90% Marginal Tax Rate Explained

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.

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.

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 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 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.

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 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.

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...

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.

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.

@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.

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 the brakes on the economy, and that excess national debt is a disincentive to savings makes sense. Obviously something happened, to turn the greatest economy the world has ever seen into a bonified shit show..Although I don't believe taxing should start with those making 250k, I think those in the stratosphere need to pay their fare share, being that a significant portion of their wealth has been derived through a subsidy in some form or another. If not, watch out because populism might begin to rear it ugly head.

Current economic policies that subsidize radical speculation are corrosive to the American economy and stifle real investment. A significant obstacle however is that...
When buying and selling are controlled by legislation, the first things to be bought and sold are legislators. P. J. O'Rourke So get on board and lets ride this thing till the wheels fall offf!!jk

Would you be happier with this system?

0 - 40K: 10% 40K+: 25%

This ensures that everyone is paying something, but to me it seems like someone earning 35K a year with a family to support would find even 10% to be a huge burden. That 3500 dollars can go very far in their life. It could be the difference between being able to afford braces for their kids or not. I don't think it's fair to deprive them of that, even if the alternative fosters a sense of apathy toward government spending.

You don't think it's fair that voting citizens contribute to the revenue and operations of their government for which they receive services? There's obviously no way to debate this because we have a fundamental disagreement about what "fair" is or isn't.

How much should a billionaire be forced to pay? Any answer is arbitrary. The correct answer is "something".

The 40k nothing and then 25 percent doesn't make a whole lot of sense. It's regressive on middle income salaries. For example, 25 percent margin is a lot harder on someone making 50k than 150k. That extra 2500 might make a huge difference to the family making 50k, especially if they have 3 kids.

I like an income based approach where we tie the marginal tax rate to the Gini coefficient (http://en.wikipedia.org/wiki/Gini_Coefficient).

The problem isn't high tax rates in themselves, it's the process of going back to them which would seriously hurt the economy. Being used to the current rates, even letting the Bush tax cuts expire will hurt the economy unless we are experiencing very strong growth to begin with. In the meantime, we can focus on streamlining the tax system and making things tougher on K Street that has been bending over the American taxpayer for decades now. Guys like Darrell Issa who are asking business what regulations should be cut should be tar and feathered on the spot.

professional traders will report this income as trading business income = regular income, not capital gains (short term or otherwise). they will pay the normal income tax rate on this income.

fairness of tax rates notwithstanding, this guy is a marxist quack. he's espousing the labor theory of value and he wants to tell us about "junk economics." c'mon.

I strongly disagree with the notion that the money you get from land ownership belongs to everyone and not the person who owns the land.

I also find it silly that the guest speaker is saying how a pro-land tax politician was the opposite of a socialist because he only wanted to heavily tax land and the revenues derived from it. Taxing rental revenue at 90% is only a very small step from total socialization of land such as what the Soviets had.

If you chose to save your money and invest in real estate, you should be able to reap the rewards of passing up Coach bags, fast cars, and expensive liquor.

I think we should try and avoid steering this conversation in the direction of wealth distribution and the eventual 5:1 ratio of libertarian to socialist posting on that subject. Plenty of other threads to hit if that is your thing.

Let me preface my statement with saying that I HATE paying taxes. All kinds of taxes. I'm also in cohabiting relationship with a government bureaucrat that takes every other Friday off, is paid pretty well and wouldn't know what a 45+ hour work week looked like let alone a 80+ one. She knows to not even speak to me during the middle part of April. I do however really like this country and from time to time people have to make sacrifices for it to survive.

That said, the hard question I think you have to ask yourself is "do you want to balance the budget and reduce the deficit?" I do, not just because it appeals to my Presbyterian upbringing but because once we get it under control it will be a lot harder to pass wasteful spending. Right now the deficit and the budget are hitting cartoon numbers, to the point where nobody cares about increases because its attained a level of "biggness" that nobody cares about marginal movements.

To get this thing under control we have a choice of raising incomes, cutting spending or some combination of the two. Budget is 3.8 Trillion and income is 2.5 Trillion, so we have a loss of 1.3 Trillion (rough numbers). Of that 3.8 Trillion 70% is spent on Defense (900 B), Social Security (730 B), Medicare (490 B), Medicaid (300 B) and interest payments (250 B). I'm sure there some waste in all those programs, most of all defense (if you want to argue that point with me, send me a PM I can talk for days about waste and worse misallocation that gives POGs golf courses at the expense of body armor for grunts), but for the most part that stuff we have to pay. In no situation is the American voter going to elect a majority of officials that will do away or cut those above programs. So if you buy that, we are still in the red if you cut out the remaining 30% of the budget which would include all the infrastructure, education, disaster relief spending in addition to government organizations that I think are important (Intelligence, Department of State, Department of Justice, EPA, etc). So what are we suppose to do? We have to raise taxes and taxing households making under 50k a year isn't going to get us there. The meat is in the top 1% and corporations that avoid paying the majority of taxes. I'm not arguing whether it is right or wrong for the government to go after that money but eventually they have to go there if the objective function is to reduce the debt or at the very least balance a budget. Or we disenfranchise anyone over the age of 40 so we can abolish SS, Medicare, Medicaid and become isolationists. I honestly don't know which option is more politically feasible.

