Tax the rich?

Posted: 19 October 2015 in Uncategorized
Tags: , , , , , ,

What would happen if the United States raised taxes on the rich?*

Well, as it turns out, it wouldn’t do a whole helluva lot to improve the distribution of income. That would barely change. But the United States would be able to generate significant additional federal revenues—enough to fund a lot of new government programs to help the working-class.

50K 10mK

Let’s start by considering what has happened to federal income tax rates over the years. As is clear from the charts above (using the handy interactive calculator here), the effective tax rates for middle-income households and for those at the top both fell in the postwar period. But the rate fell much more at the top than in the middle (or, for that matter, the bottom). Thus, for example, the effective tax for households bringing in $50 thousand a year fell from 24 percent in 1945 (when the inflation-adjusted income was $3,920) to 13.3 percent in 2012—while the rate for households with an income of $10 million fell from 90.8 percent in 1945 (on an inflation-adjusted income of $783,996) to 34.7 percent in 2012.

Clearly, the small group at the top has enjoyed an enormous decrease in federal income tax rates on their share of the surplus during the postwar period, especially beginning in the early 1980s.

So, to repeat my question, what would happen if the United States reversed that trend and raised taxes on the rich?

According to a recent study by William G. Gale, Melissa S. Kearney, and Peter R. Orszag, an increase in the top marginal tax rate would not make the distribution of income significantly less unequal. For example, increasing the top income tax rate from 39.6 to 50 percent (which would raise taxes an additional $6,464, on average, for households in the 95-99th percentiles, an additional $110,968 for households in the top 1 percent, and an additional $568,617 for households in the top 0.1 percent) would only lower the Gini coefficient in the United States from 0.574 under current law to 0.572. And consider this: even if all of the additional revenue collected were redistributed evenly to households in the bottom 20 percent (thus $95.6 billion in revenue from an increase in the top rate to 50 percent, which would lead to an additional $2,650 in post-tax income for the bottom fifth of households), the Gini coefficient drops by less than .01 (to 0.565). In neither case does an increase in the top federal income tax rate substantially alter the unequal distribution of income.**

However, as Patricia Cohen points out, raising taxes on the rich would serve to increase federal revenues—by a significant amount. Thus, for example, raising the effective tax burden on the top 1 percent from 33.4 percent today to 45 percent (in other words, close to what it was in 1986) would generate about $276 billion in revenue just in the first year.

Even more:

If the tax increase were limited to just the 115,000 households in the top 0.1 percent, with an average income of $9.4 million, a 40 percent tax rate would produce $55 billion in extra revenue in its first year.

That would more than cover, for example, the estimated $47 billion cost of eliminating undergraduate tuition at all the country’s four-year public colleges and universities, as Senator Bernie Sanders has proposed, or Mrs. Clinton’s cheaper plan for a debt-free college degree, with money left over to help fund universal prekindergarten.

Clearly, taxing the rich has enormous potential in terms of financing new programs to benefit the American working-class. But it’s also not enough.

The fact that increasing the tax rate on the top groups would not significantly alter the distribution of income but, yet, generate enormous tax revenues is evidence of just how obscenely unequal the existing distribution of income is in the United States.

*Hopefully readers will find my analysis here useful. But, even if not, I certainly hope you enjoy Ed Asner in his inimitable style explaining why we need to tax the rich.

**Now, it is true, as John Quiggin points out, the Gini coefficient is not a particularly good measure of inequality (since it is much more sensitive to what happens in the middle of the income distribution than to the tails), and the tax-and-redistribute proposal would in fact substantially improve the income of the poor even if it doesn’t alter the distribution of income according to the usual measures.

  1. Pavlos says:

    Taxing income at a high rate (50% or more) wouldn’t achieve that much and would be fiercely resisted, losing a lot of points for progressives. There are two better options: Force the rich to separate consumption income, which you tax a lot, from reinvested income which you tax lightly. That’ll reduce inequality of consumption and make taxation more politically acceptable. And while it’s hard to tax land, the financial system makes it easy to tax securitised wealth. ETFs and stockbrokers routinely levy sub-1% fees on assets. Investment banks collect a sizeable fraction of a company’s worth at IPO. Taxing financial wealth in a similar manner and amount, accruing to a sovereign fund rather than government expenses, would over time do more to lessen inequality than high band income taxation with much less protest from the rich.

  2. netbacker says:

    Federal Taxes for Revenue Are Obselete. It’s been that way for 80+ years now.
    The point of Taxing the rich is not to raise revenue needed for Federal Government to spend, but as a policy to influence what the rich do with their money. The most effective tax would be the one that raises the least revenue. Think about that.

    The necessity for a government to tax in order to maintain both its independence and its solvency is true for state and local governments, but it is not true for a national government. Two changes of the greatest consequence have occurred in the last twenty-five years which have substantially altered the position of the national state with respect to the financing of its current requirements.

    The first of these changes is the gaining of vast new experience in the management of central banks.

    The second change is the elimination, for domestic purposes, of the convertibility of the currency into gold.

    Free of the Money Market
    Final freedom from the domestic money market exists for every sovereign national state where there exists an institution which functions in the manner of a modern central bank, and whose currency is not convertible into gold or into some other commodity.

    What Taxes Are Really For
    Federal taxes can be made to serve four principal purposes of a social and economic character. These purposes are:
    1. As an instrument of fiscal policy to help stabilize the purchasing power of the dollar;
    2. To express public policy in the distribution of wealth and of income, as in the case of the progressive income and estate taxes;

    3. To express public policy in subsidizing or in penalizing various industries and economic groups;

    4. To isolate and assess directly the costs of certain national benefits, such as highways and social security.

    read more:

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