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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surf0766's picture

19% flat tax everyone except the poorest. 20% gov't cuts until we are back on a path of fiscal sanity.

Things that go bump's picture

Even God only asks for 10%.  

blindfaith's picture

God has no use for money, only man does. So guess who put the words into 'God's' mouth?

If evryone DID actually pay 10% tax there would be no deficet.  But tax dogers and the well healed know how to use the tax code to pay no taxes....after all who do you think paid for the politians who wrote the code...Joe six pack?

Sokhmate's picture

Allah asks for 2.5% and prohibits usury

falak pema's picture

Jesus offers the other cheek free; and Mahomet says share and share alike with your four wives.

Now that is not usury, its more like "giving free and plenty" from either revelatory diety.

The best things in life and the banksta tribe....oil and water.

A Nanny Moose's picture

Jesus offers the other cheek free;

Jesus didn't have Ben Dover Bernanke et. all, attempting the parting of the ass cheeks.

Zap Powerz's picture

Why do the poor get such pampered treatment?  They provide nothing to their society, in fact, they consume more than they produce.

Lets use the laws of incentive and human nature to "encourage" people to not be poor by taxing poor people at the highest rates and rich people at the lowest rates.

Lets give people a reason to not be poor instead of giving them incentives to be poor.

I mean, being poor should be so uncomfortable and horrible that a person would do the crazy thing of actually getting out of bed at 7:30 am, NOT smoking weed all day, going to a job and working all day and NOT waste their money on lotto, beer and cigarettes.

Instead, in this fucked up place we call a country, if youre poor youre treated like some kind endangered species and if you work hard and make money youre treated like some kind of villian trying to kill off endangered species.

surf0766's picture

I get what you said. There are some who will still need assistance for some specified length of time. I don't know the definition of poorest of the poor would be.

johnQpublic's picture

irony is....dont feed the animals in parks type signs....it makes them dependant on humans for food

vs.

snap cards

in credit card format so there is no stigma for being a well fed animal in the national park that is the US

A Nanny Moose's picture

National Parks don't have cages. This is a friggin zoo.

not fat not stupid's picture

I know the math doesn't add up. That isn't the point. Doing it will feel really good.

aaronb17's picture

What's amazing is, we are ever more productive, and ever wealthier as a society -- and yet it gets harder and harder to pay for simple stuff like health care and education and retirement because all the fuckers at the top are getting all of that goddamn money.  And they can't pay higher taxes?  Really? 

blindfaith's picture

When I lived inSavannah Ga., I was surrounded by the wealthist of the wealthy.  Jokes and laughs at how easy it was to not pay takes and how stupid 'joe blow' was that he didn't do the same.

One November a neightbor across the alley was moving.  The wife of this lawyer was setting out box upon box of unopened toys, unplayed LP's, cell phones, wireless stuff, TV's....more than 20 large boxes of stuff.  My girl friend and I started to gather up all this stuff to take to Goodwill.  This "high-class" woman comes out sreaming to put it all down or she would call the police, rember I am her neighbor ( in the alley is public domain and it was there for the trash collection).  I asked WHY?  And she said..."because I don't want any of those people to have any of these things because it only makes them closed to how I live and closer to me".  THAT folks is a direct quote.

To do anything that allows anyone 'not of your "class" ' to get close to you, has returned with a vengence.  Now, I don't want to get political here, but I remind the short term memory folks out there that Mrs. Romney said near the same thing about 'those folks' just a few weeks ago.  But then again she won't be running the show the way Nancy Reagen was....will she?

 

As for this shill article...shame on Zerohedge printing shill from the Morgue.  The idea that even a 3% reduction is not worth pursuing is Talk Radio tripe.  Go ask David Stockman who needs to START paying their fair share.  I will bet you that this wonder boy has his 'salary' delayed so he pays capital gains and not income tax on the earnings.

I don't come to Zerohedge much anymore, maybe it was for good reason.

sschu's picture

The basic questions when we start discussing this topic are:

What is a "fair share"?

Who decides?

Unless specific answers can be provided, these types of discussions are just pure feel-good political posturing.

sschu

 

mytwocentimes's picture

Insight - and a spot-on-critique of ZH  -  thanks !

