Why 'Tax The Rich' Doesn't Solve Anything: It's The Math, Stupid

Tyler Durden's picture

While watching the political conventions over the past couple of weeks, JPMorgan's Michael Cembalest wonders aloud: What if, something like the CBO’s Alternative Case scenario came to pass; debt markets were no longer willing to fund trillion dollar deficits, so the deficit had to be reduced to 3% of GDP by 2020; taxing the rich was the only thing the country could agree on doing? If this happened, how high would top marginal Federal income tax rates have to go? The answer, after some number-crunching: 71% for the top bracket, and 57% for the second highest bracket. Adding state, local, and payroll taxes, and in 'Blue' states like NY and CA, income taxes will approach 80%.

This is not a projection, but an illustration that there are not enough Americans subject to the top brackets to reduce the deficit to 3%.

Eventually, the US will more likely have to adopt broader-reaching tax reform (e.g., raising taxes on the middle class), larger spending cuts than those already adopted, and/or Federal Reserve monetization of the public debt.

Another option: a set of pro-growth policies that solve the problem by ramping up the denominator. The challenge: under the CBO Alternative Case, real GDP growth would have to average 8.6% per year (rather than the 2.9% that is currently assumed) to get the deficit to 3% by 2020.

After seeing what has happened in Europe, it seems likely that debt monetization would be a part of a US solution (in addition of course to the $1.7 trillion in Treasury bonds the Fed already owns).

One more thing on taxation. There was a lot of discussion around both conventions about the progressivity of the tax code.

The charts below show some history on effective tax rates by bracket, from the CBO. The first table shows income tax rates...

Note: effective income tax rates for the bottom two quintiles are actually negative due to the value of transfers and tax credits.

the second shows total Federal tax rates (including payroll and excise taxes).

 

Progressivity, apparently, is in the eye of the beholder. To me, the tables suggest a substantial increase in progressivity since 1979.

 

Before anyone says, “well, tax rates used to be that high”, consider the details. Marginal tax rates were 80%+ in the 1950’s, but applied to the mega-wealthy (income of $3 million+ in today’s dollars), rather than the $388,350 that marks today’s top bracket. In other words, people had to be 10x wealthier in the 1950’s to be subject to ultrahigh marginal rates. There were also more deductions then. For example, in 1979, while the top statutory income tax rate was 70%, the effective tax rate for the top 1% was less than 25%.

 

Source: JPMorgan

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malikai's picture

Tax the rich = Capital flight.

Good luck with that, 'progressives'.

Also, nothing really 'progressive' about trying the tried and true way of crushing an economy.

Thomas's picture

We may be past the failsafe point--in a barrel on the Niagara River trying to think of a solution. Default may be the only way out.

veyron's picture

Instead of taxing the rich (future income), what would happen if we put a 1% one-time tax on wealth?  Some of that 33T overseas could help ...

ratso's picture

Taxing the rich doesn't have to result in higher revenues.  

The rich should pay their fair share of the burdens that the rest of America is paying for - that's hardly too much to ask when their wealth was created on the backs of the poor and the of middle class. 

The Amercan rich are simply the biggest ass wipe whiners in the world.  BOOOO!

EscapeKey's picture

You speak of the Laffer curve.

I like how said ultra-rich people always assume that we're on the right of the Laffer curve, with zero statistical or otherwise evidence to back up this assumption.

falak pema's picture

rich man's laughter curve?

johnQpublic's picture

what we need is a one page tax code.

no loopholes,subsidies etc for anyone

make corporations actually pay some tax, because they are after all just people,right?

reduce total tax paid to 25% max

including capital gains

then make the politicos work within the means provided

balanced budget and all

if that means programs need to be cut, then thats what happens

nothing is sacrosact

and then maybe eliminate barriers to entry for small business, like those stupid million dollar badges for taxis(as an easy low hanging fruit example)

next we could prosecute crimes of the elites, like wall street

legalize all drugs and let little mom and pop dope growers make a little side income

i also want a pony and muthafukkin world peace(which i'm sure i'll get before anything else on my list)

odatruf's picture

Fuck you.

While I am not rich, I haven't made mine off the back of any poor and middle class. I provide a good service and do so at a fair price.  If you / they want to go elsewhere, there is the door.

Asshole.

dmger14's picture

ratso,

I love that:  "created on the backs of the poor."  How is that?  If you are talking about exploiting workers, let those people find another job paying more.  If you are talking about consumers being overcharged, let them buy from someone else, or better yet, go into business making the widgets themselves, paying labor more than market rate and charging consumers less than the cost!

ATLAS is only beginning to shrug!  I hope the successful sell their businesses and retire or move overseas to places more hospitable to business.  Let the bloodsucking noncontributing leeches cannibalize themselves!

 

AldousHuxley's picture

France has 1% wealth tax.

 

Instead of taxing the rich cut income tax to be lower than that of capital gains.

