Here’s a letter to the Washington Post:
E.J. Dionne argues that rich Americans are “undertaxed” (“In American politics, stupidity is the name of the game,” July 29). He quotes the Congressional Budget Office to explain why: “the gaps in after-tax income between the richest 1 percent of Americans and the middle and poorest fifths of the country more than tripled between 1979 and 2007.”
Mr. Dionne’s view of “undertaxed” is odd. The IRS reports that in 2007 (the latest year for which data are available) the top 1 percent of taxpayers in the U.S. paid 40.4 percent of the total income taxes collected by Uncle Sam. This percentage is well above the 24.8 percent of the income-tax burden borne by this group in 1987, the year after the 1986 tax reform. Moreover, the top 1 percent of taxpayers now pay more federal income taxes than do the bottom 95 percent combined!*
If taxes are the price we pay for government services – rather than booty to be extracted simply because someone is unusually wealthy – then Mr. Dionne’s conclusion that rich Americans are undertaxed overtaxes credulity.
Sincerely,
Donald J. Boudreaux* See the Tax Foundation’s Scott Hodge. (New IRS data should be released any day now.)
Share
Podcast RSS Feed
Full EconTalk Text
{ 237 comments }
← Previous Comments
The origami method of taxation, I like it.
You mean from the millionaries to the super-rich?
jjoxman explained it already, but I'll do it again.
When a firm calculates profits for the purposes of taxation, it takes revenues then subtracts costs. Part of the costs are the wages and salaries paid to employees, even if these employees are owners of the company. So the firm doesn't pay taxes on these wages.
It's pretty common for small businesses to be run as zero profit firms. For instance, say a performer incorporates himself and runs his career as a firm. During the year, all payments to him are actually to the firm. Then the firm pays him a salary. At the end of the year, his accountant figures out how much money is left and makes a final salary payment to him of these funds. Thus the firm makes zero profit, because all profit is converted to salary for the performer. This eliminates any problem with double taxation.
They CREATE the problem then blame it on the right.
I thought they were secret co-conspirators. Good cop, bad cop.
If lawmakers elect to do so… it's not an inevitable result.
in practice lawmakers often tend to make it easier for the ultra-rich to pay taxes
Who overthrew the Czar? Anarcho-capitalists? I don't think so. I think it was people with bigger statist hearts than even the Czar. Am I wrong?
On the other hand, I don't really know what I mean. I just know that throughout history people have attempted to “reform” the government. How has that worked out?
I read that the SEC has no power to bring criminal charges. Some other governmental agency will have to put them behind bars where they belong. I wonder if the Better Business Bureau will give the crooked brothers a black mark for stealing billions from the taxpayer. I don't believe that is their policy.
http://www.nhi.org/online/issues/135/reagan.html
That won't work. You need to use LARA — Listen, Affirm, Respond, Add — to change people's minds.
I don't get it.
Sorry Don, your arithmetic is a bit rusty. The 2007 CBO income figures quoted also show that the after-tax income of the wealthy 1% tripled since the 1980s while that of the remaining 95% barely moved. Say, if in 1987 the extremely wealthy had their income reduced by a flat rate of 30%, contributing to 24.8% of total income tax revenue, the same rate applied to an income 3 times higher in 2007 should have contributed 49.7% and not the actual 40.4% they contributed. This is just one side of the problem. The other is that, given the current level of government spending in America, both rich and poor are undertaxed.
Sorry, marques, but your argument seems to ignore the realities of the U.S. tax system. Income taxes are only a small part of the taxes contributed by the wealthy. Most of their income is taxed twice: once through the business income taxes paid by the companies in which they invest; and then again through the personal income taxes paid on the capital gains and dividends paid out by those companies. The wealthy are much more likely than the not-wealthy to suffer such double-taxation.
Your opinion about the level of government spending in America is purely subjective. Do you mean mean that America should increase government spending enough that we can recreate the welfare states of Europe? Why on earth would we want to reduce our standard of living to European levels?
