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Taxing "The Rich:" Theory v. Practice
This article is from Stone Street Advisors
In 2001, Peter Orszag and Joseph Stiglitz published a short paper wherein they concluded:
...if anything, tax increases on higher-income
families are the least damaging mechanism for closing state fiscal
deficits in the short run. Reductions in government spending on goods
and services, or reductions in transfer payments to lower-income
families, are likely to be more damaging to the economy in the short
run than tax increases focused on higher-income families.
This is all fine and dandy in the ivory tower (or the White House, as
it were to be less than a decade later), but in the realm of reality,
theories only get us so far, no matter how seemingly reasonable their
basis and underlying assumptions.
Today's WSJ included an essay about the state of The State of
California, specifically, its incredible reliance on the very-rich (top
1% +). Many if not most commentators/politicians/etc seem to think that
taxing "the rich" at a (vastly) higher rate than everyone else -
especially "the poor" - not only makes perfect sense, but is more than
"fair," given the increasingly high % of income accruing to "the rich."
This is all fine and dandy, except:
Nearly half of California's income taxes before the
recession came from the top 1% of earners: households that took in more
than $490,000 a year. High earners, it turns out, have especially
volatile incomes—their earnings fell by more than twice as much as the
rest of the population's during the recession. When they crashed, they
took California's finances down with them.
The problem with the "fair and equitable" approach is that populism
often ignores fundamental economic and financial reality. In this case,
that many of those who make more than the magical ~$500,000 per year do
so not from a base-salary, but from bonuses and capital gains, neither
of which are very stable, let alone predictable with any real certainty.
The bigger problem is that it's not just California that's
significantly dependent upon income taxes from "the rich." It's New
Jersey, New York, Connecticut, Vermont and Illinois, and to a lesser
extent, several other populous, economically important states as well.
State income taxes are generally less progressive than
federal income taxes, and more than a half-dozen states have no income
tax. Yet a number of states have recently hiked taxes on the top
earners to raise revenue during the recession. New York, for instance,
imposed a "millionaire's tax" in 2009 on those earning $500,000 or
more, although the tax is expected to expire at the end of 2011.
Connecticut's top income-tax rate has crept up to 6.5% from 4.5% in
2002, while Oregon raised the top tax rate to 11% from 9% for filers
with income of more than $500,000.
According to Orszag and Stiglitz, such tax increases for "the rich"
were a political and economic no-brainer. The subjects of these tax
increases can afford to borrow money and/or dip into savings to keep-up
their pre-tax-increase level of consumption, while those at the other
end of the income spectrum spend (virtually) every last $ of income
-including if not entirely consisting of government transfer payments -
saving little, if anything. No brainer!
Except, such "analysis" only makes sense in vacuo; When "the rich" become less-so, in a tax regime dependent upon them, it's not just the rich who suffer.
The
take-away is that States can't have their proverbial cake & eat it,
too. In times of economic and financial distress, they can jack-up
taxes on "the rich," to their hearts' content, but they cannot do so
without consequence. States prosper when the fortunes of "the rich"
increase and share in the pain when they decrease.
It seems States not only stick to Orszag & Stiglitz' suggestions,
but they seem intent on steadfastly embracing them to the very-end.
Surely, when a State is already over-dependent upon tax receipts from
"the rich," the solution is to...increase such taxes even more, right?
Where does it end, though? Round II? Round III? Never?
Eventually, "the rich" are going to wise-up and tell the states to
piss off, whether by severely decreasing their contributions to
Democrats, moving to a lower or no-income tax state, etc. We're seeing
the beginning of this in New York, where many financial employees who
made substantial donations to the Democrats are having starting to have
second thoughts. Caterpillar's CEO sent a note to Illinois' Governor last week about the possibility of moving the company to another lower-tax state.
How this will play-out is anybody's guess, but I think inevitably, at
least one state (perhaps Illinois or California) is going to be home to
an ugly income/tax inequality battle the likes of which haven't been
seen in the U.S. for decades if not centuries.
- advertisements -
Thank you!!! Most people just never get it because it is soooo counter-intuitive. But, if you pay 15% tax, then every worker you have costs you $85 out of each $100 in pay (forget FICA for the moment). BUT, at 70% tax, each worker only costs you 30 cents on the dollar. Higher tax rates stimulates the heck out of the search for deductions.
