The average effective individual tax rate for those in the top .1% (that’s the top one-tenth of one percent, roughly 138,000 of them) was 24.3%. The threshold for that income level was about $2 million in income. I think that group counts as rich by nearly any standard and, indeed, is my definition of “the rich”.
If you believe that the rich are paying too much in taxes, you necessarily mean that they should pay a lower proportion of their income in taxes than that. Those are equivalent statements. The precise mechanism for the tax doesn’t matter except at the margins. It could be a consumption tax, a flat tax, a graduated income tax or some combination.
Moreover, if you believe in balancing the federal budget (whether it could or should be balanced is a discussion for another time) and you don’t also believe in cutting Social Security, defense spending, and the various federal healthcare programs, then you pragmatically believe that the effective tax rate of 24.3% is too low.
Just for the record I believe that over the long term the federal budget should be approximately balanced but I don’t think that a small deficit in perpetuity would present a problem, that taxes are about right, that defense spending and entitlement spending are far too high. I also believe that rising healthcare spending is the single most important fiscal problem and that, while decreasing utilization might be a component of the reform that we need, most of the reform that we need in healthcare is structural.
You say, “The precise mechanism for the tax doesn’t matter except at the margins. It could be a consumption tax, a flat tax, a graduated income tax or some combination.”
But at the margin, the rich all pay at a rate of about 40% on earned income. This effectively keeps all their wives from ever considering working, since they would be paying 40%+15.6% FICA+3% Unemployment insurance+2% Workers’ comp, or something approaching 60% tax in the first dollar they earned. Normal folks, on the other hand, start out paying 0%, graduated to 15% and then 28% or some such on a typical wage, averaging out at a rate like Warren Buffett’s secretary’s, below 20%.
If we had instead a flat tax, fair tax or consumption tax, the wife would not be so thoroughly discouraged from working.
Jimbino:
Social security and payroll taxes are irrelevant to high income people, they only matter to middle class and lower folks.
According to Dave I am “the rich” or by my calculation, “rich-adjacent” and my wife works. In fact, we’re partners, and that’s how we come to be rich-adjacent. And why would you assume the high earner is the man? And by the way, non-working spouses of really rich people aren’t put off work by a few extra taxes, they’re put off work by the fact that they’re rich and don’t need to work.
I believe that you’ll find that the overwhelming preponderance of the highest income earners have spouses who work. I haven’t been able to nail down the stats on the top 1% or top .1% of income earners yet but among the top 5% of income earners more than 80% have spouses who work.
I think that both you and Drew are “rich-adjacent”. My characterization would be “well-to-do” but I’m pretty 19th century in my diction. My wife and I (for comparison purposes) are upper middle class. We’re in the top 10% of income earners.
You know, getting into the top ten percent of households doesn’t require all that much income, which is what really worries me: that for the vast majority of Americans a moderate level of success is out of reach.
I don’t think that “moderate level of success” has an objective definition. IMO it’s always relative to where you are. I think I’ve achieved slightly less than a “moderate level of success”. Relative to my abilities I’m an abject failure. Relative to most people I’m quite successful.
A nice piece in NEJM on utilization. I think there are some structural things we can do, but those are more long term fixes. In the short term, we would be much better off following the practices of other countries that spend less and still have quality care.
http://www.nejm.org/doi/full/10.1056/NEJMp1203365?query=TOC
Steve
I think I’ve mentioned before that my family is in the top 20% gross income with my wife working full-time and me working part-time. I’ve done the calculations for me going full-time and I would need to make at least $25K just to break even. Although our taxes would go up substantially, the biggest factor by far is full-time child care for three kids which would run about $15k a year alone.
I don’t have the link right now, but I remember reading about a study that concluded that part of the increase in income inequality is due to successful people marrying each other. In essence, high-powered, successful men and women are more likely to marry someone like them than marry someone of lesser means, which is a change from previous generations. In other words, people today are more likely to marry within their class or income group.
@Dave Schuler
You’re right: to be honest I find the word “success” problematic in any usage, I just wasn’t thinking when I wrote it. In the grand scheme accompishment and status are meaningless and the only measure that seems to have any value, illusory as it may be, is happiness.
Right,
Happiness is the important measure and women are being denied fulfillment. Typically some 13% of top positions are filled by women, according to Cheryl Sandberg, COO of Facebook.
All my life I’ve seen that a high-earning man meets a happily employed woman, courts her and turns her into a wife whose work is limited by tax policies. The result is that she stays home, gets bored, has kids, works nowhere outside the house, learns nothing new, gets fat and ugly, gets dumped by him and sometimes commits suicide, like Mary Kennedy.