I'm pretty sure that tax law was changed to eliminate the double taxation of dividends.
I don't think marques made any subjective comment on the level of government spending. What he said was given the current level of government spending, taxes are too low. That's not a opinion about government spending – it's simply a statement of fiscal responsibility.
His math is a bit off though. He says “income of the wealthy 1% tripled … while that of the remaining 95% barely moved”. Where did the other 4% go?
Some people take issue with the idea that the Federal government shouldn't funding local services. That they need it shows that the Federal government takes too much out of localities to begin with.
Walter Williams, in his book The State Against Blacks, cited research that showed that the Federal government took more out of poor urban areas, via income taxes, than they got back in Federally provided aid and services.
A. J. Lenze: “I'm pretty sure that tax law was changed to eliminate the double taxation of dividends.”
I do not believe that is correct, A.J. As I understand the Jobs and Growth Tax Relief Reconciliation Act of 2003, the tax rate on dividends was not eliminated but merely reduced to 15% for most taxpayers. So now the dividend tax rate and the capital gains tax rate are equal. But both represent income which has been taxed twice – once at the corporate level of 35% and then a second time at the personal level at 15%. So income from investments in corporations is still taxed twice.
Of course, in 5 months the tax rate on dividends will revert to the marginal tax rate paid by those receiving dividends. At that time, income from investment in corporations will be taxed once at the 35% corporate tax rate and then once again at the 39% marginal tax rate paid by high income earners.
Do you know of any other legislation, A.J., which eliminated completely the 15% tax rate on either dividends or on capital gains?
A.J. Lenze: “I don't think marques made any subjective comment on the level of government spending. “
It appears I read too quickly and misunderstood what Marques wrote. I had assumed he meant that government spending in the U.S. was too low and so all Americans should be taxed more. Assuming that marques did not mean that, then my response to him is that we absolutely should not accept the current level of government spending as given. It is entirely possible that the U.S. could reduce government spending to a level that taxes more than cover that spending. The surplus could then be applied to reducing debt accumulated in previous periods of overspending. The problem as I see it is overspending not undertaxation. If marques is willing to accept current government spoending as a given, then he and I would never, ever reach agreement on what is the problem.
A. J. Lenze: “Then when the owner receives the dividends, he has to pay income taxes on these dividends. Double taxation. (I think part of the Bush tax cuts was to eliminate this situation.)”
The change in dividend tax rates did not eliminate double taxation. It merely made the double taxation of dividends equal to the double taxation of capital gains. But both are still taxed twice.
A. J. Lenze: ” don't feel too sorry for business owners, as they have plenty of ways to avoid income taxes. For instance, most people have to pay for their own car and gas to get to work out of income that has been taxed, but business owners can claim these expenses as business expenses and pay for them with money that has not been taxed. “
Has you tax accountant advised you to deduct personal expenses from your business tax return? That's not legal, of course. As a small business owner, when you deduct automobile expenses from your business, you are required to specify how much of the car travel was used for personal trips and commuting. The amount of vehicle expenses you may deduct is proportional to the non-commuting business travel you do in that vehicle. Of course, one can commit tax fraud and hope to not get caught.
To further emphasis johndewey's point that the US has a spending problem, rather than an issue with revenues, I provide the following information:
Inflation adjusted federal tax revenues increased by 77% between 1980 and 2009 (in 2005 dollars). During this same time period, spending is estimated to have increased by 194% (2005$).
Spending: http://www.usgovernmentspending.com/downchart_g...
Revenues: http://www.usgovernmentrevenue.com/downchart_gr...
You seem like a smart guy. That's why I'm stunned that you think there is a mass of anarchocapitalists at the gate just waiting to usher in a new era of voluntaryism once violence breaks out and the government collapses. In spite of the fact that there is hardly an AC even at Cafe Hayek, you seem to see them everywhere. When I look around, I see something more akin to the Bolsheviks, just waiting for their opportunity.