  1. Rich won't complain because their taxes aren't going up
  2. Workers will like less taxes to spend on consumption to get the economy going.
  3. It is only the government who will then have to become more efficient dueto less total revenue.
  4. Politicians, lobbysts, lawyers, and anyone who depend on government like military, education, healthcare will have to learn to live on their own and prices will go down.

 

doesn't matter the real percentage....as long as income tax is not equal to capital gains tax, someone is getting screwed over.

blunderdog's picture

The people who earn wages, for the most part, cannot afford to purchase the necessary political representation.

So the only people who are "well represented" are the people who make their money through capital gains.  Obviously, as the only real US constituency, they're not interested in changing this. 

Some of them are complaining *now* about all those paupers who don't even earn enough to pay Federal income tax.

EscapeKey's picture

Minor technicality, but they complain about those paupers who "pay no taxes", conveniently ignoring "income taxes" != "taxes".

malikai's picture

Sales tax, fuel tax, excise tax, and a host of others come to mind.. Not to mention that little "tax" in subsidy for things like biofuels.

seek's picture

There's no such thing as a "one time" tax. Once pigs have tasted flesh, they come back for more.

In any case, inflation is a de-facto wealth tax, and thus there's an ongoing wealth tax that's well above 1% per annum. And it's still not enough.

The problem is the parasite has grown to be ~40% larger than the host -- there's no fixing this without killing the host (tax-paying population) or reducing the size of the parasite (governments and entitlement class, which includes social programs, military contractors, etc.)

EscapeKey's picture

They will 'fix' it by making the central banks finance an ever-greater share of deficits, in overt and covert ways.

The Keynesians will insist "we're in new terrotory", "this has never happened before", and "this time is different" despite significant volume of evidence suggesting the contrary.

The Austrians will shout loud, but ultimately be ignored, because it serves neither government nor big banks to have them running the country. Laymen will blame Austrians for not getting the timing right, hence "nothing they say is of value" - despite Keynesians not nailing the time either.

Sheesh, kind of depressing really...

johnQpublic's picture

so....kill the poor, eat the rich, vote the bums out....kumbaya?

MachoMan's picture

Exactly.  To create the power necessary to perform the one-off tax, you also create the political environment of total economic control and, thereby, necessary ruin.  Pandora's box.

Cranios's picture

Do you really think that isn't coming? Except it will be an annual wealth tax. The progressives (commies) aren't going to stop until every last cent of wealth in this country is used up.

marathonman's picture

In this case wealth isn't used up, it's just redistributed.  From your pocket to their voters with a healthy cut for their cronies, beaurocrats, and other legal parasites.  That's the government hussle.  Same as it ever was.

slightlyskeptical's picture

I think taxing accumulated wealth instead of income is the way to go. If a guy makes 10 million a year and spends it all he should pay no taxes, he is already doing his part to trickle down. Maybe allow the first $3 million or so of wealth to be tax free and then make it progressive from that point forward. I figure we need a top rate of about 3-4% of accumulated wealth annually for the US to make it's nut. If all the money in the economy is held in just a few hands then the rest of the economy cannot operate as desired - it's just basic math.  

drchris's picture

We already have "controlled" inflation.  That is a weath tax.  It hurts anyone with cash and helps debtors.  

LetThemEatRand's picture

The mantra that taxing income can't solve the problem is cover for the wealthy who don't want to admit that a tiny percentage of the population owns most of the wealth of the world already.  It's like Mitt Romney -- he is wealthy but he has little traditional income.  Zero hedge had a great article on this concept here: http://www.zerohedge.com/contributed/2012-07-15/soak-wealth-not-income

 

Quantum Nucleonics's picture

There is the slight problem that it would not be constitutional.  Direct taxes would have to be apportioned to the states according to population.  Article I, Section 2, Clause 3.  

Quantum Nucleonics's picture

There is the slight problem that it would not be constitutional.  Direct taxes would have to be apportioned to the states according to population.  Article I, Section 2, Clause 3.  

AldousHuxley's picture

because "rich" is not $250,000 income....

measure "rich" is wealth.....CEO with $1 salary income but $100,000,000 tax sheltered assets in Switzerland is the real rich.

 

It is the top 400 richest families in America who have rigged the game in their favor stupid!

 

http://econfix.files.wordpress.com/2011/05/us-income-distribution.jpg

 

meritocracy ends at $500,000/year...anything beyond that is luck (right place, right time, born on third base, inside trading, profit off of taking other's piece of pie rather than growing the  pie)....oh and the most popular one......via marriage.

EscapeKey's picture

I seem to recall reading that a significant cause of the fall of the Ottoman empire was down to a large amount of her wealth being exempt from taxation.