Squeeky Fromm, Girl Reporter
This is exactly why Great Britain had such massive employment when their top tax rate was 90% and the Beatles sang Taxman
http://www.bing.com/videos/watch/video/the-beatles-taxman-2009-stereo-remaster/157c0af2fe5964c760ed157c0af2fe5964c760ed-727933912368?q=taxman+beatles&FORM=VIRE6
OH, and I guess that a Beatle's Song means that we have low tax rates AND high employment in 2011 America??? I guess I just have problems with reality, and we are experiencing a Magical Mystical Employment Boom, but most of us just somehow missed seeing it.
http://www.youtube.com/watch?v=Ikjmz_SlGhg
Squeeky Fromm, Girl Reporter
Are you over 18?
Of course. I will soon be 27. But just because I am no longer jailbait, does not mean that I am interested in dating people I meet on the Internet. But thank you for asking!!! I AM flattered!!!
Squeeky Fromm, Girl Reporter
Don't worry. Nobody who frequents Zerohedge would date you anyway. We tend to despise Keynesians, socialists, and misdirected refugees from the HuffPo and DailyKos.
Rather than play with numbers pretending to solve the problem.. Why dont we just deal with what the real issue. The percentage of GDP the public sector is taking is way to high to promote fundamental economic activity. This problem is not exclusive to the US. All post industrial nations suffer from the same issue... The system worked when personal debt consumption was rising at a rapid pace, but with the Baby Boomers retiring, this is no more...
The real solution
1) Raise interest rates and force the orderly wind down of all these insolvent massive mega finance industries. Break them up into hundreds of smaller pieces. Take control of all of the US Treasury bonds from these insolvent institutions (and the FED) and consider them paid.
2) Cut all government salaries by 30% effective immediately.
3) Ban the ability for public workers from forming unions.
4) Making massive cuts in all entitlement programs. Social security was never intended to be for everyone. Only the poor that needs it should get it.. Same for medicare.
5) Start to wind down the profit centers in the medical industry and pharma industries. Offer carrots when appropriate, but otherwise make clear that the life and death of individuals should not be a for profit industry.
Simple!!! Problem solved...
Simple!!!
If you're a simpleton.
do you squeak everywhere?
Those ESL classes are paying big dividends for you.
The Brothers K, Leo and Bruce, must be proud.
Abolish the income taxes.
Bring back wealth taxes!
/sarc
Who pays for the roads? Who pays for the judges? Who pays for the teachers? Who pays for the Doctors? Who pays for the army (to protect you from US 'rednecks' who think Canucks are pork chops/spare ribs)!
Tax consumption. Simple.
Taxing income is a bullshit circus protecting high AND low earners. Taxing income is the defacto [baseless] gateway for law enforcement to sniff your crotch and crawl all over your lives looking for "crimes." Just like marijuana laws, they are around for government benefit and cash flow-- not protecting a fucking thing.
Taxing consumption is equality at the expense of crony government.
Income tax is straight up slavery. Who gets paid first for your labor? Check your pay stub-- the state does.
"Liberty" means nothing under an income tax regime... you are chattel of the state.
Who pays for drug prohibition?
Oh, gosh. Let's see here. Hmm.
How about the same people who paid for things before we established the IRS? We seem to have done stunningly well before then.
You would have thought differently if you were an Apache or an Iroquois or a negro slave.
Or an italian immigrant working for 'la famiglia' or ... a hit man for Al Capone. It was do or die time. A bit like today with GBW/BO sending the young to fights it's wars.
Don't knock the nation state. Ask Steinbeck...
Al Capone was well after income taxes were imposed. But your point misses its mark. No income tax was needed in order for the nation to prosper quite well. And even worker safety was starting to improve before it was imposed.
Do you know who built route 66 in 1926 that allowed Henry Ford/GM to rule the American dream? The US tax system. After the plutocrats crashed the market in 1929 greed, it took the New Deal, heavy handed first attempt at Keynesian science, to re-prime the economic pump through govt. spending implying raising taxes subsequently. I don't think the USA would be where it is without this initiative.
Congrats. That's got to be one of the silliest statements that I've seen here in a while, and that's saying something.
Are you a troll? Because you are wrong about 8 different ways. Anybody promoting Keynesianism here is either a troll or profoundly stupid.