“Second as always you forget about ALL the other taxes the middle and lower class are paying to makeup the difference…. starting with Reagan's tax cuts for the wealthy while increasing the regressive tax for social security. “
Actually since 1979 median total Federal taxes have decreased by 5% for all income quintiles except the highest, which experienced a 2.5% decrease.
Now what has increased is state and local taxes, especially sales taxes which have gone up at least 2% in that time. Those examination of middle class tax burdens probably include property and sales taxes.
US taxpayers who are actually poor can generally offset much of their payroll taxes with the earned income tax credit, but they can't escape sales taxes.
1. The relationship of voluntariness and fairness is complicated. Is it fair for me to steal your car if I want to? Is it fair for me not to warn you when I know you are driving fast towards a collapsed bridge.I would say no to both, but not because my actions were not voluntary. The first was not fair because my action violated your property rights, the second because I had not behaved towards you with human decency.
2. You've simply moved the boundary problem through privatization, not gotten rid of it.
3. I think there is something wrong with free riding on the positive externalities of basic services paid for by others.
4. I agree for most services, but I, like many free market advocates who knew much more about these things than I do(e.g. Adam Smith and Friedrich Hayek), would not go so far as to say that all services are best provided by the free market.
I hardly see anarchocapitalist hordes. Hell, I'm the only one I know! I view it as my job to throw in the occasional anarchist jab here at the Cafe. So many people on here seem to think the government would work if only it would follow their prescriptions. It's a fools game. History is one long story about people who think they can “reform” the state, make the state benevolent. Well, they can't! And they're wasting their time trying. Libertarians especially should know better.
You are correct about the salary taxation. It was a poor example on my part I admit.
Let me put it another way to illustrate what I am trying to get at.
If I have a regular 9-5 job from which I receive my income, I get taxed at the usual rates depending on how much I make, any deductions, etc.
If on the other hand I have 10 billion dollars and make most of my income simply through investing that money, I get taxed at a flat 15% rate.
Do you see what I am trying to say? You might think that is perfectly reasonable, I just happen to think those who simply invest money to make money (allocating capital wisely IS important) should not be taxed less than someone who is being directly productive (again allocating capital from savings to fund future potential growth IS important, I just don't think it's MORE important than productive labor).
I understand your argument that capital gains should not be taxed less than other income – it's a fairness claim, and I've heard President Obama make the same argument.
The problem with your argument is that it's been proved in economic theory and shown in data that taxing capital gains AT ALL actually brings in LESS revenue for the government in the long run. The theory is complicated but the basic idea is that capital gains are mostly reinvested in the economy, and these investments mean more jobs, thus more income that can be taxed. If you tax the capital gains, you get tax revenue once, but if you don't, you get tax revenue multiple times.
Obama has said that he understands the increased revenue argument, but he thinks the fairness argument trumps that. I disagree – I think that's an example of cutting off you nose to spite your face. If you side with Obama, that's fine, I just think you should know the tradeoffs before making your decision.
I see what you are trying to say, but the key is this: where does the money that generates the capital gains on your investment come from? The answer, in general, is after-tax retained earnings of businesses. Your salary is taken from before-tax operating earnings of a business. So the capital gain isn't taxed at 15% – it's taxed at 15% on top of the corporate rate that was already paid.
I see that as a good argument for allowing corporations to write off capital gains, but not as a good argument against taxing the “receiver” of the gain.
“The problem with your argument is that it's been proved in economic theory and shown in data that taxing capital gains AT ALL actually brings in LESS revenue for the government in the long run.”
I'm curious, who “proved” this to be true, and exactly how did they “prove” it?
I think you, as well as others, are mis-reading the temporary incentive effect that capital gains tax cuts provide. When capital gains tax cuts are made there is a TEMPORARY RUSH (especially if it is a temporary cut) of people cashing out their investments to take advantage of the new rule. This rush causes a TEMPORARY increase in tax revenue as people take their investments out of the economy.
