Posts Tagged ‘government’


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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.

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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.


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Apparently, the door between Wall Street and the U.S. government agencies in charge of regulating Wall Street continues to revolve. Former Federal Reserve chair Ben Bernanke is the latest to walk through the door.

For eight years, Ben S. Bernanke, the former Federal Reserve chairman, was steward of the world’s largest economy. Now he has signed on to advise one of Wall Street’s biggest hedge funds.

Mr. Bernanke will become a senior adviser to Citadel, the $25 billion hedge fund founded by the billionaire Kenneth C. Griffin. He will offer his analysis of global economic and financial issues to Citadel’s investment committees. He will also meet with Citadel’s investors around the globe.

It is the latest and most prominent move by a Washington insider through the revolving door into the financial industry. Investors are increasingly looking for guidance on how to navigate an uncertain economic environment in the aftermath of the financial crisis and are willing to pay top dollar to former officials like Mr. Bernanke.

Mr. Bernanke joins a long parade of colleagues and peers to Wall Street and investment firms. After stepping down, Mr. Bernanke’s predecessor, Alan Greenspan, was recruited as a consultant for Deutsche Bank, the bond investment firm Pacific Investment Management Company and the hedge fund Paulson & Company.

Last month, Jeremy C. Stein, a former Fed governor, agreed to join the $20 billion hedge fund BlueMountain Capital Management, where he will advise managers on issues like financial regulation, risk and the implications of the Fed’s monetary policy. Mr. Stein resigned from the Fed last May to return to his tenured professorship at Harvard’s department of economics.


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