Maybe just contrarian. As for your definition of Keynesian..if it's current FED, you are in a mind frame that shows you don't know what Keynesian means...There is NO government in the USA worthy of the name...This is a total rip-off organized by the private sector...you know, the scions of free market capitalism you love...Once you've understood who calls the shots in USA then we'll talk about Keynesian economics. It's not a panacea to all ills as the past has shown...But in comparison 'Reaganomics', deregulated supply side Chicago school model, is the biggest fraud practiced by big business...those you worship as role models, on the people; those I defend as should the government by due diligence, like Gl-St. etc etc etc. Which the capital class of 'wunderbar' free enterprisers did away with. Free markets = total thuggery as displayed by thirty years of Reaganomics.
If you think that you can police the "free market" all on your own...then you should go to the moon...and make it the republic of moonshined free marketeers...Good luck...while you're on planet earth learn what words mean...And accept that a lie is a lie if that's factual...and that american capitalism in WS is now synonymous with sham. Tell me where a true free market exists today...and I'll show you an economy where Keynes has his part to play. Non-controlled or de-regulated economics is like a football match without umpires...good luck! Talk about level playing field...
Governments, like my sister, don't have a revenue problem. They have spending problems. If you give them 100 they will spend 125.
/I dont' see why my income needs to be 're-distributed' anyway.
/I dont' see why my income needs to be 're-distributed' anyway.
That is not a sign of intelligence , but a dead give away about your personality
+1
I disagree! I am all for roads, sewers, and whatever else it takes to run a state. But, why should my tax money go to someone who sits at home with Oprah?
That's re-distribution, or if you prefer - extortion, and it does no one any good.
The more you tax something, the less you get of it. Ergo, tax the poor.
LOL
An excellent idea. No one should pay less than 5% federal income tax on gross earnings. If you earn $10,000 this year, you pay $500 in taxes. We all use the roads; we're all protected by the military.
We're doomed if more than half the taxpayers pay nothing and get many of the benefits.
I would agree if the military was actually protecting us as opposed to starting one Muslim babysitting adventure after another.
Down here in Texas we are facing a $26b deficit over the next biennium. Every sad story, homeless, disabled, unemployed, non-profit, teacher, or other dependent on the State's largess has been paraded in front of our legislators. It is the most shameful guilt-tripping attempt to maintain spending we have witnessed in a long time. I am not saying that some, even many of the programs are important but the idea of having to cut expenses when State tax revenues have declined seems out of the comprehensible for many of these folks. We have agreed to dip into the Rainy Day fund and have tapped about $3b which will last us until about September. All we hear is more tax, more tax, more tax but hopefully we will have the intestinal fortitude to seriuously cut State budgets to meet our current revenue situation.
The reality is Texas is broke and no one wants to admit it. If we make the cuts as planned, we are going to watch what is left of the economy implode. If we jack up taxes, it is going to slowly kill any hope of a recovery. The State of Texas is backed into a corner. Everyone wants to live off of the now broke State, but no one wants to pay.
When did "rich" start getting measured by how much people EARN? Taxing earnings, taxes productivity, and is the worst type of tax we have. Start slamming the beneficiaries of massive Estates!!! The Paris Hilton's of the world shouldn't be in a more favorable tax situaiton vs. a small business owner who's busted his hump 80+ hours per week to earn his 6 figure income.
Right on TaxEstate. The inflationary theft of the last 40 years (100years) hasn't destroyed wealth, just moved it. If you receive stolen goods (even unwittingly), you don't own them and they are due back to the original rightful owner. The accumulated wealth of the top 1% should be redistributed to those who owned it originally.
I wonder how many Apple employees will move to Wisconsin.......
Those poor Texan people...
no money there...
For sure. People might think Texas was like Wallonia.
What scares me though, is that Texas will break away from the Republic and join Mexico...
http://blogs.miaminewtimes.com/riptide/2008/12/russian_prof_us_to_break_...
Even for me, a lowly canuck, all I need is a drivers license in TX and I can buy an LMT,a box of .308 and join the revolution.
Go Texico!
More likely to annex Mexico, and restore some order.
Exactly right.
Texas will be the place to be for change you can actually believe in -- and not for cheap imports from Richestan or Connecticut.
There is money here, we just keep it out of the hands of the State gov't. Texas is way more prosperous than many other states.
This brings up a very basic economic idea. States are dependant upon tax money to support them. When the real economy (not Fed printed money or gov't spending) ceases to exist, the gov't soon will be broke. This is what we are seeing in Europe and the US. It is only a matter of time before Texas will feel the pain. Downward spiral bitchez!
$27B budget gap is 'prosperous'?
I guess basing your state revenue on sales taxes makes as little sense as basing it on the cap gains of the top 1%ers.