Just as the cash for clunkers incentivized people to purchase cars earlier to take advantage of the deal, so does the tax cut, TEMPORARILY.
This does NOT change the LONG TERM revenue stream however as investment patterns return to normal and the revenue from the gains tax DECREASES.
This reminds me of the fallacious interpretation that many make about the Laffer curve, claiming ALL tax cuts pay for themselves… that is not what the Laffer curve means.
How do you envision that mechanism? Would corporations be allowed to reduce their tax burden by the amount the market value of their shares went up? Or did you have something else in mind?
I think you have some misconceptions regarding: (1) what purpose investment plays in the economy and (2) how our tax system works.
1) To say that your 9-5 job is “directly productive” implies that investment is somehow not (or less) productive, which is a gross misrepresentation of reality. Investment is possibly the most critical factor in our economy. Without it, your job likely wouldn't exist. Without investment, we would still be stuck in the dark ages. Investment has not only allowed entrepreneurs to turn their ideas into reality, but has also allowed them to mass distribute those products at a very low cost to you and me. As a result, we are all the beneficiaries of a standard of living that continues to skyrocket (regardless of what the media wants you to believe).
2) Saying that investors only pay a 15% income tax rate equates to me saying that you probably don't pay any income taxes at all. After all, if we ignore all taxes that are taken out before the individual receives said funds, it would only follow that we would ignore the income taxes that your employer pays on your behalf. But the fact is that you do pay taxes and, since a corporation's money belongs to its investors, so do investors, but at a much higher rate (15% on top of 15-35%).
I should also point out that the argument that you pay a higher income tax rate than investors is probably incorrect. If you are single, have no deductions (including children), and make less than $66,000 per year, your effective tax rate is less than 15%. If you are married filing jointly, have no deductions (including children), and your household income is less than $132,000 per year, your effective tax rate is less than 15%. If you have children or deductions, these income thresholds increase.
Good for you if you do actually pay more than a 15% income tax rate, but not many Americans do.
Here's a fund little tax tool: http://www.dinkytown.net/java/TaxMargin.html
The original papers that discussed setting capital taxation rates to zero are by Chamley (1986) and Judd (1985). Here are citations for both articles:
Christophe Chamley, “Optimal Taxation of Capital Income in General Equilibrium with Infinite Lives”, Econometrica, Vol. 54, No. 3. (May, 1986), pp. 607-622.
Kenneth L. Judd, “Redistributive Taxation in a Perfect Foresight Model,” Journal of Public Economics 28 (October 1985): 59-84.
You seem to be emphasizing TEMPORARY effects and people cashing out their investments, but I'm talking about long term revenue effects and the incentives for people to invest MORE or let their current investment “ride”.
Let me use an example. If a company makes profits and uses these profits to expand its business (build a new plant, set up a new assembly line), it pays no taxes on these profits. If instead, the company distributes its profits as dividends, then the shareholders reinvests these dividends in the company and the company uses these additional funds to expand, the same thing happens, but there's less available for expansion because the shareholders have to pay taxes on the dividends.
Maybe there could be some kind of tax law change, where shareholders are taxed differently depending on whether they reinvest their capital gains or cash them out to spend them on consumption? But this might be difficult to enforce as people may seem to cash out part of their investments while increasing their investments in other ways. Also, Keynesians would argue (correctly) that this would make consumption more expensive than investment. And people on all sides agree that our tax code is complicated enough.
You are correct that this argument is somewhat similar to Laffer curve arguments that reducing INCOME taxes actually increases tax revenue. And you are also correct that these arguments are fallacious. There IS a taxation rate at which tax revenues are maximized (and further increases in tax rates will actually reduce tax revenues). However, all the studies I've seen say that U.S. tax rates are lower than this maximum revenue point, and even in the European social democracies where tax rates are higher, they haven't reached the maximum revenue point yet.
