Tax the Rich-- Lots of Cash in an Undertaxed Group
New data from the IRS ($$ from Wall Street Journal) indicate how much cash the extremely wealthy are making-- and how little they are paying in taxes compared to middle class families. Progressives need to consistently emphasize this reality and the fact that all the priorities we care about-- health care, transit, jobs, energy independence -- can be funded just by making the very wealthy pay their fair share.
How bad is it? Just the highest-income 400 taxpayers by themselves made $86 billion in income last year-- an average of $213.9 million in income apiece in just a year. And they paid just 18.23% of that in taxes-- far below the 30% they were paying back in 1995. That means that increasing the taxes paid from the over $70 billion in after-tax income of this tiny group could fund a range of priorities just by itself.
Since the very wealthy don't pay social security taxes on all but a miniscule portion of their income, that 18.23% of income if far less than the taxes paid by many middle class families who get most of their income in wages taxed at 28% marginal tax rates plus the 7.65% paid in payroll taxes, rather than the 15% rate owed by the wealthy getting their income from capital gains.
If you go beyond just those 400 richest income makers and include the even broader group of high-income folks making more than $200,000 per year, the revenue gains are massive. A recent proposal by Ways and Means Chair Charlie Rangel that would impose just a 4% surtax on income over that level -- 4.6% over $500,000 -- would raise $831.7 billion in revenue over ten years. That's a pretty modest change that doesn't even reverse the Bush tax cuts, so adding higher surtaxes at the very wealthy level can obviously raise far more to fund health care and other priorities -- all without adding new tax burdens on average families.
With working families paying income taxes, social security taxes, sales taxes, property taxes and other daily taxes, most would be outraged if they focus on the low tax rates paid by those wealthiest taxpayers. The Bush years have been bad for working families in many ways, but the flip side is that the inequality that has been fostered means that there are now easy opportunities to raise revenue in politically painless ways.
Comments (17)
Here's my solution:
1. Lower marginal tax rates (but preserve a progressive tax structure)
2. Eliminate all deductions except for a modest standardized deduction
3. Tax capital gains and all forms of income the same, except for an inflation adjustment on capital gains
4. Treat liquid estate income like any other income
5. Amortize taxes on illiquid estate income and defer taxes indefinitely on undeveloped land as long as it remains undeveloped
6. Require all businesses to be incorporated and business income and assets to be separated from individual income and assets for tax purposes
March 5, 2008 7:34 AM | Reply | Permalink
I probably should have added a seventh reform--eliminating the payroll tax and instead funding Social Security (and other social insurance programs) by reserving (in some kind of trust) a large enough percentage of overall tax receipts to fund anticipated current and future benefits.
March 6, 2008 7:07 AM | Reply | Permalink
. . . $200,000 per year . . . the very wealthy level Nathan Newman
Hmm.
March 5, 2008 10:27 AM | Reply | Permalink
March 5, 2008 10:46 AM | Reply | Permalink
You would have greater credibility with those same working people if you admit they pay the full 15.3% of their income into Social Security/Medicare. The accounting trick of having the employer send in half the money does not alter the fact it is the labor of the worker that produces the money. The employer gets to keep ALL the money by firing the worker and workers know this. That middle income worker pays a 43.3% marginal rate to the federal government, assuming none of the special tax protections added on by the Bush tax cuts for having too many children, etc. That 43.3% rate is before state and local governments get their hands on the worker's paycheck - it often goes over the 50% number when the state income taxes are added. Of course, giving the average worker the same rights to their retirement (Social Security) as the average Public Employees Retirement Association (PERA) worker enjoys would help to change that perception. PERA workers do not pay into Social Security, just their private system, and they have legal rights the average Social Security taxpayer does not. Giving this same level of protection to the average worker might lower perceived marginal tax burden by the amount going into the retirement program - something no one wants to address. This is precisely what Al Gore proposed with his "lockbox" on Social Security. The fact is that younger workers are very intelligent and do not perceive they will receive any of their 15.3% back that they pay on their first and last dollar of income. It is pure tax to them, plus the federal, state, and local income taxes that come of the top before they have even started paying taxes on the consumption side. Yes, the reality may be that the very rich have low marginal rates, especially compared to the middle class worker, but the very rich are also savvy enough to move their money into international markets and other currencies. Middle Class workers rarely have the knowledge, skills, or CASH t make these kinds of changes - which is why the tax burden falls so heavily on them - it is where the REVENUE comes from. Tax the rich is a great campaign slogan, but your own numbers indicate it does not make a tremendous difference in the revenue the government needs for programs.