But this time is different.

e-man's picture

Does no one else see through the smoke and mirrors here?  You could tax the rich 100% of income and it would not solve fiscal mismanagement.  So why would a government propose this?  It makes people feel that the rich are paying their fair share and so it becomes acceptable.  In reality, it is a surreptitious way for government to sterilize the effects of their profligate borrowing and spending by way of the printing press.  Simply confiscate the money by taxation on the upper end of the pay scale (where most of the newly printed money accumulates first) and you will greatly delay the effects of inflation.  Neat trick, huh? 

Now, continue on with your class warfare people or else the other side is going to eat your lunch. Nothing to see here. 

A Nanny Moose's picture

Pffft. Politicians will repeal the law of gravity if they think it will buy them votes.  Voters are just dumb enough to vote for exactly such a platform.

Bananamerican's picture

Tax

Lloyd Blankfein

Brian Moynihan

Jamie Dimon

Vikram Pandit

John Stumpf

Richard Fairbank

Ralph Babb Jr.

Russel Goldsmith

Gerald Hassel

Peter Ho

 

 

et al...

 

100%

LawsofPhysics's picture

But, none of those banks are solvent, nothing really there.  Wait, what's that?  Mark to what?

Urban Redneck's picture

And relatively few of those bankers are AMERICAN, so the IRS can`t and won`t ever tax them anyway...

A Nanny Moose's picture

Tax them? How do you think they got their money in the first place?

Vince Clortho's picture

I thought the capital already fled.

johnQpublic's picture

nonsense

you could tax every american 101% and still not get the defecit to 3% of gdp

period

silverserfer's picture

the super rich have been actively evating taxes for some time. it is their intention to "capital flight' their money. Dipshit. These fuckers get idiots like you to believe they are paying their fare share.

our system has been bled dry by rich and powerful for decades. its nto the poor people who have dont this it is the rich they are the parasites.

Republi-Ken's picture

The Tyler Durden Conclusions is

DONT TAX MILLIONAIRES AND BILLIONAIRES...!!! PLEASE NO!!!

These folks are too vulnerable and weak.

Please leave these underpriveleged fucking republican conservative assholes alone.

Tax the Middle Class More. They deserve it and there is more of them.

And Tax those Lazy Ass Niggers who dont contribute anything. But Football and Basketball.

But leave us Millionaireas and Billionaires alone so we can buy another Mercedes.

 

BigDuke6's picture

A truly embarrassing comment , bringing shame on you at every level.
Intellectual , human, cock size etc

dirtbagger's picture

Wonder who funds the writer of this article: Heritage Foundation,  Cato Institute, American Enterprise Institute or Americans For Prosperity.    How dare we question hedge fund managers who pay at the 15% capital gains rate while the  rest of us slobs pay the rate on earned income.   Even more amazing is all these ZHers who suck up this Koch Brother's propaganda.   A sad state of affairs.

dugorama's picture

The max marginal tax rate only 4 short decades ago was 90% (on income > $1mm).  Look it up.  And yet we still had capital inflows.  Of course, we also had a complicated tax code that allow for deductions and exemptions and exceptions on everything from investment in low income housing to three martini lunches.  Along with economic growth, full employment and low inflation.  No value judgement here, just history.

LMAOLORI's picture

 

 

Progressive is code for Communist and judging from the class warfare responses the Daily Kommie kids are out in full force. Even with the facts smacking them right in the face they still don't get it! 

 

Laffer code why raising taxes won't balance the budget

When France Meets The Laffer Curve: Richest Man In France Moving To Belgium

Ain't No Sunshine's picture

It's so simple,

TAX THE POOR!

Cognitive Dissonance's picture

Just print some more money. That'll fix everything.

Zap Powerz's picture

It begs the question of why we even have income tax when we can just print the money we need to run the government.

Or, if taxation is necessary to make progressives feel good, why not print a trillion dollars for every US citizen, give it to them and then tax it at 90% which would leave each citizen 100 billion dollars to buy cheap shit from China and the government would be awash in cash to finance a war against every country on the planet!  Its a win-win for everyone (excpect everyone being bombed, of course).

Winning, duh!

RockyRacoon's picture

"Just print some more money. That'll fix everything."

...or, break everything, which would be my preference!

Give my well wishes to Lady Cog.

Cognitive Dissonance's picture

The Lady Cog is well and still stacked...........er..........stacking. :>)

<Don't tell her I said that.>

LawsofPhysics's picture

File this post under "DUH".  There are over 700 TRILLION  dollars of credit default swaps out there.  Better define rich too, because one thing everybody keeps overlooking is the total debt on the balance sheets and guess what?  There isn't enough collateral ON EARTH to cover any of this.

Unfortunately, only the "rich" have something to spend.  No spending, no eCONomy, no economy and everyone gets to redefine "wealth" and "value", fucking bring it!!!   Long black markets and human stupidity.

EscapeKey's picture

Net notional = 2-3% of this. OMG $700tn = Max Keiser mathematics.

LawsofPhysics's picture

especially when used for bailouts.