Just a couple thoughts.
I agree with Dave, I do not, and never have, considered myself “rich.” I know what rich is. Rich people have net worths of $40 – $50MM and up. I make people rich when I buy their companies. I lived in New Canaan, CT for awhile. I know a Kennedy or other trust fund type when I see it. To coin a phrase, I’m no Kennedy. (I know, keep the day job.)
I also agree with Dave and Michael that twin working (in the employed sense, mind you) spouses may be a signal of financial independance, or not, or may be independant of financial status.
I also think that we need to be careful of aggregate statistics. As most know, I’m in the private equity business. Yes, I’ve had those $2MM years. I paid a hell of a lot more than 24%, and I’ve got professional accountants who do PE guys, business owners, sports stars etc. Like so many, we are a New York investment partnership. Think 50%. As a matter of fact, I can’t remember when I paid less than $250K in taxes. 15+ years? That’s not bragging. That’s just trying to get people to understand that you do that year after year and you start to wonder why you are vilified and told you aren’t doing enough. How about a simple “thanks for the contribution” sometime?
As we all (should) know, and Dave has in my opinion does as good if not better job than any blog I read at pointing it out, that taxes won’t solve the problem. The spending volume and trajectory are too great. Tax avoidance will come into play. And the tax base will have to go deep into the middle class. Michael always points out that at least its a start. I always retort that pissing in the ocean is similarly a start……..but not a solution. Whether you agree with the philosophy in this:
http://news.investors.com/article/612332/201205221809/california-illinois-like-european-unions-failed-states.htm
or not, the statistics are whats important. The magnitude of the problem is grossly understated, perhaps deliberately and dishonestly, and prior efforts at resolving the issue with taxation have failed. Its hard to imagine they will not fail in the future, as politicians are spenders, just like the frog and scorpion story. Its their nature.
Drew:
I don’t think you and I disagree all that much, really. I absolutely think we need to cut — timing and what gets cut are where we’d differ. I agree taxing the rich alone isn’t doing it. I think it’s a necessary signal, and a necessary political component — you can’t cut 2 weeks off a school year, or close down an emergency room, or fire all the librarians, and then say that Michael Reynolds should be getting a tax cut, it doesn’t fly. But it’s also true that I can’t cover all those expenses out of my income, so we need serious cuts, we need tax increases, and those taxes are going to have to touch the middle class, too.
From my perspective it’s less a matter of how much at any given point, and more a sense that ‘it will never be enough.’ In other words, if I knew for a fact, if it were chiseled in stone, that the income tax rate would never climb above X%, and if I knew that we’d all be paying fairly, that segments of the population were not able to deploy special accounting-fu and stick me with the balance, I’d be content. Part of the reason people fight tax increases so vociferously is this fear that giving an inch will mean giving a mile. Jerry Brown is about to ask for various tax increases and if I were convinced that paying a couple extra points for a couple of years would magically get us where we need to go, I’d be fine with it. (Not happy, but fine.) Instead I feel it will be a wasted effort and two years from now they’ll be back again.
Related, I’m interested by the Germany-Greece dynamic. You have in effect rich and poor there, with no real common historical or cultural bond. In the US rich and poor do share a common sense of being a ‘people.’ Interesting contrast.
“All my life I’ve seen that a high-earning man meets a happily employed woman, courts her and turns her into a wife whose work is limited by tax policies.”
I have rarely seen that. I have seen women stop working when they were in pretty dead end jobs, but I do not see women physicians, lawyers and other professionals giving up their jobs.
I am almost in the one percent. Maybe because we made so little money when I was younger I feel pretty rich now. I never thought I would make this much, but money is not a primary motivator. I dont really expect anyone to thank me for my contribution.
Taxes will not solve the problem by themselves, but they are part of the answer.
Steve
I’ve actually seen the reverse. My wife and I have some very old, very good friends. He’s a pathologist; she’s a lawyer. She went to law school when he started his internship because she decided she didn’t want to be “just a doctor’s wife”.
I honestly do not know a single woman who does not work regardless of the income level of her spouse (if any). I’d certainly like to see some actual data. I’ve produced some (above) that suggests the opposite–that in most cases of the highest income earners both spouses work.
I take it back. I do know one person. We’ve got a neighbor who used to work at the Trib but decided to become a stay-at-home mom when she was RIF’ed.
Close family friends are both doctors, and she quit a few years ago for a variety of reasons, but mainly for family/kids. Her practice group coaxed her back because they were short OBGYNs, and she negotiated a three-day work week with no on-call duties. My wife similarly works a three day week. Looking at the small percentage of women law partners or trial lawyers, it would appear that women make similar decisions. Working for the government or corporation provides more flexibility. Not working versus not working, but weighing the cost/benefit of working less.