Aggravate - a level headed discussion about our tax policy and deficit problems. SB for you!

Aggravate - maybe I'm being naive, but don't you think that increasing the tax brackets on corporations and super high earners will just encourage them to find newer and more innovative ways to get around paying taxes? And then the IRS will need to employ even smarter and more expensive people to counter this? I honestly think that if very high income earning people are taxed a fair amount, say 25% of their income, then they wouldn't bother with tax evasion or whatever, and government revenue might even increase. With a simpler system, it would also be a lot less expensive for the government to enforce the rules, and in turn, spending would go down.

Aggravate, I agree with much of what you're saying as I am a deficit hawk. However, balancing the budget is not absolutely necessary. So long as the GDP grows faster than or at the same rate as the federal deficit, we can go along pretty well given that by historical and industrialized world standards, our national debt is not yet out of control compared to overall GDP. The problem is that spending is fundamentally out of control, growing at 5% at normal clips and at 20+% in recent years. Even at 5% annual spending increases, the long-term outlook for our debt picture would be bleak given that 3% annual GDP growth is pretty good and to be expected from an advanced economy.

The problem is SPENDING. The problem is NOT revenue. And raising taxes, in fact, would be a drag on the economy, reducing overall GDP growth and exacerbating the debt problem (again, the absolute deficit is irrelevant in a given year). When government grows a minimum of 5% each year and GDP grows a max 3%, your issue is problem of expenditure, not revenue.

I am sorry, giving the government anymore money will only lead to more waste. They are addicted to tax revenue. This needs to change. Cut spending and become more efficient. Zero new taxes and the goal should be a continual decrease in taxes.

Government workers should be target #1. No one should get a pension or have these cake jobs, especially not on my dime. Increase retirement age, start scaling back social security payments for future generations, cut DoD spending, cut the fat out of medicaid/care, etc.

I could have an orgasm thinking about the cutting I would do with public schools also.

Any talk on raising taxes is treason in my book. Does nothing to attack the root of the problem.

My whole life I have looked down upon people who made less money than my family. My parents were never rich but they managed to make it to the middle class, maybe upper middle class without a college education, and I was convinced that with a college education I would make it even further. However, that all changed over the last few weeks when my father was diagnosed with emphysema and was told he could no longer do what he does. I will become what I have always hated, a beneficiary of entitlement programs. Sometimes it takes a situation like this to put things into perspective, and look at the world around you. Is Donald Trump's fourth yacht really more important than providing food and healthcare to thousands of children? A 90% marginal tax rate is quite excessive and in the long run would decimate most future productivity and output growth, but the line has to be drawn somewhere to set a basic standard of living for those who are least well off. I transferred out of SUNY Oneonta, and into Dowling College, where I have come to rely on the generosity of others to pay for my tuition. (I'm well aware this is a non-target, despite a few success stories, but it was the best choice given to me at the time given the financial situation of my family and the fact that the FAFSA form is going to take almost a year to accurately reflect the change in income of my parents.)

I think even on the laws currently on the books, execution is not matching intent. I don't think the intent was for corporations to be able to shuffle money made in the US overseas to avoid taxes or the myriad of loop holes that allow individuals to skirt taxes. My first instinct would be to go for cuts as well, but who finds where to cut (government employees?) and how do you get cuts passed through congress when cutting entitlement programs and defense crosses some of the most powerful interest groups and voting blocs?

What do you do to re-organize the government work force so you can replace all the lazy, terrible people with smart ambitious people? Increase pay and standards while firing people? It might work, but would be tough during that transition period because it would still be an awful place to work full of lazy idiots for the new blood. Historically, (over 50 years ago), people in government service were people with a stake in the country (wealthy elite) and it was something they did for a while because they had a sense of duty. People don't have that now, so we'd have to design some kind of other program. I have no idea what that program would look like. Though I've heard suggestions of a public service academy (like the military academies) but doubt it would get the same kind of candidates.

Also, I realize its your style Anthony, but the hyperbolic treason references are getting a bit stale. You called Assange a traitor even though he's not an American citizen (espionage you might be able to argue but not convict on). I know this particular topic gets your really riled up but words have meaning and the implication that anyone advocating tax increases is tantamount to treason is over the top. Personally I think anyone born between 1978 and 1988 who did not serve in the military in the past 10 years puts nothing above their own personal safety and wealth and therefore their loyalty to their country should be questioned and while I'm at it I might as well call them traitors. And their Dad's probably dodged the draft too.

