Your Lying Eyes

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06 April 2011

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:

IncomeTax Increase
$200,000 under $500,0003%
$500,000 under $1,000,0004%
$1,000,000 under $1,500,0005%
$1,500,000 under $2,000,0006%
$2,000,000 under $5,000,0008%
$5,000,000 under $10,000,0009%
$10,000,000 or more10%

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:

IncomeTax Increase
$200,000 under $500,0003%
$500,000 under $1,000,0005%
$1,000,000 under $1,500,00010%
$1,500,000 under $2,000,00011%
$2,000,000 under $5,000,00012%
$5,000,000 under $10,000,00013%
$10,000,000 or more14%

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.


Anonymous Anonymous said...

Well, at least Cochran didn't call you "insane" which is what he usually calls anyone he doesn't agree with. As I recall, Leonid Brezhnev used to do the same thing. Is the guy who calls himself "gchochran" on the web and throws around all these snotty comments really the same smart guy who wrote "The Ten-Thousand Year Explosion"? I'm starting to doubt it.

April 07, 2011 1:45 PM  
Blogger ziel said...

I guess you have a point, calling my argument "ridiculous" is in relative terms only a mild rebuke.

April 07, 2011 2:41 PM  
Anonymous Anonymous said...

Interesting analysis--

I'd be interested as well in a response to your analysis by Greg Cochran. If one of his stature (and I do believe he has stature), offers a curt "ridiculous," it seems only fair that he explain why he believes it's ridiculous, particularly after you have offered details that form the bases of your conclusions.

I hope he responds, as I really am interested in both sides of this argument.

April 08, 2011 1:02 PM  
Blogger ziel said...

I don't think Greg would get into an in-depth analysis for something like this, but his seat-of-the-pants judgements are usually far better than the conventional-wisdom assessment of things. I assume he was thinking in terms of what an aggressively progressive tax could extract is a polity where the rich had little influence.

If we were to get really, really, aggressive, and implement marginal rates in the 60% range, using 2008 income, sure, that could bring in more than 100b. But even 60% marginal rates on income over 1 million would only rake in $190b (on 2008 incomes) - and that just ain't gonna happen.

April 08, 2011 9:29 PM  
Blogger ziel said...

"could extract in a polity where the rich had little influence.

April 08, 2011 9:30 PM  
Blogger gcochran said...

As far as I can tell, everyone who isn't bought and paid for estimates the revenue increase that would have resulted from letting the Bush tax cuts expire as originally scheduled would have been between 200 and 300 billion - closer to 300. The Congressional Research Service, for example, projected that blocking expiration would result in a deficit increase of 2.9 trillion over ten years, with an additional 600 billion in debt service costs.
Excuse me: that was their first-cut estimate. Their revised estimate, which took into account the inflation-indexing of the AMT as well as the debt service costs, projected an additional 5.8 trillion. The Congressional Budget Office comes up with a similar figure.

Naturally, virtually all of that would been extracted from the rich.

Do I think that the tax rates that existed in 2000 are in some sense possible? Well, generally, I tend to think that anything that
has already happened is possible. For that matter, I actually remember tax rates that were considerably higher than the 2000 rates. Oddly enough, GNP growth was a lot higher then than it is now.

On the other hand, It's fair to say that it would be politically difficult, since big money rules the roost. To some extent that is a
matter of perception: anyone with a match or a revolver is more equal to a billionaire than people realize today.

I called someone insane who thought that Jonah Goldberg and Wretchard were worth reading. After considered thought, I'll stick with that assessment.

April 09, 2011 12:02 PM  
Blogger ziel said...

Naturally, virtually all of that would been extracted from the rich.

It depends on what you're calling the rich. Assuming people making less than $200k are not rich, I don't think I agree. The indexing of the AMT affects people making less than 200k. Then there's the child care credit - I'd guess most of that is on people making less than 200k. So if making 150-200k is rich, then you're probably right.

This CSM article lays out the Treasury's estimated impact of the Bush tax cuts - not real nice in a table of course, but adding up all the numbers in the article, I come up with $363b, which is in line with the $370t ten year estimate.

$157b is attributed to reduced marginal tax rates. When I plug the increased rates into my spreadsheet, I come up with about $190b - and I can't figure out how they only come up with 157. But the higher incomes are pretty easy to figure - and I can't come up with much more than $80b on incomes over 500k based on the increase marginal tax rates.

As far as the other pieces, some of them fall on "the rich", some on the middle/upper middle clasee (under 200k) - but two biggies - the AMT indexing and the reduction in the marriage penalty - fall squarely on the sub 200k incomes, and they account for about $100b. Other big chunks are child care exemptions - that's 26b - that sure sounds like an under-200k benefit to me.

My rough guess is that more than $200b of that 163b is from incomes under 200k - I'll try to itemize this better but I'm thinking probably less than 150b is from the rich (over 200k income).

April 09, 2011 9:25 PM  
Blogger ziel said...

$200b of that 163b

I of course meant "$200b out of $363b".

April 09, 2011 9:27 PM  
Blogger gcochran said...

Note the changes in taxation of dividends and capital gains. Until 2003, dividends were taxed at the same rate as other income, with a maximum rate of 35%. After 2003, the maximum rate for dividends dropped to 15%. If the Bush tax cuts had expired, this would have jumped back up to 35% again. That's a big change.

