Taxing the Rich

Politics International Politics
1

So, who does pay the taxes when taxes are raised and lowered? I’ve always bought into the notion that lower tax rates do result in more tax revenues… and I’ve always believed that the wealthier do pay more taxes than do the poor… Now, there is this report:

[quote][b]
A few weeks ago, the Internal Revenue Service released data on tax year 2003. They show that the top 1 percent of taxpayers, ranked by adjusted gross income, paid 34.3 percent of all federal income taxes that year. The top 5 percent paid 54.4 percent, the top 10 percent paid 65.8 percent, and the top quarter of taxpayers paid 83.9 percent[/b].

Not only are these data interesting on their own, but looking at them over time shows that [color=black]the share of total income taxes paid by the wealthy has risen even as statutory tax rates have fallen sharply. A growing body of international data shows the same trend[/color].

On the first point, we see that in 1980, when the top statutory income tax rate went up to 70 percent, the share of income taxes paid by the top 1 percent of taxpayers was just 19.3 percent. After Ronald Reagan’s tax cut of 1981, which reduced the top rate to 50 percent – a massive give-away to the wealthy according to those on the left – the percentage of income taxes paid by the top 1 percent rose steadily.

By 1986, the top 1 percent’s share of all federal income taxes rose to 25.7 percent. That year, the top statutory tax rate was further cut to 28 percent – another huge-give-away, we were told. Yet the share of income taxes paid by the top 1 percent continued to rise. By 1992, it was up to 27.5 percent.

Of course, it would be a mistake to conclude that tax increases will not raise the wealthy’s tax share or that tax rate cuts always will. Nevertheless, [color=black]it is remarkable that the percentage of federal income taxes paid by the top 1 percent of taxpayers almost doubled during a time when the top income tax rate fell by half[/color].

A common liberal retort to these data is that they exclude payroll taxes, which are assumed to be largely paid by the poor. However, it turns out that when one includes payroll taxes in the calculations, it has far less impact on the distribution of the tax burden than most people would assume, because the wealthy also pay a lot of those taxes, too.

In a 2004 paper presented to the American Statistical Association, IRS economists Michael Strudler and Tom Petska calculated percentiles data that included both income taxes and Social Security taxes. In 1999, the top 1 percent paid 23.3 percent of combined payroll and income taxes, the top 10 percent paid 52.2 percent, and the top 20 percent paid 68.2 percent.

[color=black]In recent years, a number of foreign countries have also started publishing tax shares data. They show the same trend of higher and higher burdens on the wealthy even when tax rates are cut sharply[/color].

For example, according to Her Majesty’s Revenue and Customs, the share of total income taxes paid by the top 1 percent of taxpayers was 11 percent in the [color=blue]United Kingdom[/color] in 1979, when the top income tax rate was 83 percent. Prime Minister Margaret Thatcher cut that rate to 60 percent, and by 1987 the share of income taxes paid by the top 1 percent had risen to 14 percent. The top rate was cut again to 40 percent, where it still stands, and the share of income taxes paid by the top 1 percent continued rising to a current level of 21 percent.

Statistics [color=red]Canada[/color] recently released a study looking at tax shares in that country. It shows that the share of federal income taxes paid by the top 10 percent of taxpayers reached 52.6 percent in 2002 – almost exactly the same as is paid by the top 10 percent in the United Kingdom. However, the top income tax rate in Canada is just 29 percent. (Provincial tax rates in Canada are very substantially higher than among U.S. states.)

Finally, we now have data for [color=green]Australia[/color] from the Australian Taxation Office. In 2003, they show the top 5 percent of taxpayers paying 30.2 percent of all income taxes, the top 10 percent paying 41.8 percent, and the top 25 percent paying 63.8 percent. But the top income tax rate in Australia is 47 percent. Thus we see that the country with the highest top rate also brings in the least amount of total income tax revenue from its richest citizens in percentage terms.

[color=black]At some point, those on the left must decide what really matters to them – the appearance of soaking the rich by imposing high statutory tax rates that may cause actual tax payments by the wealthy to fall, or lower rates that may bring in more revenue that can pay for government programs to aid the poor? Sadly, the left nearly always votes for appearances over reality, favoring high rates that bring in little revenue even when lower rates would bring in more[/color].[/quote]

So, what do our liberals say about this? Or anyone who understands statistics and numbers better than I do? Is this not convincing evidence that tax cuts do not usually soak the poor?

2

Put it simply…

who pays more taxes?

