A certain retarded clown* is calling for raising taxes onthe rich:
Yet in the 1950s incomes in the top bracket faced a marginal tax rate of 91, that’s right, 91 percent, while taxes on corporate profits were twice as large, relative to national income, as in recent years. The best estimates suggest that circa 1960 the top 0.01 percent of Americans paid an effective federal tax rate of more than 70 percent, twice what they pay today.
Of course, this claim is patently untrue. It’s like Krugman just makes up facts to suit his fancy.
Along the way, however, we’ve forgotten something important — namely, that economic justice and economic growth aren’t incompatible. America in the 1950s made the rich pay their fair share; it gave workers the power to bargain for decent wages and benefits; yet contrary to right-wing propaganda then and now, it prospered. And we can do that again.
Now, I’m no apologist for rich people, especially since a lot of them benefit from and continuously lobby for greater government goodies. However, Krugman’s argument for increasing income taxes on the rich is nothing more than nonsense on stilts.
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In the first place, a good number of wealthy people don’t actually get wealthy strictly through income. Instead, they rely on capital gains from their investments. Warren Buffett doesn’t actually make billions of dollars every year; rather, he becomes wealthier because his holdings increase in value. In fact, Warren Buffett’s salary is only around $100,000 per year (though he does earn more than this due to having other sources of income). If he stuck solely with his Berkshire-Hathaway salary, he would fall squarely in the middle tax bracket. His proposal for increasing income taxes on the wealthy, then, wouldn’t even apply to him.** Thus, Krugman’s call for increasing the marginal tax rate on the wealthy might not even have any effect on the wealthy because some of the wealthy aren’t even in the highest tax bracket.
Second, it isn’t even clear that the tax code is good at providing economic justice. As noted in a prior link, the wealthy never really paid that much in taxes even when the marginal rate was 91%. Now, if the effective rate of taxation for the highest tax rate tops out at, say, 35%, then there really is not much point to having a nominal rate higher than 35%, except to make less wealthy people that are inclined to jealousy feel better about sticking it to the man. In other words, Krugman is more concerned about symbolism than reality. Who cares what the rich actually pay when it appears that they are paying 91% of their income in taxes.*** Of course, closing deduction loopholes for those in the highest tax bracket would also increase their tax burden. Why doesn’t Krugman recommend this policy? Because Krugman is far more concerned about symbolism over substance and, quite simply, raising rates is sexier than closing off loopholes. Really, Krugman is nothing more than an instigator of class warfare.
Finally, it should be noted that the fundamental purpose of taxation is to raise revenue. Economic justice and other platitudinous bullshit can certainly be ancillary to this, but revenue should be the primary focus of any discussion on taxes. Now, as anyone familiar with the Laffer Curve knows—and hopefully this would include Nobel-Prize-winning economists—raising nominal tax rates does not necessarily lead to increased revenue. In fact, a brief look at the history of tax revenue would suggest that, no matter what the tax rates are, the federal government will be hard-pressed to collect more than 20% of GDP in tax revenue. As such, proposing ridiculously high tax rates even though they will likely lead to lower revenue in spite of being in the middle of a recession and facing a spending deficit of over $1 trillion is an incredibly irresponsible thing to do.
* Paul Krugman, obviously.
** Note: as I said above, he does earn more than $100k in a given year. However, the sources of his other earnings are unclear, so I’m not sure if they would all be taxed as income or possibly as capital gains, etc.
*** And, with the US tax code using marginal tax rates, the nominal 91% rate for the highest earners is itself misleading, since the 91% rate would apply to earnings over a certain threshold. (E.g. you could have a 10% tax rate on the first $60k you earn and then have a 91% tax rate on all earnings above $60k, which makes for an effective tax rate of less than 91%).
So Romney is getting into trouble for at one point in time observing the verifiable fact that 47% of Americans don’t pay personal income taxes. (Or, to state it more accurately, 47% of Americans did not have any income tax liability.) Perhaps now would be a good time to observe that 47+% of Americans do not pay corporate taxes either.