The maximum capital gains rate dropped from 28% to 20% in 1997: Bush dropped it further, to 15%.

Capital gains + dividends are concentrated in the top 1% (who receive more than half of all capital income), and account for a significant fraction of their income. I'm thinking that this might screw up your spreadsheet.

Naturally, the lower rate for capital gains created an incentive for people to find ways of turning earned income into capital gains. The simplest way of doing this is old-fashioned lying: you probably remember the backdated options story.

There have been less official changes, too. The Feds don't try very hard to collect corporate income tax anymore. Audits have decreased. particularly for large corporations: in 2005 the agency audited 43 out of every 100 big-company returns, but by 2009 the audit rate had fallen to 25 out of every 100. 20 years ago, two out of every three large corporations were audited by the IRS.

April 09, 2011 10:11 PM  
Blogger ziel said...

Naturally, the lower rate for capital gains created an incentive for people to find ways of turning earned income into capital gains. The simplest way of doing this is old-fashioned lying: you probably remember the backdated options story.
No, the CSM article valued the capital gains cut at 35B - I assumed that all went to the rich, but it's not that significant overal.

As for lying and cheating, well there's little official data out there for us to judge that. Overall, I wish the data were presented in a way that alllowed us to get a finer understanding of what's really going on.

My overall feeling is that the normal federal tax take is 18-19%, but that seems really tough right now, and that a general tax increase - not just for the rich - will be needed to get there. But a big tax increase for the rich is no doubt needed as well.

April 09, 2011 11:08 PM  
Anonymous Anonymous said...

I'm not sure who's right here, but the debate seems close enough that Ziel's argument hardly warrented the word "ridiculous".

April 11, 2011 11:37 AM  
Blogger gcochran said...

In 1970, the top 1% of taxpayers paid an average of 47% of their income in federal taxes. In 2004, about 30%. During that same period, their share of national income went from about 10% to about 20%.

So is it possible for the Feds to get quite a lot more money out of them? Say, 50% more than today? Obviously. The top 1% could afford it in 1970, and they could afford it more easily today.

Since the top 1% pull in more than 2 trillion, you have to think that the Feds could raise considerably more than another 90 billion from the top 1% - if they wanted to.

Stones they are not. That kind of increased taxation would be politically difficult, sure, but certainly possible.

April 11, 2011 6:30 PM  
Blogger ziel said...

The top 1% pay more like $350+ billion in taxes, but I would agree that if we taxed them all at a 47% (vs. the 35% today or the 39.6% of the '90's) marginal rate, we would get another $170b out of them.

April 11, 2011 10:45 PM  
Blogger gcochran said...

47% wasn't the marginal rate for the top 1% in 1970: it was the _average_ rate. The top rate in 1970 was 71% .

April 13, 2011 2:22 PM  
Anonymous Anonymous said...

OK, are we talking about the Bush tax cuts, or are we talking about the maximum amount of money that could possibly be squeezed out of the top 1%? There's quite a difference. And gcochran, are you really suggestion that high tax rates increase GDP? I don't think that even hard-line Keynesians believe that anymore.

April 13, 2011 3:10 PM  
Blogger gcochran said...

You'd think that low marginal tax rates would increase real GNP growth: but judging from experience, they don't.

This doesn't prove that low rates hurt growth: maybe other factors predominate.

You have to look at the record. There's no sign that the Bush tax cuts, which set the lowest rates in my lifetime, had any positive effect at all.

I have some ideas on the real reasons for the slowdown in growth and suspect that the explanation is not simple. Maybe I'll opine on this sometime.

April 13, 2011 10:19 PM  
Anonymous Anonymous said...

I'd be interested to hear your thoughts, in all seriousness. Whatever the problem is, it certainly isn't being addressed by either major party.

April 14, 2011 9:02 AM  
Anonymous Anonymous said...

"In 1970, the top 1% of taxpayers paid an average of 47% of their income in federal taxes."

Yes, indeed they did. However, we didn't live in a global economy. Investors, entrepreneurs, big money movers and industrialists stayed here with their money for good reason.

Many of those reasons no longer exist.

April 14, 2011 10:26 AM  
Anonymous PT Barnum said...

The top 1% pay more like $350+ billion in taxes, but I would agree that if we taxed them all at a 47% (vs. the 35% today or the 39.6% of the '90's) marginal rate, we would get another $170b out of them.

Ignoring the fact that most of rich peoples income is capital gains, and is not taxed at "35%", is just pretty much lying.

Your tactic seems to be repeating a lie over and over again until the person is worn down.

Your one of those guys who ignores Social Security taxes when talking about government income right?

Despite the fact that Regan EXPLICITLY and OBVIOUSLY financed his rich person tax cuts by jacking Social Security through the roof.

April 26, 2011 3:44 AM  
Anonymous Anonymous said...

The rich are a moving target. They won't bend over and pay these fantasy rates.

At an extreme, they'll simply relocate (the Caymans are beautiful) and outsource, and/or get their accountants cracking to find loopholes.

It has been said they pay no tax now. This is obviously false, because the tax code is in orderly black and white for all to see.

July 06, 2011 9:26 AM  

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