See what a did there?

My style? Get real. The guy who helped Julian is a traitor. I never called Julian a traitor. I think he is an enemy of the state though.

Sorry guys, I apologize for my "hyperbole". Go pay more taxes because the government is now all of a sudden going to take that extra money and pay their bills. I'm a dick for thinking they will just piss it away.

Thoughtful, well worded arguments are nice, but that doesn't make them correct. Sorry for cutting through the verbose and getting to the point. Brevity is a skill you might want to learn.

Stop stealing from people who work and earn.

11:24, I just added "like a Chinese Menu" to my vocabulary

So who's going to fix operational inefficiencies in each government organization? Are you? They might give you a GS-9 and you can make 50k a year. You'd also be in an organization that cannot resists change in all forms and is institutionally trained to spend every dime they have in their budget, lest they get less the following year. Assuming those all got fixed that would just be the executive branch portions of spending. Cuts to all the entitlement stuff is never getting through Congress.

Saying you'd fix the problem by doing things that are politically impossible isn't a solution. Fixing all the systemic problems with the Federal and State governments is necessary but realistically is a pipe dream in the short to medium term. It will have to be a gradual process of cutting spending and raising taxes (or enforcing the spirit of the tax code and removing loop holes). Left in the hands of politicians and the whims of the easily manipulated masses, this will never happen. So basically we are screwed.

Given that reality, I think the only feasible option if you want a balanced budget is to raise tax revenue where we can, while unfair, at least we know any money the government takes in gets spent. Something that is not true of money made by the ultra-wealthy.

Hey aggravate, thanks for proving that socialism is a STD.

You know what is politically feasible? Not raising taxes. I am sorry, all of your BS reasons still does not convince me that raising taxes will do anything but add to government waste. And since when did saving aka investing, become bad for the economy? Get real.

Aggravate, how can you argue with a straight face that there is a revenue problem in the United States? As I already mentioned, the federal government is growing at rates that far exceed GDP growth. Raising revenue will only incentivize more government spending and will actually be counterproductive in bringing the balance sheets back into line.

I’d like to see a flatter (not quite flat) tax with virtually NO exemptions – The one tax I favor is the inheritance tax. I do not see a need for dynastic wealth.

FYI: No exemptions means no exemptions for charitable donations or mortgage interest payments.

Re: Trump’s yacht:

I don’t care about Trump or the super rich. The problem lies in drawing the line between “well off” and truly rich. According to many democrats, Those making over $250K are rich. Ask any 2nd year associate with $100K in MBA debt how rich he feels.

I am enraged at republicans. No one listens. I am against deductions. Eliminate them all. Nothing more than social engineering.

txjustin, what happens if the guy who lied is running against a socialist?

VirginiaTech, I'm not saying that revenue is the problem, I'm saying that cutting costs in the near term isn't going to happen and that the negative effects on the economy of taxing the top 1% are exaggerated. So if you really want to balance a budget, that is a way you could do it feasibly. Would this lead to elected officials just spending that incremental money on top of current deficit spending, I'd bet on it. However, politically it would be more difficult and just maybe it could work out. Bush got away with it because of 9/11, it would have been difficult to increase spending and cut taxes in any other environment starting from a balanced budget.

There isn't $1.3 trillion among the top 1% to marginally confiscate. No idea how you could balance the budget by raising taxes on the top 1%.

txjustin, almost everything you said concerning cutting spending is ridiculously unrealistic.

You're right, Bush tax cut was supposed to cost 3.3 Trillion over 10 years and a decade of estate tax with debt service was about a trillion. So even if you bake in very aggressive assumptions on corporate tax revenue you would only be about three quarters of the way there. Guess I'll have to find something else to tax...

tax inheritance above $10m at 90-100%. problems solved.

Yawn, can we just give the Democrats 100% of what we make so they can fix everything.

Sure, let's tax Rich people because they don't own businesses, invest in companies or consume anything. Let's give more money to the poor so we can increase the sale of cheap beer and scratch off tickets.

Anyone seriously saying we should give this drunk, spendthrift called the government more money is delusional.

Although I generally do not agree with them, I can understand the points that taxes are inherently "unfair" and should be set as low as possible.

However, I have yet to see one logical explanation from those that want to minimize inheritance taxes. If you are truly a libertarian, this is one tax that should go against your beliefs because it sets people from different backgrounds at different starting points. This is an entitlement if there ever was one, given benefits due to being born to the right family. If the poor should not be entitled to benefits, then why should the rich?

Other than that, this is an issue that everyone will have different beliefs on and will never reach a consensus. Trying to claim that your opinions are "truth" and disparaging others is a waste of time.