[W]hile it's true that we can't solve all our fiscal problems by taxing the rich, we can solve more of them than people realize, as inequality has made the rich a lot richer than people realize. In 2007, the top 1 percent of households accounted for 23.5 percent of the nation's income. That is to say, for every dollar of income in America, the top 1 percent got about a quarter and the rest of us split the other 76 cents.What are the policy implications of continuing to solve our problems by taxing the top one percent? Of course we can set the top marginal rates as high was we want. The important question is whether this is a good idea.
Ezra is correct that the richest households accounted for 23.5 percent of the nation's income in 2007. But as the Tax Foundation points out, the top one percent of earners also paid 40.4 percent of all income taxes in 2007.
Is it really smart to have such a large portion of our federal income tax revenue coming from such a narrow base? Of course not. In fact, it's more dangerous than many people realize, since earners in top one percent tend to share many common characteristics.
The truth is that it's unwise for the federal government to get most of its revenue from such a narrow subset of the population for the same reason that it's unwise for an insurance company to cover mostly houses in a particular neighborhood. It's bad to have so many correlated risks. You need to diversify.
But how do you diversify when the wealthy have so much and the rest of us have so little?
Debates over tax policy are often framed in terms of rich versus poor. There are, as John Edwards insisted during the 2008 Democratic Primary, "two Americas." President Obama has arbitrarily decided that the division between these two Americas begins around the $200,000 income level. Anyone below this level should be exempt from federal tax increases, while anyone above this level should experience substantial rate increases.
Sounds good to most of us. But is it really fair that those making between, say, $30,000 and $199,000 should be insulated from any kind of federal tax hikes? Is it smart to tell so many people that they can have more services without having to pay more money? Is it good policy?
Politically, it may be wise to tell 95 percent of Americans that they should never expect to see their taxes raised. But, outside the world of electoral gimmickry, narrowing the tax base so dramatically isn't just stupid, it's essentially fiscal suicidal . . . .
2 comments:
But how do you diversify when the wealthy have so much and the rest of us have so little?
Here are my questions (and I honestly don't know the answers):
Does this take into account tax loopholes? Does it matter that someone making somewhere around 1 billion dollars a year may not pay that much in taxes simply due to the nature of our tax system?
Two, is this really a tax problem?
Or, rather, is it an income problem? Could the problem of taxing the middle class be solved somewhat by incentivizing (or mandating, or what have you) companies to pay their CEOs and CFOs only X amount of times what their lowest paid employee makes?
If that happened, I'm sure not a lot of people would be thrilled with being taxed - because the only person I know who doesn't mind paying taxes is my father - but since the income disparity would be less, it would make more sense to tax the population more equitably.
It is hard to make the argument that everyone should pay into the system and it is a bad idea to consolidate risk by only raising taxes on a miniscule amount of the population, when that miniscule amount can afford second and third (and fourth and fifth...) homes and the other people are working hard at putting their kid through college.
But if the income disparity were shifted, then the argument for risk management (and the moral argument of "we should all be paying into the system of which we benefit") is, I think, easier to make.
Does this take into account tax loopholes? Does it matter that someone making somewhere around 1 billion dollars a year may not pay that much in taxes simply due to the nature of our tax system?
It does. The top one percent is now paying more than 40 percent of all federal income taxes. That's the highest share of the tax burden in history.
I think loopholes used to be a much bigger problem in the past. The alternative minimum tax -- and the adjustments to the AMT in the early 1990s -- helped to ensure that the wealthiest Americans pay a much higher effective income tax rate.
Or, rather, is it an income problem? Could the problem of taxing the middle class be solved somewhat by incentivizing (or mandating, or what have you) companies to pay their CEOs and CFOs only X amount of times what their lowest paid employee makes?
It's important to note -- and I know that you're not disputing this, but it just doesn't get mentioed enough -- that business executives aren't the only people making millions of dollars. I understand why the populist outrage has been directed at corporate leaders recently, but there are lots of other high-salary jobs.
I honestly don't know a lot about this, but I think that corporate executives are grossly overpaid and I suspect that it has a lot to do with imperfect information. If that's true, then this is really a market failure. Capping compensation would be an extremely inefficient solution, but there are some things that the government can do.
Capping people's pay is like imposing a 100 percent marginal tax. It dramatically reduces work incentives and has the potential to seriously damage economic growth.
There's this perception that the Laffer Curve is somehow wrong -- that increaing taxes doesn't reduce work incentives -- because Reaganomics failed to achieve its goal. But I don't know any major economist who belives the failure of supply-side economics disproves the Laffer Curve. If we tax people at 100 percent (or cap their income), there's no question that there will be behavioral changes. (In fact, Greg Mankiw wrote about this just today.)
I also still think that a lot of the income disparity in the United States is being driven by globalization and the increasing demand for highly-skilled labor.
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