Some high income Americans pay a lot of tax; others do not. If you have right tax advice and if most of your income can be structured as some form of “capital gains”, your marginal rate – what you pay on the your last dollar of income – may be very low. The highest marginal income tax rate currently is 35 percent, while long-term (over a year) capital gains are taxed at 15 percent at most.
The Buffett Rule is a proposal is establish a minimum tax rate for “millionaires” – people earning more than $1 million per year – and the Senate is likely to vote on a version this week. The exact amount of revenue that this would bring in depends on the details, but there is no question that it is small relative to the country’s need to control the federal budget. (The Joint Committee on Taxation scored one version of this proposal as generating about $30 billion over ten years; the annual budget deficit will remain over $1 trillion in the near term even under the most optimistic projections.)
In the first place, let me just note that Warren Buffet is a sniveling hypocrite of the highest order if his effective tax rate is higher than that of his secretary’s. See, Buffet holds the solution to the problem right in his own hands, in that his nominal income tax rate is presumably higher than his secretary’s, and so all he needs to do to increase his effective tax rate is…stop making deductions. In fact, if he’s so concerned with increasing his tax rate, why doesn’t he forego all deductions and credits, and report all the money he makes as income (instead of reporting some of it as, say, capital gains)? What disingenuous pricks Buffet and his ilk are.
But more to the point, I think I can see a solution that would work out well for everyone. Why not allow a voluntary guilt tax for uber-wealthy liberals?
Under my plan, uber-wealthy liberals who didn’t think that the wealthy were being taxed enough could opt to have all deductions and credits eliminated on their personal tax return, and could even add points to their tax rate! This would ensure that those calling for increased taxes would get exactly what they want, and have the additional bonus of making sure that those who want lower taxes will not be forced to endure tax raises. Everyone wins!
A somewhat strange myth has taken hold in some precincts of American conservative opinion that some vast swathe of the population isn’t paying taxes. In fact everyone pays sales taxes and other state and local taxes, and as Adam Looney and Michael Greenstone write for the Hamilton Project almost all working-age people pay federal tax on their income.
The main bloc of people who don’t pay income or payroll taxes are elderly people. Old people tend not to work, and many old people don’t have much in the way of investment income either. But it’s not like they’re freeloading, they’re just people who paid taxes in the past when they were working.
There are a couple of points worth making.
First, Yglesias is correct in noting that technically everyone pays taxes. Some taxes are direct, like fees for federal services, sales taxes, payroll taxes (which are generally only avoided by student workers, a handful of other workers, and the unemployed), and a few other taxes besides. Furthermore, everyone pays taxes indirectly, in the form of foregone goods and services. Corporate taxes are a perfect example of this, and some limited taxes (think: capital gains) also have indirect costs. Thus, to say that no one pays taxes is technically incorrect and highly misleading. If conservatives continue to say that there are a large number of people who don’t pay any taxes, they will find themselves facing political problems later.
Second, the more technically correct claim would be that there are large numbers of people who don’t have any income tax liability. This could mean that some people don’t earn enough to be charged taxes, it could mean that some people are able to claim enough deductions to avoid having to pay taxes, or it may be that someone is able to claim enough tax credits to negate their tax burden. Not having an income tax liability does not necessarily make one a parasite on the system, and given that a large number of current non-tax-payers have basically paid taxes for fifty or more years, painting them as lazy or as parasites, or as evidence that the system is on the verge of collapse is likely not going to go over very well politically.
Finally, the correct response to this issue should be two-fold. Conservatives should use this issue to argue for generally lower tax rates for all, in the name of fairness. Instead of raising taxes on current non-payers, conservatives should argue for lowering rates on current payers. In keeping with this, conservatives should also call for radical spending cuts. Ideally, conservatives would cut out all unconstitutional spending, which would cut the current budget by roughly 60%. In lieu of this, a spending cut of at least 45% would be acceptable.
At this point in time, conservatives have a good opportunity to cut taxes and reduce government spending. As long as they understand the reality of non-payers and take pains to not put their collective feet in their collective mouths, and as long as they hammer home spending cuts (hopefully in a more serious manner than Paul Ryan), they should have a chance at actually making a difference.