The rich guy who gets taxed 5% but earns $1,000,000 a year

or the poor guy who gets taxed 10% but earns $10,000 a year.

The rich guy pays $50,000 and the poor guy pays $1000.

In addition the rich guy probably employs poor guys, creating jobs.

But we have the idea in America that somehow rich people should be taxed huge amounts, in a higher percentage, so they can move to other states or other countries and take the jobs with them.

3

Tigerman

Good topic, but I big to differ with your point. Lies, damn lies and statistics as they say.

The rich are paying a greater amount of their wealth in taxes relative to the poor because they have become comparatively a lot richer, whilst the poor have become relatively a lot poorer.

I’d give you a graph showing that change in income but I can’t seem to copy it, but here’s the link (go to page 9):

US census income distribution

4

OK, I guess there is no denying that the top 5% rich are getting richer and the bottom 5% poor are getting poorer.

But, that graph you linked to showed that on average, families are getting richer.

So, my question… how does that graph negate the stats identified in the article I cited above?

Are the bottom 5% poor getting poorer because of tax cuts? If so, how? I mean, the stats I cited show that despite tax cuts, the rich are paying a greater proportion of the entire tax revenue… and, unless I’m mistaken, when taxes have been lowered, total tax revenues have been increased.

Lowering taxes seems like a win-win situation.

As such, I am sincerely open to understanding why some of you believe the opposite is true.

5

[quote=“Tigerman”]Are the bottom 5% poor getting poorer because of tax cuts? If so, how? I mean, the stats I cited show that despite tax cuts, the rich are paying a greater proportion of the entire tax revenue… and, unless I’m mistaken, when taxes have been lowered, total tax revenues have been increased.
Lowering taxes seems like a win-win situation.[/quote]
As superbly demonstrated by…

6

Firstly I should probably revise slightly what I said before - I tend to believe that everyone gets richer as time goes by. What concerns me is that the rich are currently comparitively becoming a lot richer, while the middle and lower classes are stagnating.

Hence, envy comes into play. From what I understand societies with greater equality tend to be happy. Keeping up with the Joneses in other words creates stress (and high credit card debt).

The whole idea of tax cuts is a bit of a scam I believe. It’s more like a shiting of burdens. Whenever you cut taxes, you need to cut services, at least if you want to balance the budget (but let’s not go there).

So if you cut taxes for everybody, everybody has more money to spend. But let’s say you have to cut health and education quality as a result. The rich, with a relatively greater amount of money in their pockets go private and recieve an equal or better standard of care/education as they no longer have to cover the burden of paying for the poor’s use of public services. The poor can’t afford this path and stay in the public system whose standards have dropped.

So in answer to your question are the bottom 5% poor getting poorer because of tax cuts? Yes and no. They’re not getting poorer, but they are receieving worse services or having to pay more to recieve the same level of service. So they end up being worse off than before. So we can say that a tax cut for everyone, shifts costs from the rich to the poor.

And (politely) please, no links to the heritage foundation. That’s like arguing over Taiwanese indendence and using a public opinion poll supplied by the CCP poll. I used the US census bureau, let’s try and stick with neutral information suppliers. :slight_smile:

7

The graph you cited shows that on average, everyone is getting richer. That graph only illustrates the gap between the top 5% and the bottom 5%. As such, I don’t know how you can say that the middle class is stagnating… not saying there are no other indicators out there… but, that graph you cited doesn’t seem to indicate that the middle class is stagnated in terms of financial growth.

Well, I agree that many, if not most human beings envy others. But, i don’t see how this is a problem created by the way income is taxed.

But, if lower tax rates result in higher overall revenues, and in higher proportionate amounts paid by the wealthiest portion of the population, then how can your claim above be correct?

Lower tax rates result in greater amounts of revenue. Thus, why would there be a need to cut services?

I agree, the wealthy may go for private services that they can afford… but, again, if lower tax rates create or result in greater revenues, then what you are assert about service cuts doesn’t seem correct.

Arrgh! Don’t try to confuse me… :laughing:

But, if revenues increase as tax rates fall, then worsening services should not be a function of lower tax rates, right?

Politely: It matters not from where the information comes. Are those facts wrong as presented on the heritage foundation site? If so, how? What are the actual (correct) facts? I don’t care about the messanger… just the message.

Here is another site that argues lower tax rates result in increased tax revenues.

And another.

And yet another.

