I just heard Obama guarantee that no one making less than $250,000 a year will pay a dime in higher taxes for the budgets he is proposing. He said he would be rolling back the tax cuts for the wealthiest 2% of the American people.
The top 1% of all taxpayers currently pay about 40% of the income taxes. So what Obama is saying is that that is not enough. The wealthy need to pay more.
And he is also saying that the other 98%, who are getting all the goodies are going to get it for free.
This process cannot be sustained.
UPDATE: Just to make it clear–I'm talking about the extra goodies Congress just passed, $787 billion. The way I understood Obama tonight is that the bill for that will not require the bottom 98% to pay higher taxes. That's what's unsustainable–giving 98% of the population a free lunch at the expense of the top 2%. Because why stop at an extra trillion. How about two trillion? It's the political economy that's unstable, not higher marginal tax rates. It's not higher marginal rates that are problematic, it's ZERO perceived marginal rates. Yes, I know about the payroll tax. I've written here many times about why the income tax is not an accurate measure of tax burden. But it may be an accurate measure of perceived tax burden as I argue here.
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"This process cannot be sustained."
That seems empirically false. European countries have sustained much higher marginal tax rates for many years, even individual states in this country have sustained higher top marginal tax rates than Obama is proposing. So it seems quite likely it is sustainable, it's just probably not a sustained situation that you find preferable to the current one.
Of course, a buzzer should always go off when someone separates the income tax from all the other taxes. As it's underreported that when taxes from all levels of government are used our tax system is flat . Also, another factoid the top 1% of wealthholders holds 30% of the wealth (Krussell and Smith 1998). The top 1% of income earners earn 13% of income source .
Maybe it is a bad idea that income taxes will rise on the top 1%. There is certainly room to debate that, but "This process cannot be sustained" seems like the kind of overly dramatic editorial comment that Russ would strike through in some other post.
But isn't that democracy? Two wolves and a sheep voting on what to have for dinner?
Yep, that is democracy. And yes, it is sustainable, just so long as the parasites have a host to feed on.
Who is John Galt?
You don't even need Atlas to shrug. When such a large proportion of revenue depends on so few people, an economy that fails to produce profits (read Kling) will fail to produce tax revenues. That's essentially the problem California has right now. In good times, lots of taxes came from "the rich". So "the rich" have a bad year, and voila, $40+ billion deficit.
What high earners will do is find ways to defer compensation, expecting the tide to turn in Washington and redirect it to capital gains. Even the most radical Dems would never thing of jacking up the capital gains rate significantly. Doing so would absolutely tank the economy.
Charlie – your belief in the sustainability of the process reminds me of the guy who fell from the top of a 50-story building. Halfway down he thought to himself, 'Well, this isn't so bad.'
Charlie,
As you probably remember, I am always careful to talk about income taxes and other kinds of taxes.
My point is not just about high marginal rates. It's about ZERO marginal rates on a substantial portion of the population. Yes, payroll taxes are important, but I don't know if the average American thinks about those as taxes–the employer half is paid by the employer (not true but it can seem that way) and the other half goes toward your social security account (also not true, but I suspect, often believed.
What is the structure of European taxation on the low end? I don't know. Someone out there must know.
Correct me if wrong, but I've always thought that the wealthy are the most mobile group and that they can easily move into or out of zones depending on tax policy.
Ex: If NY becomes less attractive in tax policy as compared to London, aren't the most wealthy going to incrementally find the point at which they are indifferent to living in either Finance center?
Of course far more than taxes would theoretically go into the equation, but one big factor for the big time income earners is taxes.
Maybe the only thing that's been holding them back from going to London, or Dubai, or wherever, is taxes. And, theoretically, if US tax policy is now becoming less attractive it would cause incremental levels of the rich to make the decision to move abroad?
Just a theory
We should each pay a similar percentage of our income to taxes. You make more, you pay more. Why complain? Pay your fair share
Charlie,
His presented data argue against his conclusion. The table in the article shows all-in rates ranging from 32% to 47.7%.
———
One tax that WILL hit those in the bottom 98%–inflation.
Another one is higher power utility rates with Obama's green energy plans, carbon tax, and opposition to foreign (cheaper) sources of oil.