During the legislative debate before enactment of the 16th Amendment, Republican President William Taft and congressional supporters argued that only the rich would ever pay federal income taxes. In fact, in 1913, only one-half of 1 percent of income earners were affected. Those earning $250,000 a year in today’s dollars paid 1 percent, and those earning $6 million in today’s dollars paid 7 percent. The 16th Amendment never would have been enacted had Americans not been duped into believing that only the rich would pay income taxes. It was simply a lie to exploit American gullibility and envy.
I believe it was either last year, or possibly in the spring of this year, when conservatives got their panties in know over how 49% of all taxpayers paid no income taxes (though, funnily enough, all taxpayers still paid their FICA and other payroll taxes). The theory was that there would arise a class of professional voters, who would simply elect officials to pay take money from the rich and give it to the more-deserving poor, of which said professional voters just so happened to be a part.
The reality appears to be a bit different, at least historically speaking. When the income tax was first enacted, it only applied to the rich, who comprised 0.5% of the population. Thus, the percentage of the population paying the income tax increased 100-fold over 98 years to 51%. If the theory of professional voters were true, the percentage of taxpayers should have at least remained stable (or even decreased) while the tax rates should have remained stable or increased. Reality, as it were, is markedly different.
In spite of all the attempts at class warfare in the last one hundred or so years, the poor still get screwed over by the rich. This is probably because there is a strong correlation between a general form of stupidity and poverty,* as well as a strong correlation between wealth and general intelligence. In essence, the wealthy are generally intelligent enough to figure out how to make things work to their advantage (hence their wealth). If one is cunning enough to convince people to buy something they don’t need, it seems plausible that one could also sell someone a political policy that works to their disadvantage.
The historical norm has been that poor people pay quite a bit in taxes, and the wealthy are often the beneficiaries of those taxes (think of the feudal system as a general model of this). The idea that those who are intelligent enough to become quite wealthy won’t also be intelligent enough to protect their wealth is, quite frankly, absurd, and the idea that somehow the poor will manage to “reappropriate” wealth from the rich is even more absurd.
* Two quick notes: a lack of education generally correlates to stupidity, which in turn correlates to lower income (as evidence by the myriad statistics showing that high school dropouts earn less than those with a high school diploma, bachelor’s degree, etc.) Also, shorter time horizons also correlate to stupidity as well.
There’s a lot to comment on here
I think most people like the idea of a simpler tax code. No argument there. But I’ve never met a person who would volunteer to pay higher taxes in exchange for simplicity.
I don’t know if most would actually pay higher taxes. Sure, direct taxes might increase for some, but a flat tax would really cut down on indirect taxes. If everyone paid a flat 15% income tax, I don’t think most people would see their tax payments rise because everyone already pays a base level 9% income tax (in the form of Social Security and Medicare payroll taxes), not to mention plenty of indirect taxes. So, while nominal net income might decrease, the purchasing power of that income would increase, assuming the money supply would remain stable (note: inflation is considered, for purposes of this post, an indirect tax).
The flat tax idea is a brilliant bit of psychological class warfare. At least I hope that’s what it is. I’d hate to think the people in the highest tax brackets, i.e. my peeps, are as dumb as the people they hope to screw with promises of unicorns and flat taxes.
The flat tax seems brilliant, but most of the supporters of either a flat tax or FairTax are decidedly upper-middle class, and they know that they will be better off. The lower-class people I know don’t seem at all sold on the idea of increased rates, so maybe the flat tax isn’t as brilliant as is supposed.
The flat tax diversion is a deliciously cynical way to maintain the status quo while appearing to be in favor of change. The diversion works because the middle class has been duped by the media into thinking high income people pay a lower tax rate than the general public, so maybe a flat tax will set things right. That’s the power of anecdotes. If you hear a few stories about Warren Buffett paying a lower tax rate than his secretary, you assume your dentist is beating the system too. He probably isn’t.
