90% Marginal Tax Rate Explained
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on 1/6/11 at 6:00am
We debate tax policy quite a bit here on WSO, and it is often mentioned that marginal tax rates were as high as 90% during the Eisenhower administration. I ran across this interesting explanation of enormous tax rates and how modern economic theory (including the Austrian theories I so often espouse) are junk economics. Michael Hudson brings up a lot of interesting points, especially about how loopholes were written into the tax code to benefit the rich as early as the 1920's, and how those loopholes have led us today to be heavily indebted and have an average holding time of 22 seconds for stocks. I'm interested to hear what you guys think. Have we been dead wrong about tax cuts for the rich?
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Even if a lot of modern
Even if a lot of modern economic theory is junk science, that doesn't mean that super-high tax rates (on anybody, rich or poor) will not have serious consequences in terms of production/output. In fact, the argument doesn't depend on modern economic theory, but rather the simple economic theory that's been around for centuries. If someone only keeps 10% of their income by becoming an investment banker, entrepreneur, or CEO then why wouldn't they take a job that's much less stressful, offers significantly more leisure time, with only minor cuts in pay? While I don't support all kinds of tax loopholes for the rich -- or poor, or middle class, or anybody else -- I also don't support super-high tax rates on the rich. As far as I can tell, such proposals rarely stem from anything other than populism and envy. Legal scholar Richard Epstein eloquently addresses many of these issues in this podcast.
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econ - are you saying that
econ - are you saying that the higher tax rates in the upper brackets disincentives work (or at least work at that level)? I'm not disagreeing, just asking for clarification's sake. I know you have a more extensive background in the field so I'm curious.
If I had asked people what they wanted, they would have said faster horses - Henry Ford
a lot of the loopholes are
a lot of the loopholes are part of government policy to stimulate growth, spending, investment or any other government priority of the time. a good example of that is cca allowances in Canada that are constantly changing to reflect investment decisions the federal government wants to encourage.
at the end of the day higher tax rates for the rich are, as econ rightly pointed out, a disincentive for ambitious, hard working, risk-taking people to use the skills and qualities they have to improve the global economy and through the spending of these taxes, an incentive for risk-averse, lazy people to continue their ways and enjoy a higher quality of life in the short-term. Flat rates for income taxes is the closest thing to "fair" taxation other than a pay per use policy for government services.
I only hope that members here
I only hope that members here will be able to have a honest discussion about the tax rates/debates.
First thing, I spent couple Summers in the tax group in the firm I worked for; there are so many loopholes in tax system, rich, poor, rich corporations, small corporations-and etc.- that it makes tax planning pretty hard to do. I think it is an unnecessary burden on companies to always try to work the system to get nice returns; and get this 90% of the returns are not even verified by the IRS because they do not have enough staff to check them.
One more thing: when it is said that the highest bracket is 35%, it means usually that the tax paid in average is close to 28-30%; you would need to add all brackets.
Therefore, if a company does its due diligence, it should pay about 20% of its entire gross profit.
That said, if the tax code was reformed to remove those loopholes and shenanigans, it would have been better to have the highest tax bracket at 30% and hopefully in average corporation would have paid 25%. Companies would have paid less in tax preparations, the IRS would have done a better job finding cheaters.
As far as the tax rate for the rich, I don't see how we always want to combine people making 500K and small business owners. I know that when you have a business with employees you are required to have an EIN for each employee, thus my thought: why not giving the special rates to people who pay employees, and keep the greater rates on richer people?
The fact and the matter is, it is easier for someone making $1M to pay $300K in tax than someone making $30K to pay $9K in tax.
I don't think anyone
I don't think anyone disagrees that it's 'easier' for the guy that makes 1mm to pay 300k than it is for the guy that makes 30k to pay 9k as those are both ~30%. I think the big problem people have is that about half of this country pays zero income tax.
If I had asked people what they wanted, they would have said faster horses - Henry Ford
jeremydos you sound like an
jeremydos you sound like an accountant man, in which case you should be happy that there are so many loopholes otherwise most of the big 4 firms would be laying off thousands from its tax practice, arguably one of the best performers at an accounting firm.
Not that something like this
Not that something like this would ever happen, but in my opinion, the ideal tax system would be:
Pay nothing on the first $40,000.00 earned, and then pay 25% of everything above that. That way people with low incomes aren't burdened with taxes at all, and someone making 100K still gets to keep 85K. The very high earning people will never have to turn over more than a quarter of their earnings, and so they'll have less of an incentive to try to "cheat" the system by evading taxes or finding loopholes.
-MBP
everythingsucks wrote: Not
Not that something like this would ever happen, but in my opinion, the ideal tax system would be:
Pay nothing on the first $40,000.00 earned, and then pay 25% of everything above that. That way people with low incomes aren't burdened with taxes at all, and someone making 100K still gets to keep 85K. The very high earning people will never have to turn over more than a quarter of their earnings, and so they'll have less of an incentive to try to "cheat" the system by evading taxes or finding loopholes.
So you've read Friedman too huh?
If you include removing all but one deduction (costs to secure employment) you just described his negative income tax plan.