Another one is unemployment that will result from increased government confiscation of capital. To really beat up on the lowest 1%, maybe he'll increase the minimum wage just for good measure.
Another one is rationing that will result from his nationalization of health care.
Another one is higher cost of consumer goods by Obama's push to keep us from buying "batteries from Korea" and other protectionism.
"And he is also saying that the other 98%, who are getting all the goodies are going to get it for free."
No. He's not saying this at all. Plenty of us in the 'bottom 98%' are still going to be paying plenty of taxes.
A little honesty, please?
TC,
I'm talking about the extra goodies. The Federal government's expenditure is about to increase by about a trillion dollars. Obama implied that that increase will be financed by the top 2%. Did I miss something?
Regardless of hyperbole, the top .01% pay a very small percentage of their incomes in taxes. Most people do not understand how the ultra-wealthy shelter their income almost completely.
To conflate the people making mid six up to low seven figures with those making high seven up to eight figures is completely false.
"What is the structure of European taxation"
20-25% VAT.
The rich fly to America (or Dubai) to go shopping.
"And he is also saying that the other 98%, who are getting all the goodies are going to get it for free."
Exactly who is getting it for free, you nitwit? While middle class taxpayers often get refunds, they still pay in. And their wages have been declining over the past 8 years.
Grow up and stop looting the country.
What a overstatement this is… yes, people making over $250,000 a year make up a lot of the overall tax money coming in, but it isn't like they are paying a lot more of a percentage of their income. People making between $82K and $171K pay 28%, people making between $171 and 372K pay 33^ and those making over $373K pay 35%. When you make more money, the percentage of money being paid out is obviously more… give me a freaking break.
Do some math,
Please read the previous comments. I meant the extra goodies. Should have made it clearer, perhaps.
I have just added an update to the original post to avoid misunderstanding.
I find it quite disingenuous to separate the share of taxes paid from the share of wealth stashed and doubly disingenuous to separate income taxes from all the other taxes and fees paid while divorcing these real numbers from the growth in wealth and income for the rich detailed here: http://www.cbpp.org/1-23-07inc.htm
One should also bring in hourly wages here and the obvious fact that the market for all its goodness, does a pretty poor job of actually pricing the value of labor and ownership. No one can argue that some CEO pulling in a five hundred million over his lifetime is worth 500 times more than some laborer pulling in a million over a lifetime. So given that the market can't possibly price these things properly it makes sense that those who benefit disproportionally from our system, pay disproportionally in taxes. And I think it is pretty clear, given the rise in inequality over the past 30 years and the current economic conditions, that what is actually unsustainable is continuing the feed the rich strategy we've been on.
And what's with the continued irrationality of taxing capital gains at a higher rate than work. Talk about the wrong incentives. On simple market principles you don't discount investment in capital over labor. It creates imbalance and favors those who don't need to work. Dumb. And all in the name of the ridiculous notion that it greatly increases investment. I call bullshit. People invest in capital because they think they'll make money off of it, not because if they do make money the taxes will be low. And again, why bias capital investment over actual productive work and labor. Invest in the one that's needed at any time instead of biasing for Capital. That's how imbalance occurs.
I'm about done talking to people about economics. It's completely pointless.
People are going to have to learn the lessons instead of being told the lessons. Unfortunately, it's time to touch the stove.
BTW, if it were by blog, some of these commentators would get a perma-ban. If you talked like that to one of my friends in person I'd punch you in your damn mouth.
Russell, good thing that the richest 1% pay 40% of all taxes…
They are in control of what? HALF the wealth?
We'd be banged for sure if they didn't pay more.
And viking, our wages have been declining for 8 years, true. Compare it to the CEOs and managers, and our wages have been decling since the early 70's.
This is the most tiresome argument of the right.
Yes, the wealthiest 2% are already paying a big amount of taxes, but that's simply because… they have most of the money.
For the last four decades the wealthiest have multiplied their income many, many times over, but middle class wages have remained the same. That is the process that cannot be sustained.
But perhaps hayekists would argue that the Wall street CEOs deserverd not only their huge bonuses, but also the low tax rates on them, because they were so talented and worked so hard.