ElvisDog's picture

Aaronb17, you're either stupid or ignorant, take your pick. The reason we're having more and more trouble paying for health care and education is that cost of those two items are going up annually by 3-4 times the rate of overall economic growth. Here's a math test for you, Einstein, plot out the functions y = x^1.1 and y = x^1.02 over a long time horizon and see what happens.

aaronb17's picture

That's not a reason, that's just a fact, you stupid ignorant idiot. A fact I referred to in my original post.  What is the REASON that education and healthcare have increased at 3-4 times the rate of overall economic growth?  And have you noticed that CEO salaries have increased even faster? 

ElvisDog's picture

Hah, that's funny, your witty retort was to use my own accusations (stupid or ignorant) against me. Nice to know this is a battle of wits against an unarmed man. The fact is that healthcare and education costs (college specifically) are going up by 8-10% per year. Economic growth is maybe 2% per year. So healthcare/education costs will double every 8 years or so. The overall economic "pie" that can pay for education and healthcare is doubling every 36 years. (Again, just plain old mathematics dumbass). But according to the fantasy-land in which you live, we can pay for the current healthcare/education system if we simply tax those evil rich people.

The reason education costs are going up that much are Federally guarenteed student loans. The middle class has bought into the idea that sending their kids to college is worth the cost, any cost. They can borrow an unlimited amount of federally guarenteed loans. The colleges know this, and have no incentive to rein in annual tuition increases. The reason healthcare costs are going up that much is there is a complete disconnect between how much medical treatment actually costs, how much is billed, and how much people actually pay for healthcare. In other words there is little incentive for many people to limit the healthcare they receive because they aren't paying the full price ($2000 hearing aid? No problem, medicare is paying for it).

In the words of Dean Wormer: Fat, drunk, and stupid is no way to go through life.

aaronb17's picture

Well, I tried to throw your shitty attitude back in your face to show you how it felt, but apparently you liked it and decided you want to keep throwing it around.  I'll leave you to play in your doo-doo.

Your economic analysis of education and healthcare costs is pretty much standard Republican drivel -- "people should know better than to consume too much education or too much healthcare, but they can't stop because the government is paying for it." Because clearly we all suffer if people are too educated or too healthy.  The solution is always "they should have less of this stuff that will make them better citizens/people, because it costs too much."  

The analysis is wrong, because healthcare and education are absolutely fucking paramount to a society worth living in.  It's not about saying "we have to choose -- should we have rich people, or should we have education and healthcare for all?"  That's an idiotic question to even ask.  

Healthy and educated people are what are essential to a society worth living in.  Mitt Romney enjoying an extra marginal 20% of his income is what isn't fucking necessary to a society worth living in.

And yet that is essentially the Republican platform -- "how can we possibly have healthcare and education for all, when Mitt Romney might have to live on $25 million net per year instead of $35 million net per year?" 

StychoKiller's picture

Git yerself edumacated:

"Economics in One Lesson", ISBN:  978-0-517-54823-3, by Henry Hazlitt

GoldenTool's picture

Nice apples to oranges argument.  Growth can't be exponential the world is finite, but money can be.  His statement above is correct and one I have often complained about.  More "stuff" is being produced with less work by humans, yet cost keep going up.  We should be near a nirvana state, yet the money system appears broken and does not reflect this.  The creation of false inflation to hide deflation will, IMHO, destroy everything it touches, if it, it being the financial system, becomes uncontrollable.  Right now "it" is controlled and could very well stay that way, but IF the leash breaks I don't think I want to be in that tiger cage.  Can bernanke hold the tiger of raw comodities and energy in check.  China isn't hording for nothing would be my guess.

 

"Do unto others."

ElvisDog's picture

I would suggest you travel a little more, specifically to the Developing World, if you think there is enough stuff to spread around to reach a nirvana state on this finite rock we call Earth. The fact of the matter is there is not enough "stuff" to meet the promises made to everyone by their respective governments or even their own expectations. Taxing the Rich is a simplistic approach that appeals to a certain part of the political spectrum. But redistribution of wealth by taxing the rich doesn't cause any more stuff or wealth to be generated. It would not cause lving standards, net-net, to rise, and in fact would cause them to fall.