I don’t personally know of any middle class people who think that high income people pay lower rates.
I’ll chalk Adams’ analysis up to self-selection bias.
proved that Buffet wasn’t paying a lower rate than his secretary.
Another brilliant aspect of the flat tax argument is that it’s simple to explain, and our brains are wired to perceive simple solutions as better than complicated ones. In reality, the simplest solution is usually the one that comes from someone who is either trying to screw you or who isn’t capable of understanding the full situation.
Actually, the simplest solutions are the best. However, that doesn’t mean that everyone will benefit from changing to a simpler solution. For example, in the case of a Flat Tax, lots of lawyers and lobbyists would be out work. And possibly several bureaucrats.
Furthermore, I don’t see how it’s “screwing over” people to make them pay for the benefits they receive from the government.
The flat tax diversion is weasel-clever because it shines a light on the absurd “fairness” argument coming from the folks who want to raise taxes on the rich. Fairness is an illusion our parents taught us as kids to make us stop fighting with our siblings over the appropriate division of candy. Fairness isn’t an objective quality of the real world. The reality is that the rich willingly pay higher taxes for the same reason that the British monarchy willingly converted from a dictator model to a symbolic role: If you want to avoid being beheaded, sometimes you need to be flexible.
If I could ban one word from the common vernacular, it would be “fairness.” It doesn’t exist, and never has. Plus, no two people and ever agree on what it means, at least in terms of practical application. Justice is a much better concept, and more objective in application, though not perfectly so.
Personally, I’m quite comfortable paying taxes at the highest rate. It’s like paying protection money to the Mafia, and I mean that in the best possible way. High taxes reduce the odds that jealous mobs will kill me for succeeding in my chosen field. Oh, and my taxes are also helping fund national defense, education, social program, and other good stuff. That’s a win-win. But please don’t insult me with arguments of fairness. Save the fairy tales for your kids.
I’d rather get rid of the mafia, personally. I suppose that buying protection is the next-best solution. However, never underestimate mankind’s propensity for killing the goose that lays the golden eggs.
I know some of you will leave comments about your own fairy tales of Laffer Curve economics, in which lower tax rates stimulate the economy and fill the treasury with free money. And then someone will point out that economic growth in the Unites States has often coincided with higher tax rates. Can we agree that the Laffer Curve has been debunked everywhere but on Fox News?
While I’m not one who has studied the Laffer curve with any degree of depth, I always thought the it existed to show a) that tax revenue is $0 and rates of 0% and 100% and that b) the rate optimal for maximizing revenue was somewhere between 0% and 100%. That’s all I use it for.
And I’m not sure how federal tax revenue equates to economic growth, except by definition per the widely used Samuelsonian macroeconomic metrics like GDP. Also, lower tax rates don’t stimulate the economy per se; they simply don’t disincentivize certain market behaviors.
Some blogs that caught my eye last week. First is The Burning Platform
with Edward Gibbon’s five marks of Rome’s decaying culture from his book The Decline and Fall of the Roman Empire:
1. Concern with displaying affluence instead of building wealth.
2. Obsession with sex and perversions of sex.
3. Art becomes freakish and sensationalistic instead of creative and original.
4. Widening disparity between very rich and very poor.
5. Increased demand to live off the state
I think it would be fair to say we are close to ticking all of them. Second is Steve Keen on the RBA’s setting of the cash rate:
The graph shows an almost 100% correlation between the cash rate and the 90-day bank bill rates. However the data also shows that in almost every instance the RBA cash rate FOLLOWS the 90-day bank bill rate, rather than leads it. … This analysis raises a number of interesting questions:
1. Why do we have the RBA as an interest-rate setting body at all when all they do is follow the market?
2. Why does the RBA shroud itself in such mysticism when their actions are so transparent to all?
3. What is the quality of our economists, politicians and financial commentators that we have to go through the “Will They or Won’t They” pantomime each month?