KJ,
"it makes sense that those who benefit disproportionally from our system, pay disproportionally in taxes"
If the person who doesn't "benefit disproportionally from our system" wants his neighbor's wealth, then he can do what his neighbor did to get it. The same deferred gratification, the same hard work, the same risk taking, the same prudent choices, the same reputation building, …
"Our system" didn't give me anything that it didn't also give people with 1/10 my income–arguably it gave me a lot LESS.
But then you can't reason with the mind of a common thief.
"That's what's unsustainable–giving 98% of the population a free lunch at the expense of the top 2%."
Again, who's getting a free lunch? Stimulus is not going to equally benefit the 98%. It's a *floor* not a giveaway to 98 percent of the people. And FWIW, I'd gladly take the $250,000 income and pay a little extra vs. the $40,000 and not paying taxes.
Oh, and no mention of the fact that income taxes on the richest in America were much higher under even Clinton, and yet our economy prospered.
"VikingVista" is most definitely not "vikingvista". Please get your own moniker.
An alleged imposter wrote: "And FWIW, I'd gladly take the $250,000 income and pay a little extra vs. the $40,000 and not paying taxes."
So go do something worth $250K/year and see how that works out for you. I don't know of anyone who moved up a tax bracket by bitching about how little "the Man" gives them.
Folks,
Wealth is interesting but we don't tax it. We tax income. Until recently, the top 1% of tax returns accounted for about 20% of the income and 40% of the income taxes. You can debate whether that's fair or unfair. All I'm saying is that when you increase government spending by about 25% as we just did and you make that a free lunch for 98% of the population, you are creating an unhealthy situation for a democracy.
The other point I would mention is that the average American has no idea what portion of income tax revenue comes from the top 1%. The average person thinks it's a very small number like 5%. It isn't. It's a pretty big number, like 40%. Ask your friends. They have no idea.
Finally, I also don't think it's good for democracy that the government relies on the well-being of its richest citizens.
A country without rich people is a country of poor people.
"I also don't think it's good for democracy that the government relies on the well-being of its richest citizens."
Ah yes, much better that the rich become richer and richer in a system stacked in their favor, while everyone else's income declines.
You guys got eight years to do what you wanted to do. You wrecked the country. Stop pretending you have any solutions to the problems you created.
$250,000 seems like a lot of money to me. I guess it doesn't buy what it used to. Maybe to that lady who gave birth to 8 "bundles of joy" and already had 6 disabled bundles, $250,000 a year is inadequate. (I've heard she MAKES zilch.) But that's more than $20,000 per month. Yummy. Why are those making $250,000 exempt from a tax increase? Obama, please explain yourself. Are you a closet Rethuglican or something? I guess so. Next time McCain or his clone is getting my vote. Then we'll see who gets taxed. I assure you everyone making less than $1,000,000 is in for a tax increase and everyone over $1,000,000 is in for a huge tax break. It's called Reaganomics, Bushonomics, trickle down theory. Call it REVOLUTION eventually when things get bad enough, and enough people have to dig in the trash in order to eat.
misperceived is more like it
"They are in control of what? HALF the wealth?"
Whose half is it?
"The way I understood Obama tonight is that the bill for that will not require the bottom 98% to pay higher taxes. That's what's unsustainable–giving 98% of the population a free lunch at the expense of the top 2%. "
Oh here I think I can explain how it works.
Say you have a $10 trillion dollar economy.
20% goes to taxes ($2 trillion)
2% of the richest people pay a 40% tax rate ($ 0.8 trillion)
- they make $5 trillion combined (50% of all wealth)
- their tax rate is 16% ( kinda like Warren Buffets)
= or dividing by 2% they are taxed 8% per percentage of population
- that is too small so now we will make it 10%
The 98 % pay 60% of all taxes ($1.2 trillion)
- they make $5 trillion combined (50% of all wealth)
- their tax rate again en mass is 24%
= dividing by 98% they only pay 0.25% per percentage of population
that is too big so now we will make it 0.20%
Now you set up a productive economy that grows 100% instead of only 50% over say 30 years. And the income growth goes up 266% to the the 98% lowest wage earners while the 2% top wage earners see their incomes increase by 33%.