My point is that our current system, and healthcare and education specifically, are unsustainable. You can't change the mathematics of an unsustainable system by printing money or taxing the rich. The system itself has to change. The exponents have to come together.

GoldenTool's picture

You have just defined the illusion.  Could everyone in the world have 2 cars, 3 tv's, and a summer home?  That's the promise, right...  There will always be enough money to meet the monatary promise, but that doesn't guarantee 2 cars, 3 tv's and a summer home.  Keep chasing that carrot.  I believe Greenspan said some such in the 90's.

I agree with your last point and actually think we are saying the same thing, if you leave the strawmen out that is.

slightlyskeptical's picture

How much are we capable of producing annually as a world? Don't define it in our current system, but in a system where everyone put forth their best effort for 30 hours a week and jobs that were non-productive were eliminated. I think we definitely have the ability to provide everyone in the world with what is considered a nice life by western standards at the minimum. That would consist of a decent home, food, clothing, modern conviences, top notch health care, utilities, retirement, etc.  You would still earn more by providing more, but it would be an accepted ideal that too much for one means too little for everyone else.

GoldenTool's picture

  I have to agree with you Slightly, at the expense of seeming like I'm sitting down to sing kumbaya at fight club.  Anything that changes certain power structures would be fought tooth and nail.  Everything always looks good in dream land though.

 

"Do unto others."

 

Al Huxley's picture

While I agree with the general thesis (taxes don't solve the problem) I have some difficulty accepting the objectivity of the source.

Bob's picture

How about a fundamental reform of the tax system that penalizes predatory financialization rather than real work and productive industry?

http://michael-hudson.com/2012/08/financial-predators-v-labor-industry-a...

Is it not enough that financial parasites make the lion's share of the money and control the majority of the wealth . . . without the rest of us paying the majority of the costs required to support such a self-defeating (for the vast majority)  economic model?

It makes no sense whatsoever . . . except as servitude to sociopathic parasites.

Clueless Bill's picture

Taxing the rich is not about raising revenue.  It's about reducing the power of the rich. Unless you are one of the few thousand greedy little men who owns almost everything, you should be in favor of it.

JuliaS's picture

Reducing the power of the rich? Are you implying that those who collect taxes are poor?

A Nanny Moose's picture

Taxing the rich is not about raising revenue.  It's about reducing the power of the rich.

How do you think the "rich" working within a corrupt system, created by rich people, obtained such power and wealth? They did it by getting government to steal from others under the guise of taxing the rich, and fair shares.

The problem isn't the disparity of wealth, it is the breakdown of principles. This is a lack of respect for private property. The fucking pewblik skewl educated proles eat this shit up, just like they did in Nazi fuckin' Germany.

FishHockers's picture

How about just hitting the ESC key, or DELETE instead of PRINT. Just a thought. 

SmoothCoolSmoke's picture

"Taxing the Rich Soves Nothing"  So..... if we stopped taxing the rich today, things would not get worse?  Hmmmmmmmmmmm.

dugorama's picture

If tax cuts created jobs we'd have no umemployment by now

aaronb17's picture

As an aside, that supposed "effective total tax rate" of the top 1% is WAY over what Mitt Romney paid.  Why is that?  Is he some crazy-low outlier?  Or are you full of shit regarding the actual "effective total tax rates" of the rich? 

seek's picture

He's a crazy low outlier, because of how rich he is.

Most of the 1% are actually high-income wage earners, e.g. it's earned income. I happen to be in that category and my effective total tax rate (Fed + State) runs about 35%. You'll find most wealthy small business owners are in the same boat, as are doctors, lawyers and the like.

When you get unto the uber-wealthy segment (say top 0.1%) the effective tax rates go down. A lot. This is because the vast majority of the income is unearned capital gains, which is taxed at a very low rate relative to income. Throw in some accounting and tax credits, and you get to Mitten's 14% effective rate. Grab virtually anyone clearlying 500K a year and they'll be paying a rate that is around double this.