If I had asked people what they wanted, they would have said faster horses - Henry Ford
Correct me if wrong, but if
Correct me if wrong, but if you hold a stock for 22 seconds, it's short-term capital gains--and STCG tax = income tax. Therefore his theory about speculation due to 15% capital gains tax collapses, no? Maybe not completely, but substantially...
happypantsmcgee
Not that something like this would ever happen, but in my opinion, the ideal tax system would be:
Pay nothing on the first $40,000.00 earned, and then pay 25% of everything above that. That way people with low incomes aren't burdened with taxes at all, and someone making 100K still gets to keep 85K. The very high earning people will never have to turn over more than a quarter of their earnings, and so they'll have less of an incentive to try to "cheat" the system by evading taxes or finding loopholes.
So you've read Friedman too huh?
If you include removing all but one deduction (costs to secure employment) you just described his negative income tax plan.
Haven't read Friedman. I'm a complete economics noob and have never taken a single course. Intuitively, this system seems more fair to me.
-MBP
It's kind of wierd - most of
It's kind of wierd - most of theories that our civilization bounces around are quite dated, or rehashes of older theories but still more or less effective for keeping the system going (more or less, lately.....less) but there has never been such a highly developed level of globalization. New circumstances lend themselves to new theories: I'm curious what the next decade of economics (and life in general) will come up with.
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I don't agree in exempting
I don't agree in exempting the first $40,000 of gross income. The tax base should be as expanded as possible with as many people as possible contributing to federal revenue. We have far too many people--about 50% of the country--that pay no federal income tax. Therefore, half the country has an incentive to vote for people who support the welfare and entitlement state. To say that it's "fair" to exempt half the population from contributing to the Treasury yet allowing them to vote for tax increases on others is actually what's unfair.
Good tax reform should include mass simplification of the tax code, which includes lower marginal rates with far fewer--if any--deductions and the tax base should be as expanded as possible.
To the point about historical marginal tax rates: it is rarely pointed out that at the time we had 90% brackets, the inflation-adjusted highest bracket was in the neighborhood of $5-$10 million and there was a far smaller proportion of citizens who earned that kind of wealth at the time compared to now. Bureaucrats never sunset laws or adjust them to inflation (see alternative minimum tax).
Dogs react to punishment,
Dogs react to punishment, children react to punishment, but people think adults are happy to keep working as more of their reward is stolen. This isn't economics, it is common sense. Taxes are wages taken by the government and inefficiently spent and wages are what you keep and efficiently spent. Pretty simple. Cut taxes and people will spend or save more. Both of those are better than letting the government have your money.
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@Virginia Tech 4ever: The
@Virginia Tech 4ever:
The fact of the matter is that rich people already pay most of the tax. The average person making 40K probably pays no (or so little that it doesn't make a real difference) tax after factoring in all the deductions. Might as well simplify the system so that by law, they are exempt from paying any taxes under 40K of income. This way, higher earning people also don't have to pay any tax on the first 40K. I'll make about 140-150K this year, and I think it is complete BS that i'll be paying almost 50K to the government. Under my proposed system, I would (happily) pay half of that.
I do agree that people who are not paying taxes should not have the power to vote for tax increases on others though. It's similar to a population of straight people voting on whether or not gay marriage should be allowed. It really doesn't affect them, so they shouldn't have the power to decide the outcome.
-MBP
So what you're saying is that
So what you're saying is that we have a bad system now of exemptions and deductions on the first $40,000 anyway, so why don't we just codify it into straight-up law rather than beating around the bush? I disagree. I don't think you codify garbage into permanent law. In any case, a reduced tax base should not be part of tax reform because tax reform is fundamentally connected to the deficits and national debt. Any decrease in the tax base will simply exacerbate the problem with government spending and entitlements because politicians are being held accountable by fewer tax payers.
The premise that debt puts
Would you be happier with
-MBP
everythingsucks wrote: Would
If I had asked people what they wanted, they would have said faster horses - Henry Ford
You don't think it's fair
happypantsmcgee
-MBP
How much should a billionaire
Virginia Tech 4ever
-MBP
The 40k nothing and then 25
Virginia Tech 4ever
-MBP
monkeysama wrote: The 40k
-MBP
The problem isn't high tax
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everythingsucks
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Aggravate - a level headed
Aggravate wrote: I think we
If I had asked people what they wanted, they would have said faster horses - Henry Ford
Aggravate - maybe I'm being
-MBP
everythingsucks
If I had asked people what they wanted, they would have said faster horses - Henry Ford
Aggravate, I agree with much
happypantsmcgee
-MBP
I am sorry, giving the
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everythingsucks
My whole life I have looked
Men are so simple and so much inclined to obey immediate needs that a deceiver will never lack victims for his deceptions.
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I think even on the laws
My style? Get real. The guy
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11:24, I just added "like a
So who's going to fix
Hey aggravate, thanks for
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Aggravate wrote: So who's
-MBP
ANT wrote: I am sorry, giving
You know what is politically
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Aggravate, how can you argue
mike55555 wrote: My whole
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