New economy is now $20 trillion dollars
2% of the people now make $6.65 trillion combined
- their tax rate is 20%
= they pay $1.33 trillion dollars
98% of the people now make $13.35 trillion dollars
- their tax rate was lowered to .2% or 19.6% combined
= they pay $ 2.62 trillion
So now the rich people now pay about 34% of all taxes (instead of 40%) and the poor people pay about 66% up from 60%) and the total tax rate is actually lower at 19.75% instead of 20%.
The richest 2% now earn 33% of the wages (instead off 50%)… and I mean now they actually earn it now. And the other 98% earn 66% of the wages instead of the old 50%.
PROBLEM SOLVED.
Can't let the muirduck get the last word in. It's time to bring in registration and banning all trolls.
"This process cannot be sustained."
And yet it is sustained.
There are no contradictions. Check your premises.
You are assuming that the top percenters are actually paying the taxes. They are not. They are simply collecting the taxes. The idea of "taxing the rich" is propaganda – a way to get the productive class as a whole to accept a higher level of taxation than they would otherwise accept. The powerful don't pay taxes. They never have and they never will.
So, forget the tax brackets and focus on the percentage of available resources allocated to the political class. There's a reason that it tends to hover around 40% – because higher percentages truly are unsustainable.
"- their tax rate is 16% ( kinda like Warren Buffets)"
I'm as much for small government as the next guy, but it wouldn't break my heart if Buffet (and maybe even Dr. Muirgeo) had to pay 40% of his net worth annually in taxes. That's really taxing the rich.
Gee Russ, you sure stirred up the nest. I never figured there were so many righteous thieves reading The Cafe.
The commenter saying that the tax revenue shortfalls in CA are because of the rich is full of it. The single largest problem with CA's tax system is Prop. 13. Anyone arguing differently is lying or ignorant. If you don't believe me, believe Warren the God of Capitalism.
Russ,
In this analysis, you seem to make errors that you would never make normally. "That's what's unsustainable–giving 98% of the population a free lunch at the expense of the top 2%. Because why stop at an extra trillion. How about two trillion? It's the political economy that's unstable, not higher marginal tax rates."
Implicit in your argument is an assumption that the income distribution is static. This isn't true. I have some probability of entering the top 1% bracket, and if you allow for altruism across generations (parents care about their kids), almost everyone else does too. Thus, as we'd expect the progressivity of the tax system should rise with income inequality. There is a paper coming out in JME that solves for the computational general equilibrium of such a model ( Politico Economic Consequences of Rising Wage Inequality. So I don't think your implicit model is right, this isn't a strange or unique event, just a natural equilibrium response to changing conditions.
Charlie
I suspect you make more than $250k.
Finally, I also don't think it's good for democracy that the government relies on the well-being of its richest citizens. – Russ Roberts
"You cannot legislate the poor into freedom by legislating the rich out of freedom. What one person receives without working for, another person must work for without receiving. The government cannot give to anybody anything the government does not first take from somebody else. When half of the people get the idea that they do not have to work because the other half is going to take care of them, and when the other half gets the idea that it does no good to work because somebody else is going to get what they work for, that my dear friend is about the end of any nation.â – Adrian Rogers
I'm in the target group to do the paying. I won't do it.
I own my business and, unlike an employee, I have the option to work as much or as little as I like. At some tax rate, the marginal dollar won't be worth earning. I'll fire some employees, scale down the business or retire altogether and stick my money in tax advantaged muni bonds and do all the traveling and relaxing I can't do now. The tax advantage of muni bonds will NEVER go away because municipalities will scream bloody murder. If I'm not ready to retire and the tax rate gets too high, I may just immigrate to another country because it's very easy for me to get almost instant citizenship in any other country. I respond to incentives and I'm not incentivized by enslavement and neither is anyone I know. The specialness of this country is the lack of totalitarian regime and individual liberty. Once that's gone, this country is no longer all that special. You can call me evil or "not doing my part" because I'm not willing to work myself into the grave for your family instead of mine, but the reality is that unless you plan to start a Gulag, you can't make me.
The question is, why should I be expected to work and risk more than you to provide you with the lifestyle to which you have become accustomed?
Yes, it's sustainable to raise taxes on the most productive. However, it's not sustainable at a high standard of living. It's sustainable only at ever decreasing standards of living. France and Germany are good examples.