(There's another argument about whether maximizing tax revenue and thus the size of government is really a worthy goal, but that would get us off on a tangent.)
Let me quote myself from the very comment you are replying to:
“allocating capital wisely IS important”
“again allocating capital from savings to fund future potential growth IS important, I just don't think it's MORE important than productive labor”
I was not trying to downplay the role of investment. I whole-heartedly agree. Without investment, savings, the ability to for-go current production for future growth, etc. etc. etc. we would be unable to advance as a society, would not be where we are today, and on and on.
No argument on that point. I am sorry if you got the impression that I felt otherwise.
Similarly we would not have the standard of living we currently have if people were not being directly (by “direct” I mean “direct”… putting nails in wood, writing software, growing food, etc. I don't think it is inappropriate to refer to this as direct production… if you take offense at that I am sorry, I cannot think of a better term right now) productive. In order to have the wonderful world we have today it requires investment AND production… among other things.
I hope that clears up some of the confusion. More later…
As usual, you don't have a clue. (You pimp for the rich.) My mother just had new plumbing pipes put in under her house. The bulk of the work was done by a guy from latin America who worked his ass off digging under the house and doing all the dirty, hard work by lamplight. The guy was sweating bullets and dead tired when he was through. I know he was overworked by the foreman and left distraught. I gave him a mango to try to make him feel a little better. My mother shelled out $7,000 to the company's owner. What fraction do you think this Spanish-speaking “plumber's assistent” got. By any standard of reasonableness the owner was vastly overpaid while the worker was trashed. I object to this form of exploitative capitalism. You are clueless and need a new hobby such as tiddlywinks. You are a toady and a troll. One of many around here.
You effing idiot.
I was adding a caveat to a statement by someone else who I quoted here with italics.
I consider the caveat to be of great significance, which obviously passed over your ignorant comprehension.
Consider your example. Was the fellow a legal immigrant?
Are you familiar with licensing of plumbers, and business, which reduces competition and the availability of jobs for this poor fellow?
Are you aware that the historical alliance between business and government has rendered workers more dependent on jobs provided by others than on their own skills and willingness to work?
Why didn't you just go find some people who could do the plumbing and you could pay them directly instead of contracting with such a business?
Because you have been trained by your government indoctrination to do things in the “proper” manner and haven't the balls to handle the hiring yourself, or because hiring people directly has been made a risky business by all sorts of labor laws.
You should trying starting and running a business and see if you can do it better.
the regulatory situation always favors incumbent businesses.
You make some good points, which shows that you can think. The unionization of workers is the way most progressives think is the answer to the exploitation of workers. You can see in China now that workers are demanding better treatment and more rights. But for the most part, the union movement has died out in the U.S. The unions were busted by Reagan (think airport tower controllers) and by conservative courts ruling against unions and in favor of capitalists. Libertarians oppose unions as a corrupt and extortionary actor in the marketplace; and they hate the forced membership in unions, in spite of the benefits and protections. Many libertarians simply view workers as exploitable and disposable element of production, nothing more. That is Don Beaudreaux's view without reservation.
That is Don Beaudreaux's view without reservation.
That is your malign interpretation of Don Boudreaux's view.
Libertarians don't oppose unionization per se, but rather the certain legal protections union receive from government which corrolate to protections that businesses receive from government.
Workers should be free to organize, but business should be free to replace striking workers. If work conditions are so bad as to justify worker organization, then business will find that it's cheaper to improve conditions rather than deal with repeated worker replacement.
No person owns or is entitled to a job (except one that the person creates anymore than a business owns market share.
What libertarians oppose is the imposition of hierarchy on social and economic relationship via political force and the continued depletion of workers' personal wealth through taxation and market share protections granted to incumbent businesses.
← Previous Comments
Comments on this entry are closed.