
URL: http://QandO.net
Why does everyone fall for the same stupid trick when talking about progressive or flat taxes? Why does everyone seems to forget all the other taxes that the poor and middle class Americans pay after income and SS taxes? Has everyone forgotten Real Estate taxes, Sales Taxes, Excise Taxes?

It is local (state, city) taxes and federal excise taxes that are so unjust to the poor and working middle class. Just do the math.

Lowest Federal Tax Rate:
15%
Federal Social Security: 8.5%
Sales Tax Rate: 8% (poor & middle class spend 100% of take home)
Sub Total: 31.5% (before paying Real Esate taxes, etc.)

Add on top of that the billions taken in each year by lotteries. Billions taken in each year by gasoline tax. In most areas of the country real estate taxes have been rising 20% a year.

In short, the poor and middle class of this country are left with less than 50% of their income. No wonder we have a negative savings rate.

Flat Tax on Corporate America:

This is where we should roll out the flat tax. All corporations, no matter the size, industry, sector, etc would pay a flat 20% of income, or better use some number they can’t fudge, like total annual cash receipts. The system would be simple to administer and save corporate America $billions each year in accounting fees and tax reporting.

Excise Tax or Wealth Tax:

Some of the most conservative states (N.H., Florida) have an excise tax. There should be a Federal excise tax of 1 to 2% on all net worth over $10 million. Wealthy people already pay about 1% just to have their money managed by Wall Street. So add another 1% for them to pay their fair share of maintaining this country.

Ace Tracy





 
Written By: Acetracy
URL: http://
Ace,

First, the lowest Federal Income Tax bracket is 10% not 15%. Second, sales tax in most states doesn’t apply to food or clothing and few states have a sales tax rate as high as the one you cite, so the average is nowhere near that high. Third, "Social Security" is not a tax, it’s a contribution (using FDR’s own words). So to the extent that it’s regressive it is to the same extent that purchasing any insurance plan, or any other product or service would be - and since benefits are tied to contributions, the wealthy receive much lower benefits as a percent of their contributions because of the progressivity of that system in the first place. Lotteries, while disproportionately played by lower income classes, is a choice they make and hardly can be attributed to reducing income except if you’re trying to say that any consumption reduces income - and since it’s a choice they’re making, I’ve little sympathy in this regard to the detrimental impact it has on savings. Although I don’t believe that real estate taxes are rising 20% a year in any part of the country, rents have not been rising anywhere close to that level, which means the land-owning class is shouldering the increase in property taxes even if your rate is correct.

Finally, citing any income tax brackets as evidence of tax burden is either purposefully misleading or wilfully naive. There are deductions (the standard for example, EITC, etc.) that reduce the marginal tax rates, which is why, as can be seen in the link embedded in my previous comment, the total effective Federal tax rate for the lowest quintile of household incomes is 10.4% - the lowest it has been since 1960 and according to the CBO, the tax burden (share of total Federal tax liabilities) has decreased for every income quintile except for the top from 1979 - present.
 
Written By: m.jed
URL: http://
"you say that it’s ONLY purpose is a punishment on the rich"

It is not necessary for raising adequate revenue, so what other purpose does it serve?

"it represents a MASSIVE tax increase for some group (usually the group well above the deduction limit,"

You are going to have to show me some evidence before I believe that.


"while ANY non-progressive tax would necessarily tax "getting by money" from one group and you don’t even acknowledge that punishment."

That is just nonsense. As I mentioned befor, allowing a personal exemption, as the present system does, would prevent that.

"If a person earns $50,000,000 in a year, they might pay 15% today. Now if this person actually lives on $2,000,000 and accumulates the rest, he’ll only pay taxes on that $2,000,000. So you have eliminated $48,000,000 from the tax base. So who is going to make up this gap?"

Once again, that sounds a little far-fetched to me, so I will need some evidence. It has been a while since I took a tax course, but to the best of my recollection, your example is faulty for several reasons.
 
Written By: timactual
URL: http://

 
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