There's a difference between the natural altruism that occurs between family members and confiscation by the state. I feel great when I donate to charity. I feel really crappy when I write the check to the IRS. Maybe I should figure out how to receive one instead. Seems a lot less time consuming.
Yeah, let's nail the guys without money!
Give me a break.
Just to get the facts straight, I believe Obama spoke of families making $250,000 a year or less. The line no doubt falls much lower for individuals. This distinction may well mean higher taxes for me. And you know what? I'm willing to pay them to rebuild our sadly neglected infrastructure and support an economy that gives people a shot at a middle-class life.
Just a few observations.
First, as others have pointed out, while it is politically useful to call top earners of ordinary income "the rich", those people do not represent the wealthiest Americans, and in a lot of cases the class does not even include the wealthiest Americans. Taxing income and taxing "the rich" are not the same or close to the same.
Second, the incentives here are actually very bad. For all the moralizing of people who have never known the joy of 6 or 7 figure tax bills, the fact is that people do pay those taxes, and at least some of them do it on income they earned in productive activities. For each of those people who determines that life is just too short, wealth will be destroyed, jobs lost, and progress halted. This process could actually keep the US from coming out of this. How can these planners possibly not see this? Do they think all these folks will just do what they do when it is not worth their while?
Third, I am amazed at the hubris of these planners. For Obama, Congress, and others to use words like "Now you set up a productive economy that grows 100% instead of only 50% over say 30 years…" really defies understanding. I don't know what else to say about it other than that it is arrogance of the highest order I have ever witnessed and far in excess of anything I would have imagined possible in the information age. This lays dreams of westernizing Iraq to shame in its unreality.
Last, I guess the good news is that it should be pretty easy to restructure employment and income to maximize your handout receipts and leisure time. The key is to make sure you're unproductive enough to need stimulation. This industry will boom.
Sorry to double post but while I was typing Methinks articulated what I meant in my 2nd and 4th observations in her 10:50 post. Again, some people might say she is not productive to begin with, but even if that's true in her case (I would disagree, but whatever), is the supposition really that no "productive" people would feel the same?
Jack's comment pretty much sums it up. If we are going to steal from someone to fund all of our pet projects, we certainly can't get it from Jack. And even Willie Sutton might say to forget the banks right now.
Here's a thought for you Jack: Maybe we shouldn't nail anyone. Maybe we should let individuals decide what to do with their own money to solve their own problems. Government, even the best, brightest, and most altruistic government, is not as smart as 300 million individuals put together.
"That government is best that governs least" –Henry David Thoreau
It is truly amazing that someone like Thoreau wrote that line over 150 years ago when the government with which he contended was a mere pipsqueak compared to our Goliath.
Methinks – cry us a fucking river. People who are forced out of their homes thanks to people like you who leveraged the system.
John, I guess it depends on what people consider "productive". I provide a product that people need and want (liquidity). Without it, the cost of raising money and the risk of investment increases so that fewer projects are economic, fewer will be undertaken and less wealth and jobs will be created. I apparently produce enough to write enormous checks to the IRS.
The productivity of people who do what I do can be debated up one side and down the other by some of the resident morons here because they don't understand the product. The fact remains that the IRS will surely miss our giant checks. BTW, most of my income is considered "ordinary", so I'm taxed at the regular income tax rate and that is the case for everyone who does what I do.
Either way, it's no skin off my nose. Given enough incentives, I'll be living it up on vacation. Sometimes I sort of hope Obama gives me a reason to stop as I haven't had a vacation in years. My former employees, however, will be looking for jobs. I saw your post after mine and you put it very well.
Methinks I assume you refer to my posts despite the salutatory "John." At any rate, I only brought up the "productive" thing because I observe people who believe they know better than the market what is productive and what isn't. I don't presume to myself.
Mezz your post is despicable. Methinks doesn't appear to seek anyone's sympathy except maybe a little for the people she will lay off after Obama makes her enterprise worth less than her leisure. Then you make a generalization that isn't appropriate in the first place and proceed to apply it to someone you don't know. I know a lot of people profile, stereotype, and persecute others in this way, but their numbers don't make them right or worth joining.