The “fools gold” of high progressive taxation

California provides an object lesson in why steep progressive tax rates are a bad idea. The state is awash in cash in boom years, and when recessions hit, the funds don’t just shrink. They dry up.

Of course, this is exacerbated by the fact that during the boom years, the politicians shower rich, greedy public employees with payroll, pension, and pork that no state or nation can sustain.

If Obama succeeds in his tax hikes on “the rich,” he will only make matters worse.

Rise of the Super-Rich Hits a Sobering Wall

The relative struggles of the rich may elicit little sympathy from less well-off families who are dealing with the effects of the worst recession in a generation. But the change does raise several broader economic questions. Among them is whether harder times for the rich will ultimately benefit the middle class and the poor, given that the huge recent increase in top incomes coincided with slow income growth for almost every other group. In blunter terms, the question is whether the better metaphor for the economy is a rising tide that can lift all boats — or a zero-sum game.

Only an idiot thinks it is a “zero-sum” game. Language deficiencies or not, at least Bush understood that we have “grow the pie higher.”

Some economists say they believe that the contrasting trends are unrelated. If anything, these economists say, any problems the wealthy have will trickle down, in the form of less charitable giving and less consumer spending. Over the last century, the worst years for the rich were the early 1930s, the heart of the Great Depression.

Other economists say the recent explosion of incomes at the top did hurt everyone else, by concentrating economic and political power among a relatively small group.

“I think incredibly high incomes can have a pernicious effect on the polity and the economy,” said Lawrence Katz, a Harvard economist. Much of the growth of high-end incomes stemmed from market forces, like technological innovation, Mr. Katz said. But a significant amount also stemmed from the wealthy’s newfound ability to win favorable government contracts, low tax rates and weak financial regulation, he added.

You don’t do that by allowing the rich to game the system, but you don’t do it by taxing them too much either. The rich will always find a way to avoid the worst taxes. Only an idiot works to punish them.

In the three decades after World War II, when the incomes of the rich grew more slowly than those of the middle class, the top marginal rate ranged from 70 to 91 percent. Mr. Piketty, one of the economists who analyzed the I.R.S. data, argues that these high rates did not affect merely post-tax income. They also helped hold down the pretax incomes of the wealthy, he says, by giving them less incentive to make many millions of dollars.

Since 1980, tax rates on the affluent have fallen more than rates on any other group; this year, the top marginal rate is 35 percent. President Obama has proposed raising it to 39 percent and has said he would consider a surtax on families making more than $1 million a year, which could push the top rate above 40 percent.

What any policy changes will mean for the nonwealthy remains unclear. There have certainly been periods when the rich, the middle class and the poor all have done well (like the late 1990s), as well as periods when all have done poorly (like the last year). For much of the 1950s, ’60s and ’70s, both the middle class and the wealthy received raises that outpaced inflation.

Yet there is also a reason to think that the incomes of the wealthy could potentially have a bigger impact on others than in the past: as a share of the economy, they are vastly larger than they once were.

In 2007, the top one ten-thousandth of households took home 6 percent of the nation’s income, up from 0.9 percent in 1977. It was the highest such level since at least 1913, the first year for which the I.R.S. has data.

The top 1 percent of earners took home 23.5 percent of income, up from 9 percent three decades earlier.

If it appears that I’m overusing the word “idiot,” blame the article. Who thinks like this?

In the three decades after World War II, when the incomes of the rich grew more slowly than those of the middle class, the top marginal rate ranged from 70 to 91 percent. Mr. Piketty, one of the economists who analyzed the I.R.S. data, argues that these high rates did not affect merely post-tax income. They also helped hold down the pretax incomes of the wealthy, he says, by giving them less incentive to make many millions of dollars.

Why on earth would you want to destroy the incentive to earn more? No one is arguing for letting the rich game the entire society in their favor (something Democrats allow as much as Republicans), but the fact is that the more rich you have, the more money you have for necessary government services. (and fat pensions and early retirement aren’t necessary)

The best tax system is one that taxes many things, all at very low rates. This isn’t rocket science.

It’s time for new thinking on Taxes

I’ve blogged in earnest about the need to scrap the income tax as it currently exists.

First, let’s review the revenue collapse that occurs because our tax structure is so top-loaded. The moment the economy slows, the government drops deeper into deficit.

Second, let’s look at the trouble the Republicans have gotten themselves into by taking so many people off the tax rolls that they no longer can play the tax card politically. Tax cuts have become “pork” for conservatives, and all the carping (at me) in the world won’t change that fact.

No matter how you look at it, our reliance on income taxes is simply has to come to an end if the nation is to prosper. Let’s hope the “stupid party” realizes this, and starts to campaign on a total tax overhaul. The “Fair Tax” is one idea (I argue it needs serious tweaking). The article below talks about another angle.

A Tax Even Libertarians Can Love.

It’s time we replaced the income tax with a tax that favors thrift.

Many object that the income tax discourages work effort. Perhaps, but that doesn’t imply it causes harm. Many parents, for example, work longer hours hoping to earn enough to buy a house in the best possible school district, only to discover that when all follow this strategy, they merely bid up housing prices in those school districts. School quality is a relative concept, and half of all students must still attend bottom-half schools. If income taxation encourages people to spend more time with friends and family, that might actually be a good thing.

