Will the proposed top-end tax rate increases go far enough?

James Surowiecki:

At the same time that the rich have been pulling away from the middle class, the very rich have been pulling away from the pretty rich, and the very, very rich have been pulling away from the very rich.

The current debate over taxes takes none of this into account…. Our system sets the top bracket at three hundred and seventy-five thousand dollars, with a tax rate of thirty-five per cent…. This means that someone making two hundred thousand dollars a year and someone making two hundred million dollars a year pay at similar tax rates….

This makes no sense — there’s a yawning chasm between the professional and the plutocratic classes, and the tax system should reflect that. A better tax system would have more brackets, so that the super-rich pay higher rates. (The most obvious bracket to add would be a higher rate at a million dollars a year, but there’s no reason to stop there.) This would make the system fairer, since it would reflect the real stratification among high-income earners. A few extra brackets at the top could also bring in tens of billions of dollars in additional revenue.

7 thoughts on “Will the proposed top-end tax rate increases go far enough?

  1. Would increasing taxes on those earning millions of dollars per year be progressive? It very well may not. Economists who discuss the incidence of taxes show that taxes on the richest are often passed through to the poorest in society. This should force us to discuss this question not only in moral terms, but in empirical terms as well.

  2. Dear slantedicular, can you provide a reference to any studies on your point? I’d be interested to get a “route into” that.

  3. It may well be the case that the rich can pass the tax burden on to the poor (through higher prices, lower wages, etc) but this possibility always exists and the alternative, not taxing the rich is worse for the poor. The result is chronic stagnation, low and depressed wages due to the resulting high unemployment and a shift of the tax burden to the poor in the form of more regressive local taxes. This is what is in fact occurring now.

    Taxing idle wealth is good if it is productively used to create a new economy of high paying green jobs that are not prone to being outsourced. This is what will sustain the economy over the long term and create greater stability based on steady GDP growth that rests on growing real incomes instead of borrowing and debt. According to a often cited FT article;

    “The top 1 percent of Americans got a little more than 8 percent of total income in the late 1970s, they now have 24 percent of income – a breathtaking increase. Median incomes have hardly increased over the last three decades…When there is such concentration of income a the top, demand has to be propped up, either by extremely low interest rates, irresponsible subprime mortgage practices and staggering credit card debt, as was the case in the US for most of the last decade…But the question is whether there can be enough effective demand in the US economy, without the record low interest rates and the fiscal deficits which create other problems, such as asset bubbles and too much debt…Less inequality in income distribution may not only be ethically desirable – it may be a necessary condition to resolve global macroeconomic fragility and ensure more sustained growth.”

    http://www.ft.com/cms/s/0/20134cf8-bf1e-11df-a789-00144feab49a.html

    Higher taxes is a far better solution for the working class and the economy as a whole than concern about the tax burden being shifted. Taxes on the rich have decreased markedly over the last 30 years; the top 5% of income earners received over 55% of the Bush tax cuts by late 2010. Despite massive tax reduction for the rich, the middle class has never been smaller or its real income lower. Since 1999, the real national median income has declined at least 6% from over $52,587/year to $49,777/year. Redistributive policies, fiscal stimulus, public investment for full employment and the promotion of union rights is a much better insurance policy against poverty.

  4. Steve, that’s an interesting post. Tomboktu, Steve’s post caused an email to appear in my inbox which lead me to see your post just now.

    Unfortunately, I don’t know enough to really introduce you to the literature. The idea is one that is mentioned here: http://worthwhile.typepad.com/worthwhile_canadian_initi/2007/11/canadas-tax-sys.html It’s also something that I’ve seen mentioned in a lot of thought experiments (e.g. relating to increases in the wages for sports stars that increases ticket prices for sports games which is regressive in incidence). I’ve mainly seen mention of the incidence of taxes literature in relation to corporate taxes as a law student, not an economics student.

  5. It’s amazing just how vehemently people fight such taxes, even though those taxes can just be ‘passed through’ to the middle class and poor. If they thought that that was true, they’d accept the tax increases, and make big noises about how they were paying more.

  6. It is worth recalling that current tax rates are actually inverted. The “upper middle class” defined as high income people who predominantly earn their incomes, are taxed on those incomes at high ordinary income tax rates. The “rich” defined as high income people who predominantly receive their income from investments, are taxed on those incomes at low capital gains tax rates. Simply returning the status quo to a flat income tax rate structure, rather than a regressive one, would restore some of the balance.

  7. Barry,

    I’m not sure what you are getting at with your comment.

    A piece that the Laval economist Stephen Gordon wrote in Canadian Business magazine reminded me of this thread and I thought I would excerpt it here:

    In the wake of the financial crisis and public anger at the excesses of highly paid bankers, Gordon Brown’s government imposed a 50% tax on bonuses paid by banks. If the story ended here, it would have had a happy ending. But it didn’t: banks simply doubled the size of the bonus pool so that the after-tax payout remained the same. The tax ended up being paid by the banks’ shareholders, their lower-paid employees and their customers. The only people who were not made worse off were the ostensible targets of the tax.

    http://www.canadianbusiness.com/after_hours/opinions/article.jsp?content=20100719_10003_10003

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