How Much Blood Can We Get out of Wealthy Stones?

Greg Cochran challenges my assertion last week that if we were to raise taxes on the rich we'd get "probably no more than about $100b per year" with a pithy "Ridiculous." Had it come from any normal commenter, I'd have simply ignored such an offhanded dismal - but coming from a rocket scientist, I feel obliged to research further.

First off, given that Obama had proposed raising taxes 3.5% on incomes over $250k, which was supposed to bring in $700b over ten years, and that proposal didn't even pass in an aggressive lame-duck Democrat congress, a $100b upper bound on potential additional annual tax revenues from the rich doesn't seem particularly ridiculous.

But what if we were to get more aggressive, and implement a more progressive tax increase? Surely the very wealthy could afford more than a mere 3.5% tax increase.

The IRS publishes tables showing how many taxpayers there are, their total income and taxes paid, at various income brackets. Suppose we were to implement the following tax increases on additional income (starting at $200k as the definition of "rich") as follows:

Income	Tax Increase
$200,000 under $500,000	3%
$500,000 under $1,000,000	4%
$1,000,000 under $1,500,000	5%
$1,500,000 under $2,000,000	6%
$2,000,000 under $5,000,000	8%
$5,000,000 under $10,000,000	9%
$10,000,000 or more	10%

So this would implement the 3% tax increase, then up it progressively until we're hitting incomes over $10m with an additional 10%! (FYI - Congresswoman Pat Schakowsky has proposed something similar, but only on incomes over $1m - and it's projected to bring in $78b). So how would my proposal fare in the revenue generation sweepstakes?

I calculated its impact based on 2008 IRS data. Using 2008 income data and these tax increases, I come up with about $90b in increased revenue. My math can be checked here.

What if we get even more aggressive, employing a tax increase that looks like this:

Income	Tax Increase
$200,000 under $500,000	3%
$500,000 under $1,000,000	5%
$1,000,000 under $1,500,000	10%
$1,500,000 under $2,000,000	11%
$2,000,000 under $5,000,000	12%
$5,000,000 under $10,000,000	13%
$10,000,000 or more	14%

Well then we do indeed breach my "$100b" ceiling. We'd pull in about $124b in additional revenue. But in today's climate, it would take the mass deployment of pitchforks and torches against congressional offices across the country to pull of these rates. And though 25% higher than my off-the-cuff guess, $124b isn't all that much more help than $100b when you've got deficits well in excess of $1,000b. And this is based on 2008 income - as I pointed out in that prior post, it appears we're losing revenue mostly among the wealthy, so current revenues would probably be less.

I'm not saying we shouldn't tax the rich more heavily - I doubt these more aggressive rates would reduce economic activity much - though I might lay off the <$500k incomes.

Conclusion: My putative $100b dollar ceiling on additional taxes from the rich might not hold true under every possible scenario, but I do not admit that it is "ridiculous."

And, by the way, now that the 2008 data is available, we can compare 2007 to 2008 taxes by income to see whether my hypothesis - that the big hit in tax revenue was from less income among the wealthy - is falsified.


Well it sure wasn't falsified - the impact of taxes on the rich in this recession are clear. Of the $84b loss in tax revenues from 2007 to 2008, 72% of it came from incomes over $1m. And it wasn't due to shirking - at each 1,000,000+ bracket, the income drop was larger (albeit only slightly) than the tax drop. Unfortunately, since it appears the 2008 data was only just published, we might have to wait another year for the 2009 numbers, where the revenue loss was even worse.