4. How could any economist get their forecasts wrong, particularly on the up-side?
Very much Wizard of Oz man behind the curtain. Third is Mark Tier at economics.org.au with two takeways on small/no government, which speak for themselves:
“… when the income tax was introduced in 1913 no one in his right mind would have suggested a top rate of 90 percent. In fact, there was considerable support for capping the income tax at 4 percent. This was shot down by those who argued that specifying such a maximum rate would mean the income tax would rapidly rise to that (then) horrific level. Can you imagine living in a world where an income tax of 4 percent is unthinkable!?”
“On January 24, 1848, the California gold rush began. But it took eighteen years for the U.S. Congress to enact a mining law to regulate such discoveries. Meanwhile, gold production in California boomed. How could that have happened without a governmental framework to recognize mining claims, register titles, and regulate disputes?
The miners created their own. They established districts, registries, procedures for establishing and registering a claim and buying and selling claim titles, and a system for resolving disputes. Officers were usually elected, including the recorder of claims.”
Finally, we have a report by Mineweb that I think few PM commentators will pick up, but which I think is a good signal that gold is on the move into the mainstream. Mineweb reported on Thomson Reuters buying GFMS which “will enable Thomson Reuters to offer clients analysis of metals markets alongside its news and prices”. This is a sign to me that smart money is moving into gold, as they are the only ones who can afford a Reuters feed. The mass market (dumb?) money follows much later, which is when we’ll see a real bubble.
With the federal government looking like it is about to default on its obligation to pay the nation’s debts, it seemed like a good time to remind everyone that it is possible to delay your annual obligation to file your income tax paperwork by submitting an income tax extension form, even though the federal government expects you to pay your taxes on time, unlike the government itself.
According to the IRS, you are able to postpone the date that your form 1040EZ, 1040A, or 1040 is due from April 18, 2011 to October 17, 2011 by filing form 4868. An even easier way to delay the due date is to use tax preparation software to file for an IRS extension, since it will, e-file your federal extension form, make a payment of tax due, print a PDF copy of the extension you e-filed, allow you to see when your extension has been accepted by the IRS, and access the forms you need to file a state extension by mail if necessary.
If you do need to delay your income tax filing and you owe taxes, be sure to pay a reasonable estimate of your taxes owed, or you can face stiff penalties.
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notes the problem with an increasing number of people who don’t pay taxes:
We all understand that no entity can survive for long if it gives away its resources while asking nothing in return. And this leads me to my point: In the United States, 51% of adults pay zero federal income tax, and yet they have the right to vote. That’s the very definition of a system that can’t last.
I’m not sure where the tipping point is. So far, the power of the non-tax-paying majority has been blunted by the influence of political parties and the misdirection of the media. If the majority ever figures out that they can legally confiscate the wealth of the minority, tax rates will double overnight. My best guess is that the United States will go into a death spiral at about the point that 55% of adults pay no federal income taxes. We’ll probably get to that point as baby boomers continue to retire in large numbers.
has noted, “It’s not quite a legitimate analysis, in that many of those who don’t pay any income tax do pay payroll taxes.”
I would also add that everyone pays certain federal taxes indirectly, like the taxes on automotive fuel, so even those living off government largesse don’t escape all taxes.
At any rate, Adam’s sentiment is largely correct, and is a sentiment shared by economists Thomas Sowell and Walter Williams, among a host of others.
Furthermore, the United States is definitely trending towards becoming a nation that has more taxtakers than taxpayers. Consider the following chart from Zero Hedge:
If this trend keeps up, we will definitely be in trouble.
LeBron James’ state income tax attorney might have saved LeBron millions of dollars a year by employing one of the best state income tax strategies around. Lets take a peek at the King James playbook of state income tax strategies.
CHOICE OF STATE INCOME TAX STRATEGIES
Like LeBron James and others you can likely better play the game of state income tax strategies.
As a free agent, LeBron had options. He could go wherever he thought he could win a title, get the most money in endorsements, where he could enjoy the best Cuban food and beach lifestyle, and maybe all three. After being courted by half a dozen teams, he had some really nice offers and some potentially lucrative deals. The biggest players were Cleveland, the New Jersey Nets, New York Knicks, maybe even the Bulls or the Clippers and of course Miami. LeBron finally picked Miami. Miami could arguably offer a lot, but I wouldn’t doubt that his state income tax attorney whispered a few sweet words into his ear about income tax strategies, like “$2-5 million a year,” that may have influenced his Decision.
