Rather than get into an argument about whether David Leonhardt is bouncing back and forth among personal income taxes, marginal vs. effective rates, and corporate income taxes in his latest New York Times column, I will couch my objection this way. If you think “the rich” don’t pay enough of their income in taxes, blame Congress. Just changing the marginal rates (the rates in the 1040 instructions) won’t necessarily achieve the objective you want.
You’ve got to change how income is calculated and what’s deductible from income, too. Take the home mortgage interest deduction, for example. Under present rules the interest on the first $1,000,000 in mortgage debt can be deducted from your income for purposes of calculating the taxes you owe. I feel confident in asserting that very, very few in the bottom 90% of income earners are taking out million dollar mortgages. If we were to want to give most of the benefit of that “tax expenditure” as it’s called to those with incomes in the bottom 90%, we’d reduce the cap to something more reasonable.
That would engender howls of anguish from people living in places with very expensive housing, realtors and home builders, and state and local governments.
But the biggest howls of all would come from Congress. Most of Congress’s power depends on being able to offer something (in this case a tax break) to high rollers. Even with simplification the tax code runs to thousands of pages. That isn’t to keep it simple and comprehensible.
Marginal rates are eye-catching and make good political footballs but the real action is in how income is calculated and what deductions are offered.
Reminds me of the verse in Creedence Clearwater Revival’s song ‘It aint me’
‘Well, when you ask them how much you should give
Yeah, it’s always more, more, more’
While you make what is a true, and I think obvious point, if I understand their methods, they capture a lot of that by looking at effective tax rates. What we see is that when you include all taxes, there is a fairy small variance in tax rates, and the very richest pay taxes at a rate lower than much of the middle class. So they both get all of the money AND pay taxes at a lower rate. Looks like owning the media and the politicians pays off, especially having one of their own as POTUS. I predicted when he took office that he would talk a lot about “workers” but the results of what he put into law would most positively affect the wealthy.
Also, if you remember the Panama Papers and the laws that were passed so that rich people could bring back their money from Swiss banks without penalty, we have no idea how much money our wealthy our hiding. People need to understand that many/most of our wealthy now look after only their own needs. Cutting taxes will make them wealthier but it may or may not benefit anyone else.
Steve
Were Democrats to raise the highest marginal tax rate to 70%, as has been suggested by some, I predict an enormous flurry of lobbying activity followed by a variety of tax breaks which result in far fewer people paying an effective tax rate of 70% than might otherwise have been expected and when the dust is settled we wouldn’t see much change. In fact I think most representatives would see that as an objective.
I’m skeptical that the tax code is an effective way of producing greater income equality.
Correction for you. The limitation is not on the first million of mortgage interest paid, the deduction is limited to the first million of mortgage debt.
“So they both get all of the money AND pay taxes at a lower rate”
Doctors and lawyers you mean?.
Thank you, Mark. I will make the necessary correction.
The theme of the Democrat party seems to heavily rely on taxing the rich, period, accompanied by increasing central government bureaucracies to manage the revenue rolling in from this taxation. Republican’s follow a different doctrine, supporting lowering taxes, growing more revenue by greater job creation, broader public access to opportunity, accompanied by less government interference.
When an apolitical analysis is done of the Trump effect on the economy, there are more good, rather than bad, stats describing it. Furthermore, much of the “good†has been redistributed and felt by minorities, women, those with less than HS educations ( the under class), and the working and middle classes. Sure, corporations received tax benefits. However, their higher profits often translated directly into business expansion, leading to more jobs. Higher wages, especially in lower wage jobs, have been attributed to the compensatory by product of lowering corporate taxes.
However, people like my husband and myself have not been advantaged by tax reform. Our taxes actually went up (SALT was a factor), while our lower-salaried son’s went down.
Second correction: for homes (and mobile homes and and) purchased after Dec 15, 2017 the mortgage debt subject to deductibility is $750k. It doesn’t change the thrust of the post.
“What we see is that when you include all taxes, there is a fairy small variance in tax rates, and the very richest pay taxes at a rate lower than much of the middle class. “
The difference is actually still significant. Second, taxes on capital is another layer of taxation, unless you put it into a mattress. Earned income less 40% taxes —> saved income in the capital markets —> invested income from the capital markets —> return on original earned income taxed at 20%. (Or OI rate) The labels change in the capital cycle, but the tax rate on the original income is really 60%. The capital gains rate was set lower many, many years ago in recognition of the value of risk capital and its ability to create wealth.
“Cutting taxes will make them wealthier but it may or may not benefit anyone else.â€
“
(Grabbing torch and pitch fork). What we need is a good yacht tax to screw those bastard wealthy, well, we tried that. Screwed the yacht workers.
Maybe our Government should just put all it’s payroll, transfer payments, procurement payments, student loans on plastic instead of bank transfers like the credit card companies and rake in 3% every time the “money” changes hands.
All federal benefits are presently obtainable via debit card as well as many expense payments by federal agencies. However, the processing banks receive the fees not the federal government.
That’s actually an interesting question. How much do the processing fees cost all told? Those are effectively subsidies to banks. On the other hand the federal government has reduced its check-printing costs.
“Doctors and lawyers you mean?.”
Did you even look at the graph from the article Dave cited? At least read the stuff he cites before saying stupid stuff.
“What we need is a good yacht tax”
Nope, but nice straw man. What we need is to stop cutting taxes on the wealthy believing that it will give us economic growth. Let them pay taxes at a rate at least equal to the rest of us.
Steve
Steve