And the Congressional Budget Office should suffice for neutrality:

[url=WSJ: Real Tax Cuts Have Curves -- George Bush proves Art Laffer right -- again.]Last week the Congressional Budget Office released its latest report on tax revenue collections. The numbers are an eye-popping vindication of the Laffer Curve and the Bush tax cut’s real economic value. Federal tax revenues have surged in the first eight months of this fiscal year by $187 billion. This represents a 15.4% rise in federal tax receipts over 2004. Individual and corporate income tax receipts have exploded like a cap let off a geyser, up 30% in the two years since the tax cut. Once again, tax rate cuts have created a virtuous chain reaction of higher economic growth, more jobs, higher corporate profits, and finally more tax receipts.

This Laffer Curve effect has also created a revenue windfall for states and cities. As the economic expansion has plowed forward, and in some regions of the country accelerated, state tax receipts have climbed 7.5% this year already… New York City… finds itself more than $3 billion IN SURPLUS…[/url]

8

But, if lower tax rates result in higher overall revenues, and in higher proportionate amounts paid by the wealthiest portion of the population, then how can your claim above be correct?[/quote]

Question: Has it been shown that lower tax rates do result in higher overall revenues? It may be true, but I don’t see it stated in the report.

Edit: Never mind, missed the last bit of Tigerman’s post above.

9

[quote=“daasgrrl”]Question: Has it been shown that lower tax rates do result in higher overall revenues? It may be true, but I don’t see it stated in the report.

Edit: Never mind, missed the last bit of Tigerman’s post above.[/quote]

In any event, I guess it cannot be proved… but, there certainly seems to be a high correlation between lower tax rates and higher tax revenues. Enough so that those who argue against lowering tax rates based on the argument that the same will result in less revenue ought to reconsider their argument… no?

10

Er… dunno :slight_smile: It depends on whether a link can be shown and how they spend the extra revenue, IMHO. Australia has been in the process of cutting tax rates for high income earners, so it’ll be interesting to see how that pans out.

11

As far as the laffer curve is concerned, there is no doubt that the highest possible tax rates do not produce the highest revenue, nor do the lowest tax rates. Rather at some point the incentive to produce profit becomes so great that the total return starts to decrease. As far as I know, there’s no certainty as to where that point is, and it’s really kind of an iterative process where the variables are hard to isolate.

edit: – sorry – insert disincentive for incentive in the 3rd line – makes a minor difference :slight_smile:

12

But, that is a different issue.

redandy, thanks for that. I suspect that is correct.

13

But, that is a different issue.[/quote]

Agreed.

I was thinking more about the possible argument that lower tax rates would actually benefit the poor due to increased revenue, which is a different issue to whether they would occur.

14

[quote=“Tigerman”]The graph you cited shows that on average, everyone is getting richer. That graph only illustrates the gap between the top 5% and the bottom 5%. As such, I don’t know how you can say that the middle class is stagnating… not saying there are no other indicators out there… but, that graph you cited doesn’t seem to indicate that the middle class is stagnated in terms of financial growth.
[/quote]

OK here’s some other information regarding different income groups and their change in real income between 1979 and 2000. Hope it is suffice to hold my point that the gap between rich and poor is growing.

In terms of real dollars, how much did the various income groups gain or lose during the last three decades?

To quote:

From 1979 to 2000, the average after-tax income of the richest one percent of households tripled. More precisely, it climbed 201 percent, or $576,000. Among the middle fifth of households, average after-tax income rose a much more modest 15 percent, or $5,500. (These figures are adjusted for inflation and expressed in 2000 dollars.)

Average after-tax income gains, 1979-2000
Top 1% 	$576,400 	201% increase
Middle fifth 	$5,500 	15% increase
Bottom fifth 	$1,100 	9% increase

More information and graphs there.

[quote=“Tigerman”]skullboy wrote:
Hence, envy comes into play. From what I understand societies with greater equality tend to be happy. Keeping up with the Joneses in other words creates stress (and high credit card debt).

Well, I agree that many, if not most human beings envy others. But, I don’t see how this is a problem created by the way income is taxed.
[/quote]

Envy is not caused by taxation for sure. However, taxation can be a tool used by governments to “smooth out” inequalities that arise between groups. Of course, this may not be the goal of your government.

[quote=“Tigerman”]skullboy wrote:
The whole idea of tax cuts is a bit of a scam I believe. It’s more like a shiting of burdens. Whenever you cut taxes, you need to cut services, at least if you want to balance the budget (but let’s not go there).