A big clue given to me by my accountant for detecting people who understand taxes v. not: the clueless will talk about tax rates, the clued will talk about the definition of income. Tax rates are one page of the 20,000 pages of tax code; the vast majority of the code is wrapped up in defining what counts as income, and that's where the games are played. You can raise the rates to 100% and Mittens will still pay 14% unless you change the definition of capital gains.

The uber-wealthy just love it when people focus on rates. It's the distraction that lets the magician get away with his tricks.

aaronb17's picture

I agree with you, and would also note that the combination of the payroll tax and capital gains tax (capital gains earnings don't get payroll taxed, yay!) are the two massive distortions in the tax code that cause wage earners to be the ass-raped class of society.  Someone with a nice big bank account (say 2.5 million) has a 15% marginal tax rate on his captial gains.   A self-employed plumber works 60 hours per week to make $100,000 that same year, and has a 43% marginal tax rate on money he earns.  Hard work will get you nowhere in America -- it's almost like the tax code rewards people for finding ways to make money sitting on their asses. 

Bob's picture

A particular result of the corporate buyout of Economics.  Actual meaning got downsized out of the equation:

http://michael-hudson.com/2012/07/veblens-institutionalist-elaboration-o...

StychoKiller's picture

[quote] Hard work will get you nowhere in America -- it's almost like the tax code rewards people for finding ways to make money sitting on their asses. [/quote]

Well, "The purpose of a System is what it does."

No "almost" about it!

FoxMulder's picture

Yes but this doesn't account for the utils of pleasure we will derive from sticking it to the richers. /sarc

Bob's picture

I guess all good things must come to an end.  sigh. 

falak pema's picture

so only the poor should be taxed; and how do we define the dividing line?

I know only one thing I learnt from Robin Hood : Take it from the rich. 'Cos you can't take it from the poor.

The heading of this post is the snake eating its tail.  

The logical conclusion of the title is : taxation is useless.

WHy didn't he start with that as the postulate? 

Just some history : WHat were the tax rates when the US was truly top dog? From 1945...to 1975?

Why bother to look back....lol! That's why history repeats!

And its repeating like in 1929...

Bob's picture

“Do not waste your time on Social Questions. What is the matter with the poor is Poverty; what is the matter with the rich is Uselessness.”
? George Bernard Shaw

SDS Trader's picture

"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."

Why can't ANYONE ever get this correct?  Wealth DOES NOT equal income.  It's not "mega-wealthy", it's "mega-earners".  People had to have a 10X higher INCOME, not wealth. Wealth is assets minus liabilities.  It's a balance-sheet notion.  It does not necessarily derive from the income-statement side of accounting.

If I find a Monet in my grandmother's attic that is worth $30 million but I only make 30K per year, I am wealthy but I have a very low income, especially relative to my wealth.  If I just hang that painting in my living room it ads NOTHING to my income, even though I am worth 8 figures.  Maybe that's a little extreme, but recenlty there was a guy who found baseball cards in his family's attic that were worth millions.  That did not mean he was a high-earning individual.  Likewise, if I spend up to my income on caviar and champagne, I can earn a lot without being wealthy.

At least Cembalest phrased it correctly.

Of all the publications out there, I expect ZH to get it right.

Bob's picture

In defense of ZH, I think that--for the most part--they get the caviar and champagne poverty perfectly.  FWIW. 

chet's picture

Then let's give them some more tax cuts.  That will probably turn everything around.  If we just keep our lips locked on the tycoon's butt holes long enough, I swear that any day now they'll feel beneficent and start trickling down the love on us.  They'll throw globalization into full reverse out of pure appreciation.

As a society, we just haven't kissed the plutocrats' asses enough, or given them enough hand jobs.  I'm sure just a couple more hand jobs will cause the "job creators" to stop investing in China and start investing in the American economy again.  Okay wage slaves, whose turn is it to give the next handy to the poor put-upon and greatly misunderstood masters of our universe?

Walt D.'s picture

The Governments at all levels -Federal, State and Local are all spendaholics, and like all alcoholics and drug addicts, they will steal from anyone, family, friends, children, grandchildren, to support their habit.

There is only one true and tried solution - quit cold turkey. Congress has a chance to do this when we hit the debt ceiling again before the end of the year. Unfortunately, Obamacare does not have a cojonnes for Congress provision.