March 5, 2008 10:55 AM | Reply | Permalink
Gov Spitzer made much the same point yesterday when he proposed boosting the top rate in NY by 1%. This would bring in an estimated $3-6 billion while only affecting 3-4% of the taxpayers.
Naturally the Republicans are against it. Is Bruno really in this tax bracket?
The secret of being rich is that you have lots of money, why do people find this so hard to understand...
March 5, 2008 12:34 PM | Reply | Permalink
Offensive . . . the IRS statistics are for income tax only and don't include FICA taxes, which Newman mentioned and which significantly increase the overall federal tax burden on middle class people. If you account for FICA, households earning $30,000 to $100,000 pay roughly 15% of their adjusted gross income in federal taxes (below that the effective federal tax rate is closer to 10%). The biggest federal tax burden falls on households earning around $100,000 and above. These households typically pay around 20% to 25% of their adjusted gross income to the federal government. The burden begins to decline for the super rich, however, because so much of their earnings are in the form of capital gains, which are taxed at lower rates.
The upshot is that we have a progressive tax structure, but the degree of progressivity is fairly small and the federal tax rate on high-income earners (particularly those with large capital gains) is quite small by the standards of most Western industrialized countries and by our own past standards. Personally, I'm not for soaking the rich, but I think a bit more progressivity would significantly benefit the majority of tax payers with only minor effects on the spending and investing habits of the very rich.
March 5, 2008 1:29 PM | Reply | Permalink
"If you account for FICA, households earning $30,000 to $100,000 pay roughly 15% of their adjusted gross income in federal taxes (below that the effective federal tax rate is closer to 10%)."
Huh? The current "escape" amount for FICA is $102,000 with no limit on Medicare, giving a tax rate of 15.3% just for payroll taxes alone. Federal income tax is on top of that amount. Unless that "household" has significant income from non-wage sources, they are paying closer to 25% assuming they re only in the 10% bracket for income (15.3 + 10). Again, a significant number of children might reduce the income tax, but has no affect on payroll taxes.
March 5, 2008 7:55 PM | Reply | Permalink
RS, the individual portion of FICA is 7.65%. You're adding in the employer-paid portion to get to 15.3%. That's not totally unjustifiable if you assume that the employer tax reduces wages, but that employer-paid portion isn't paid by the individual. According to IRS statistics, individuals in this income group pay around 8% or 9% of their AGI in income taxes on average (about 7.6% for taxpayers between $30K and $50K and about 9.2% for taxpayers between $50K and $100K). Adding the 7.65% payroll tax to that income tax percentage gets you to a 15% ballpark for total federal taxes (actually it's slightly higher than 15%, but I was rounding to multiples of 5 for simplicity). Of course, individual taxpayers will have different situations. A lot of that low average has to do with the mortgage interest deduction and deductions for children. Taxpayers without those deductions pay significantly higher rates--and way more than the average rates of billionaires. Our tax system "punishes" wage earners (relative to investors) and those without property, assets, business expenses, or children. By doing so, it does favor the wealthy in many ways. That's why I argued above for reducing tax rates overall, but eliminating deductions and treating capital gains and income the same. Those changes would remove the major biases from the system and result in a more equitable distribution of the tax burden.
March 6, 2008 7:05 AM | Reply | Permalink
Everything you posted is true. I include the total amount for FICA because the workers effort produces the money that pays both halves of the tax - self-employed people see this more directly as they pay the full 15.3%. Having the employer send in half the money is just an effort to make the worker think he is paying less.