HOW STATE INCOME TAXES ARE CALCULATED
In fact, in the clip above from the Decision, LeBron said one little thing that might cost him over $2 million a year.
States all calculate their state income tax slightly differently but in general, the state where you have your tax domicile will collect income tax on all of your income. If you earn income while in some other state, you may have to pay income tax to that state for the amount earned there. So for NBA players like LeBron, he pays state income tax on his salary for 41 home games to his home state, and state income tax to the various states where he plays 41 away games. His endorsement income is probably taxed by his state of domicile.
So what does LeBron make? On average, about $32 million a year in endorsements. This might go up if he wins a championship or might go down if he is caught with his pants down like some other athletes, but we will assume it stays the same. His contract with Miami was for about $110 million for 5 years. Of course there are bonuses, different options, buy outs etc., but we will assume a simple average of $22 million each year in salary, 1/2 of which will be played on his home court.
So, if you are keeping score at home, that is about $44 million a year that will be taxable in LeBron’s state of domicile.
COMPARISON OF STATE INCOME TAX STRATEGIES
What would LeBron’s income tax strategies have cost him if he picked one of the other teams?
Cavaliers – (Ohio) 6% state income tax rate – $2.6 million per year in state income taxes.
Bulls – (Illinois) 3% of Federal AGI – $1.65 million per year in state income taxes.
Knicks – (New York) 7% state income tax rate – over $3 million per year in state income taxes.
Clippers – (California) 10.5% state income tax rate – $4.6 million per year in state income taxes.
Nets – (New Jersey) 11% state income tax rate – over $4.8 million per year in state income taxes.
So what is his state income tax bill in Florida as a Miami Heat? Z-E-R-O. That means that by simply playing for a team based in a state with no income tax he will be saving anywhere from $1.65-$4.8 million per year! SCORE! Over the course of his 5 year contract he could be saving anywhere from $10 – $22 million without considering compounding interest.
This is of course assuming that LeBron properly changes his tax domicile to Florida. Ohio will not be a gracious loser of more than $2 million a year in tax revenues. You can bet that they will pressure King James to make sure his state income tax attorney crossed the t’s and dotted the lower case j’s to be domiciled in Florida rather than Ohio. In fact, in the clip above from the Decision, LeBron said one little thing that might cost him over $2 million a year. So much for clutch play. I don’t want to tip off the state of Ohio so I will let you discuss what that was with your income tax attorney.
OTHERS EMPLOYING STATE INCOME TAX STRATEGIES
LeBron isn’t the only person to change domicile to save a ton in taxes. Tiger Woods moved his tax domicile from California to Florida very early in his career. He is estimated to have earned about $1 billion over the course of his career so far, a savings of about $100 million. He might want to use that $100 million to buy a giant “I’m sorry” diamond for his wife, or maybe an “I’m sorry” island. Lots of wealthy New Jersey-ans have also “vanished” from New Jersey.
HOW CAN REGULAR FOLKS USE THESE STATE INCOME TAX STRATEGIES?
So what if these guys are saving millions of dollars a year. Most people don’t even make as much as those guys are saving, so why bother? You may not make $54 million a year, or even $4 million a year but it is likely that you are making closer to the NBA league minimum of $475,000 a year. If you earn that much being domiciled in Ohio you might be spending about $28,500 a year in state income tax, in New York $33,250, in California, even in a lower tax bracket of 9.55%, you would owe about $45,000, and in New Jersey $52,250. Still not worth your trouble to think about where you are domiciled?
Like LeBron James and others you can likely better play the game of state income tax strategies. Your tax domicile can mean thousands of dollars more in your pocket each year. But states hate losing milk when their cows escape from the pen. Talk to your state income tax attorney to make sure you correctly and legally change your domicile.