But, if lower tax rates result in higher overall revenues, and in higher proportionate amounts paid by the wealthiest portion of the population, then how can your claim above be correct? [/quote]

Whether lower taxes do result in higher overall revenues is the point we’re stuck on here. I don’t believe anyone’s proved that point. But I’ve been busy all day and I’ll have a better look at your links later. Anyways, redandy’s point is valid I believe - where that “perfect” taxation level is is what is disagreed upon - 5% tax won’t allow any government to pay for the services its citizens expect and 90% rates will kill off private enterprise.

Perhaps taxation should be looked at more like interest rates - a moving target that is changed regularly to suit the state of the economy. In times of stagnation rates drop, in times of boom they go up.

But I feel this is what always supposed to happen. But we have a propensity to go into debt when times are bad. When times are good though we don’t payoff enough debt and then some people look at how much government revenue has increased and demand a tax cut (when really that “new” income should be spent on paying off the debt we incurred digging ourselves out of an economic slump/depression).

[quote=“Tigerman”]skullboy wrote:
So if you cut taxes for everybody, everybody has more money to spend. But let’s say you have to cut health and education quality as a result.

Lower tax rates result in greater amounts of revenue. Thus, why would there be a need to cut services? [/quote]

Same presupposition again. And really if this was true where are the constant examples of it? Reagan and George W. may have both cut taxes and (supposing that the recent improvment in US economic figures continues) seen economic gains. But they have also spiked deficits to previsouly unseem highs due to massive increases in governemnt spending. That, to me, is not being fiscally prudent - it’s borrowing your way out of a depression just as was done in the New Deal era.

But I think daasgrrl may be right - looking at Australia might give you better examples of lower taxation leading to increased revenues. Also, New Zealand from 1984 on I think, but I;d need to look at the stats.

[quote=“Tigerman”]skullboy wrote:
They’re not getting poorer, but they are receieving worse services or having to pay more to recieve the same level of service. So they end up being worse off than before. So we can say that a tax cut for everyone, shifts costs from the rich to the poor.

But, if revenues increase as tax rates fall, then worsening services should not be a function of lower tax rates, right? [/quote]

Ummm…do you mean result of lower tax rates? (maybe I don’t see your point sorry. Without any other outside factors why else services worsen?)

Really? awesome!! You’ll love this one then! :laughing:

But thanks for the Congressional Budget Office reading, I’ll get onto that after I cook dinner.

15

Tigerman, excellent choice of thread topic, and some good points made. Skullboy, a couple of very solid posts.

It strikes me that we may have missed some theory here… Take a simple closed economy (Smallsville) with a flat tax rate of 25% and a gdp of, say, $1000. Smallsville’s statistics agency reveal that annual tax revenues are worth $250. There is no tax evasion in our model, nominal tax rates equal the actual tax incidence, and the year is AD1. This is our starting point (i.e. don’t debate this bit…).

Now, in AD2 the govt raises Smallsville’s 25% tax rate by a further 25% - to 50%. What will this do to revenues in AD2? Laffer Curve fans will say that while you may see an increase in total revenues, Smallville’s gdp is likely to shrink through AD2 such that doubling the tax rate doesn’t give the govt 2x$250. For the sake of filling in the blanks, let’s say they pull out $400, or half of gdp $800 in AD2.

Why did gdp shrink in AD2? The substitution effect: the good citizens of Smallsville look at their work/leisure tradeoff and decide that with taxes so much higher, they might as well work less and spend more time at home with their kids. There is plenty of empirical evidence to suggest this does indeed happen, particularly at the upper ends of the tax scale.

But that’s not the end of the story. Those coming from a Keynesian position will say that while SOME citizens of Smallsville will reduce their work input, others will surely increase it along with the tax increase. So for the Keynesian analyst, raising the tax rate to 50% may actually result in an increase in revenues of GREATER than 2x$250 through AD2 and beyond. For the sake of argument, let’s say the Smallsville treasury pulls in $600 in AD2, or half of a gdp for that year of $1200.

Why did GDP increase in AD2? The incomes effect: the citizens of Smallsville have their disposable incomes significantly reduced by the 25% tax increase, and to make-up the shortfall, they have to increase their work hours to compensate. There is, as with the substitution effect, plenty of evidence to suggest that this does in fact occur, and is particularly important for lower income earners.

So overall, what’s going to happen to Smallsville’s tax revenues? Which theoretical approach is likely to prove right? Here’s the clincher: there is no apriori, theoretical reason for expecting that either is going to be correct. We can refine both models, but ultimately the outcome is not entirely predictable.