Yes, single people without dependents pay most of the taxes. My current marginal rate is 43.3% to the federal government alone in income and payroll taxes. The challenge of the single-payer universal health care proposals is to not increase tax burden on these people too much in an effort to provide further subsidies t people with dependents. The greater the taxes on singles, the incentive to either hide income or simply reduce income. Revenue begins to drop as a result. I happen to live in a state with no income tax, though I pay significant property taxes for services I do not use. For people in my situation in income tax states, many are already above a 50% marginal rate. Giving them some ownership of the FICA taxes they pay could reduce the perceived marginal tax rate, but raising that number to near 60% is going to cause a backlash - probably a silent one - but still a backlash. Working only part of the year, taking really extended vacations as many in Europe currently do, starts to look really attractive when you are keeping less than half the dollar you earn while families with excess dependents are pretty much limited to that 15.3% payroll tax.
March 6, 2008 11:27 AM | Reply | Permalink
I tremble at the thought that had marginal rates been higher over the past few years Stan O'Neill might have spent less time in the office and more time on vacation.
March 6, 2008 12:12 PM | Reply | Permalink
RS, I think we're pretty much in agreement. If you combine the federal, state, and local tax burden (including payroll, income, sales, property, and excise taxes), wage earners without significant capital gains or deductions get hammered, while billionaire investors with lots of capital gains and lots of deductions pay a much smaller percentage of their earnings in taxes. It's hard to imagine how a tax system that takes nearly 50% of the gross income of someone making $80,000 and only about 20% of someone making $80,000,000 makes much sense.
But is there anyone in our current group of candidates who is looking at this issue seriously?
March 6, 2008 4:32 PM | Reply | Permalink
No. I think they have a problem they can't resolve. It is easier to get money from we working stiffs as our money is not "mobile" in the international markets and through differing currencies. Wealthy people can move their money easily to more favorable locales and may actually keep most of it out of the US to avoid currency hits or taxes. I think if they do too much to raise the taxes locally, it would just force more money out of the country. In such a liquid situation, taxes become a competitive issue amongst jurisdictions, much as they are amongst local jurisdictions within the US. Just look how much local governments will discount or completely forgive taxes to attract a business to their county or town. They give the business owners huge breaks, but then go after the people working for the business in an effort to recover revenue from the little guy who can't fight them.
March 6, 2008 5:38 PM | Reply | Permalink
No one is ready for it yet, but globalization is going to require some kind of stronger global regulatory system to check the power of global corporations (and global individuals with billions in assets). In the meantime, though, you've got billionaires paying just 18% on earnings they actually report (i.e., that they don't shelter). Increasing tax rates may decrease reported earnings to some degree, but maybe not as much as one might think, since people with billions to invest need to maintain pretty heavy presences in well-regulated and relatively transparent major economies.
March 7, 2008 6:26 AM | Reply | Permalink
To me Newman wasn't clear, deliberately so I think.
FICA is a not a progressive tax. That should be said up front. It's like a sales tax; you pay more, you get more.
Redistributing wealth through progressive taxation is probably the best way to take the hard edges off capitalism while retaining its benefits. But you ought to be clear about what you're doing. Using words like "fair" just muddle understanding.
March 5, 2008 2:33 PM | Reply | Permalink
Ellen,
Yes, it certanly might do less harm for people such as this to spend more time off the job. As we have discussed, he is probably in a lower marginal tax bracket than most of us "middle" income workers without dependents. He is likely in a 15% bracket through a capital gains strategy as many investor type people tend to be. Certainly a better deal than the 50% bracket many of us currently experience!
March 6, 2008 2:43 PM | Reply | Permalink
of course the democrats will screw this up when they try to sell this proposal.
For one, they'll use confusing jargon and nuanced hyperbole.
second, they'll lump in those who are not rich, 500K per year wage earners with the truly wealthy, e.g. someone who earns 50MM per year.
It angers me how often they lump together people who make say 500K a year with someone like Bloomberg or Larry Ellison; the earnings difference is so great, it's akin to lumping together earners who make minimum wage with those who make 100K
July 28, 2008 9:16 AM | Reply | Permalink