It’s nice that some one still realizes that man does not live by bread alone. But then, any one with a brain knows Jesus trumps Ayn Rand any day.

This harm could be avoided by replacing the income tax with a progressive tax on spending. Taxpayers would report their income to the Internal Revenue Service as before, and also their savings, much as we now document contributions to 401(k) accounts. A family’s income minus its savings is its consumption, and that amount minus a large standard deduction–say, $30,000 a year for a family of four–would be its taxable consumption.

Rates would start low, perhaps 20%, then rise gradually with total consumption. A family that earned $60,000 and saved $10,000 would have consumption of $50,000. After subtracting the standard deduction, its taxable consumption would be $20,000, for a tax bill of $4,000, about the same as under the current income tax.

With savings tax-exempt, top marginal tax rates on consumption would have to be significantly higher than current top rates on income. But unlike high marginal tax rates on income, which discourage thrift, high rates on consumption would encourage it.

Again, I recommend the entire article. One hopes the nation is still capable of changing its tax laws. If it can’t, we are doomed to a slow decline relative to the rest of the world.

Charles Murray – Ending the Welfare State

This Podcast contains a monologue of my views on Charles Murray’s 2006 idea to replace the Welfare State with something that actually might work

MP3 File

The excellent article (from March 2006), which provides details, is here. Combine a reasonable plan to shift from our current tax system to the “Fair Tax,” and add Murray’s ideas to the mix, and you have a good foundation for a “limited government” platform.

Too bad America doesn’t have a “Limited Government” party.

World to GOP…Got Any Ideas?

If there is an upside to the last two drubbings taken by the GOP is that it got rid of a lot of deadwood and scum. (Nothing signifies “scum” as much as the Turd Stevens, senator from Alaska, staying the office for the sole purpose of his narcissism, costing the GOP a seat in the process.)

The other upside is that the Dems have won by basically surrendering on guns, abortion, and are now actively courting evangelicals. (Being one, I despise the stupid and corrupt GOP, and could easily vote for an honest Democrat – assuming such thing exists – over a piggish Republican apparatchik.)

With Obama running hard to the center, and the far left in near panic mode over this move, let’s take a moment to look at the REAL PROBLEM in the GOP. They are running out of ideas and STILL playing from the 1980 / 1994 playbook.

Hey Boneheads, it’s 2009…AND YOU ARE LOSING!!! If we focus on the national stage for a moment, we can see that the tax issue has lost it’s lustre for the right. As I’ve stated before, they are victims of their own success. It is time to move on beyond “tax cuts,” which are structurally impossible in the current spending climate.

If you are too cowardly to run on spending cuts, then run on dramatic reform of the tax system, and give us a Fair Tax.

Take It From McCain’s Advisers: The GOP Would Raise Taxes

We’ve already got $50 trillion in unfunded liabilities in these and related programs. There’s no way to make the math work at current levels of taxation.

Don’t take my word for it. Listen to some of today’s pre-eminent Republican budget analysts, who’ve told me that taxes are going up no matter who is in power. Like every Republican who aspires to serve in a public role, they’ve been schooled by the party’s antitax police to avoid saying things too definitively, or to leave themselves an “if we only got tough on spending” escape hatch. We know this spending talk is a charade, though, because Republicans balked at trimming a few teensy billion from the next trillion in planned Medicaid outlays when they controlled every corner of Washington a few years ago. So there’s no mistaking what these folks are saying.

“If you do nothing on the spending side, you’re going to raise taxes whether you’re a Republican, a Democrat, or a Martian,” says Douglas Holtz-Eakin, the Republican-appointed director of the Congressional Budget Office (CBO) from 2003 to 2005, who also served as the top economic adviser to John McCain’s presidential campaign. “It’s arithmetic.”

You know, arithmetic like 100 – 59 = 41 Senators…
or like 55 Republican Senators (2004) – 41 (2008) = 14 lost seats in only 2 election years.

So, the consensus of two professional Republican budgeteers and the nation’s pre-eminent fiscal worrywart is that taxes will rise by between 4% to 7% of GDP over the next 10 to 20 years, translating (in today’s dollars) into $550 billion to $1 trillion more in new annual taxes. You heard it here first: The Republicans have a secret plan to raise taxes. So do the Democrats, of course, and well beyond the rollback of the Bush tax cuts for the top rates they felt safe discussing during the 2008 presidential campaign.

No taxpayer looks forward to paying more. But the inevitability of higher taxes offers an overdue chance to change the debate. Though it may seem hard to imagine now, the endless fights about whether taxes should go up will soon seem passé. The real question once this recession has passed will be: Given that taxes have to rise, how should we raise the revenue we need in ways that are best for the economy? The answer will involve lower taxes on payrolls and corporations, and higher taxes on dirty energy and consumption.

Of course, if ideas are your cup of tea, then I strongly suggest you read this excellent piece.

A Plan to Replace the Welfare State

As I’ve blogged on before, shifting to consumption taxes, zeroing out the large Federal Bureaucracies, while transferring all “transfer payment” decisions to the citizenry, will be political paydirt for Republicans.

Of course, they will be hidebound to pick up such good ideas. That is why America needs a 3rd (or new) party.