I welcome the increase in tax revenues from the top end of town that have accompanied the Bush tax cuts (if Tigerman’s stats are correct). And this only because I worry about the US federal deficit (I worry about all sorts of shit, that’s just me :slight_smile: ). Just looking at the revenue stats, however, aint gonna tell you if there is a causal relationship going on here (i.e. that the supply siders are right).

That would probably require a breakdown of labor productivity per worker in the relevant quintile. At this point I’d dip out of the discussion: labor economics is a whole lot slipperier (sp?) than public finance…

16

Ok, so I started reading stuff.

First off the Heritage Foundation:

I notice the article was written in 1996 and states:
[color=darkred]
The tax rate increases imposed under George Bush and Bill Clinton, as outlined below, are associated with the slowest growing economy in 50 years and a decline of more than $2,000 in the average family’s income.[/color]

Guess he wouldn

17

I do not deny that the gap between the very richest and the very poorest is increasing.

What I want to know is why some people oppose tax rate cuts when so much evidence shows that when tax rate cuts are made, tax revenues increase, and the wealthiest pay a greater proportion of the overall texes paid.

How would the government “smooth out” inequalities with taxation?

Well, its a fact that when the tax rates have been lowered in the US, and in the UK, and in Canada, tax revenues have increased.

Agreed.

Hmmm.

I honestly don’t know. You’re getting into an area that I am not all that familiar with. I have seen some claim that the deficit is a terrible thing and others claim that it isn’t much of a problem. I honestly don’t really understand it.

I agree that Bush has been a reckless spender… but, we were not in a depression.

What I mean is that if the quality or quantity of services deteriorate when we are taking in more money, then there must be some reason not related to tax revenues that explains the deteriation. In other words, there must be some other outside factors that account for such deteriation.

That’s right. He shouldn’t be dismissed simply because he’s been shown to be a liar on many occassions. That fact doesn’t preclude him from telling the truth at some time in the future.

You’re very welcome. Enjoy your dinner.

18

[quote=“skullboy”]And I didn

19

First off, let me give a tip of the hat to all of the contributors to this thread for an excellent discussion. :bravo:

This has been one of the more interesting reads I’ve seen in a while. Heavy on ideas and intelligent discussion, low on insults and other worthless bullshit.

So cheers guys. All of you, on “both sides”. :notworthy:

Since the topic seems to currently be less concerned with “the rich” or “the poor”, and rather on general macroeconomic effects of taxation, I’ll just ask this quick question on this point. Here’s the statement that is puzzling me:

[quote=“skullboy”]Given that the Republicans control all the levers of power, there

20

On Laffer Curves and the Reagan cuts: the mere fact that the US was heavily in deficit for nearly all the 1980s and into the 1990s, and didn’t climb out of the red ink until taxes were raised (Bush 1? and Clinton), would seem to suggest that the Reagan Administration’s initial tax models were wrong. Sure, if you simply assume that you are going to get a productivity boost (substitution effect) when you cut taxes, then yes, your projections will indicate that the budget will balance sooner or later. But you should also assume that you are going to get people cutting back on their work time (incomes effect) when you cut taxes, as they will have more cash in their hands when the monthly paycheck arrives. Projections that incorporate this assumption alongside the productivity boost will suggest that a deep tax cut may throw your budget into the red in perpetuity. Potentially, the two responses to tax policy moves cancel each other out. I think there is prima-facie evidence here that Reagan just completely ignorred the incomes effect in his modelling - to wit, red ink as far as the eye could see… I worry GW Bush has made the same mistake, and the projections that the US will be back in the black 2011 (?) are wildly off as a consequence.

On government responsibility for economic performance. One phrase: animal spirits. If Keynes was right in suggesting there is an irrational element in economic behaviour, often wrapped-up in the term ‘business and consumer confidence’ and engendered by the lack of perfect information about markets, then yes, governments must wear a chunk of the responsibility when things go right or wrong. As the soul compulsory agent in an economy and with at least the potential to act in the general interest, government has the capacity to send a bunch of good or bad signals about where the economy is going that private agents cannot. These signals in turn will affect the way consumers and producers spend their money, with very real effects on economic performance down the track. If you give the impression that there is no-one at the wheel (perhaps the Bush administration and President Chen here in Taiwan), then people hang-back. Sentiment becomes reality.

One more point in passing: lost growth is a sin. Hobbes mentioned the difference between 3.9% and 3.7% in government impact on economic performance (0.2%). A back of the envelope calculation re. the US economy reveals this is worth about US$20 billion. How many jobs and lost opportunities in that? Missing out on even 0.02% is unforgiveable.