The high marginal tax rates affected my lifestyle choices a lot, probably more than they do those of most people, because I have concentrated on the economics starting at the beginning of my career. As a contract software engineer, I can earn between $65 and $100 per hour, depending on location, which threatens to put me in a high marginal tax bracket, especially if I work near home, where I can’t write off half of the wage as per-diem expenses. I also don’t take contracts for more than 6 months, though I do take contracts of up to a year if split between two tax years.
When I’m not working in my profession, I spend my time quite profitably remodeling several houses I own, knowing that every hour I spend in improvements will come back to me 100% on sale, if the capital gains amount to less than $250,000 for a principal residence, or 85% on a second home.
I have never subscribed to the foolishness of insurance. Because of these measures and some gaming of the tax and welfare systems, I have been able to confine my professional work to some 13 weeks average per year for 40 years, which qualifies me now, just barely, for social security and medicare. If I had taken the usual tack as a programming physicist at age 26 when I was offered a full-time job as VP of Engineering, I would surely now be president and CEO of something. My life would be very different: I would have married a co-worker at 28, at which point she would have quit for tax reasons (both high marginal taxes on her wages and the high marginal taxes paid for caretakers and housekeepers), then bored to death at home, she would want to breed. After her breeding, I’d have to keep working to afford the ever-larger houses. Then come the cats and dogs, college tuition expenses. I would have found myself trapped at midlife instead of world-traveling and building, buying and enjoying my homes in Austin, Crested Butte and Rio de Janeiro. I’d be lucky to be married or living still with the woman. The one constant would be child support, another thing that keeps you trapped in the corner office, where you go on contributing 60% of your blood, sweat and tears to the gummint and 33 to 50% of the 40% left to child-support, leaving you with as little as 20% of your “fabulous” wage. And if you ever make time to see your own kids, you pay more!
I have seen this so many times among my professional acquaintances. The last one sold a patent to pay off the $500,000 it cost him for both lawyers to divorce his wife, and the payments to her and for the 11-yr-old kid go on and on and on.
It isn’t the life I’d wish on a dog. Any smart young man should follow in my tracks instead, though he should avoid the one mistake I made–though I ended up lucky–by getting himself sterilized at 18 and just lying to every woman afterward who is trying to trade sex with him for babies and big houses. Fair is fair when dealing with rapacious women and gummints.
Was that completely insane or is it just my imagination?
It wasn’t your imagination, that was completely insane.
It would be fun to debate reynolds and Icepick on the issue of the lifestyle-changing effects of marginal tax rates. They’d run completely out of words after a one-line ad hominem.
Oh, I could summon up at least two ad hominems. Besides, I don’t think Reynolds had your comments about marginal tax rates in mind, and I know I didn’t.
Jimbino:
I think we’d all agree that taxes can affect behavior to various degrees. Sort of like alcohol can affect behavior to various degrees, from slightly relaxed to Charlie Sheen.
I think you went full Charlie on us.
What I think is that most Amerikans, and you two especially, don’t really appreciate the degree of influence that high marginal tax rates have on behavior. They don’t influence the ignorant and complacent–what does? Football?–but they do influence the smart, informed and enterprising, and in an entirely negative manner.
Eduardo Saverin is an example. He is one of some 1000+ and growing who have recently renounced their Amerikan citizenship, entirely for tax reasons, of course. Pundits and idiot congressmen criticize them for exploiting the benefits of the Amerikan citizenship they are giving up, maintaining that the “ingrates” now owe Amerika an “exit tax.” The truth is, Amerika owes them a huge debt of gratitude for their contributions, just as it owed those anti-patriotic ungrates Einstein, Fermi and von Neumann, not to mention the Nazi Werner von Braun.
Jimbino:
Spelling America with a “k” is what makes me totally want to engage intellectually with you.
Okay, dumbass, show me where I’ve come out in favor of high marginal tax rates or high capital gains tax rates. Just because I think you are an absolutely insane misogynist doesn’t make me in favor of everything you hate.
Jimbino- It may affect some people. Certainly you can find anecdotal evidence, but it is hard to find in the literature. When you look at very high earners, Goolsbee did the studies in the late 90s at U of Chicago, you find they dont make much difference at all. While you appear to believe solely in the substitution effect, most of the rest of us have seen the income affect in action also.
Steve
This is very disappointing. I’ve been checking back for 24 hours, waiting for the Jimbino vs. Icepick fight and Jimbino forfeits?
Jimbo: TV is all in reruns. I need entertainment. If you schedule a fight, show up, huh?