Friday, February 12, 2010

Increasing Taxes on Rich Is Neither Fair nor Sound

In the name of fairness, President Obama has endorsed increasing taxes on individuals making more than $200,000 by allowing the tax rate on each additional dollar of earnings to climb from 35 percent to 39.5 for these “rich” workers. Additionally, these individuals will see their taxes on dividends and capital gains advance to pre-2003 levels.

This means that in states such as Oregon, successful business owners will pay more than $500 in income taxes for each $1,000 of additional income. Recently in a ballot initiative with less than 2.5 percent of the state’s electorate participating, Oregon’s voters approved raising the top tax rate on income to 11 percent. Oregon’s experience is not unique. Across the nation, lower income individuals are shifting more and more taxes from themselves to the “rich” via the voting booth. In 2007, the top ten percent of income earners paid more than 70 percent of federal personal income taxes, while the bottom 50 percent paid less than three percent of federal income taxes paid (http://www.ntu.org/main/page.php?PageID=6 ). This disparity will increase significantly in 2011.

There are three problems with this distribution of burdens. First, politically speaking a large number of low income individuals (the 90 percent) can vote to inflict even higher taxes on the supposed rich (the 10 percent). Second, this shifts the cost of government to a small proportion of the population, thus encouraging government overspending. Third, taxing higher wage earners more punitively reduces overall economic growth by discouraging work and entrepreneurship, thus reducing the size of the economic pie for all, including the poor. Fourth, raising taxes for either high or low income wage earners in these times of economic fragility is unwise and potentially reckless.
Ernie Goss.

14 comments:

Anonymous said...

Wouldnt "this shifts the cost of government to a small proportion of the population" decrease government spending? Because of decreased administrative costs?

Anonymous said...

Here's a solution to the tax problem.

Pay the poor and middle class more in the form of salary (as opposed to housing value which can quickly lose its value) and they will pay their share back in taxes.

Those doing well are still doing well. Those not are doing worse. Remember the greatest stimulus of all time was done right after the Great Depression.

Anonymous said...

you talk about the shifting tax burden from middle-class to rich without acknowledging the widening gap between rich and poor and the erosion of the middle class.

also, how does a shift in tax burden from one group to another (not an increase in tax income) encourage government spending?

Anonymous said...

As I understand it these arguments against raising tax rates for the 'rich' are in line with so-called 'supply-side' economics, which Reagan espoused. While attending CU in the early 80's I read the book by George Gilder that reportedly inspired Reagan and that is what I got out of it. Question is, did it work when Reagan pushed it, and if not, is there a reason to believe it would work now?

Anonymous said...

Ten percent of the population should not pay 70 percent of taxes. Entitlements consume about 55-60 percent of the overall federal budget. According to the Brookings Institution 84 percent of the federal budget is for entitlements, defense, homeland security, or interest on the debt.
If I make in excess of $200,000 a year that money belongs to me. It should not be redistributed to someone else who for whatever reason did not make $200k. I invested signifcant time, money and effort in increasing the value of my human capital. If I can now earn a very good return on the investment in myself why should anyone expect me to share more and more of it. I was not lucky; I had a plan and I executed it. Along the way I have had to adjust the plan to changing conditions, spend less than I earn, and I have sacrificed much.
In the US we have not a system of aristocracy where the deck is stacked against those who lack credentials but rather a meritocracy where those who are willing to invest in themselves can thrive--my grandparents were immigrants, spoke English as a second language and my parents only graduated high school. Each generation has progressed because of education and hard work.
Education is the great equalizer. We should be certain that everyone has the opportunity to receive a first rate education from pre-school through community college.
Other than an education, infrastructure and the military government should provide little else perhaps only a safety net for a limited time, and resources for those who are truly unable to work.
If 50 percent of the population has no skin in the game then what is their incentive to participate in civic life, in their community and family? Entitlements have contributed greatly to the decline of the nuclear and extended family. In the US we are so fortunate and everyone should pay something. The rich should pay more but everyone must pay something.
So many who relied only on public assistance are in trouble now because that assistance can be reduced or curtailed completely when the economy slows and tax revenues decrease. We need to encourage self-sufficiency. Education--not transfer payments or a free ride--is the ticket out of poverty.
The unemployment rate among those with a college degree in 2009was about 4.1%.

Anonymous said...

"If I make in excess of $200,000 a year that money belongs to me. It should not be redistributed to someone else who for whatever reason did not make $200k."

why not? you were taxed for every dollar up to $200k? why should being among the top 2% of wage earners suddenly exempt you from paying taxes? we have had top marginal income tax rates of 90% in this country before and the country still thrived. why should we expect an increase of 35% to 39.5% to halt growth?
you can talk about reducing entitlements all you want, but even if we completely erased all non-mandatory spending from the budget, we will still be running a deficit without reasonable tax increases.

Anonymous said...

"In 2007, the top ten percent of income earners paid more than 70 percent of federal personal income taxes, while the bottom 50 percent paid less than three percent of federal income taxes paid (http://www.ntu.org/main/page.php?PageID=6 ). This disparity will increase significantly in 2011."

It should also be noted that, according to this same data, over the last 5 years the top 1% of wage earners has increased in wages by an average of 7.6% each year (top 10% averaged 4.8% growth each year) while the top 50% only averaged 2.8% yearly growth. Should we expect that growth disparity to continue?

Anonymous said...

I don't buy the fairness argument. The tax code is fair in that everyone pays the same percent of taxes on the same income. It's the incremental dollars that get taxed at a higher rate. And who's to say that's not fair? I think it is fair. Now whether it's sound is a whole other issue.

Anonymous said...

This post is simplistic and ideologically driven. Very one sided. Of course those that make more pay more taxes! Throwing out such statistics reveals an ignorance or an intent to mislead. And sharing the ex ante tax rates is also misleading because what matters is the ex post (effective) tax rates, which are not very progressive at all (i.e., rich people do much better at lower their rates with write-offs, creidts, etc.).

There are many fundamentally sound (i.e., based on solid economic theory) reasons for a progressive tax code. The economic system that benefits the 'rich' relatively more (for various exogenous reasons) is a public good, and it makes sense that they should pay relatively more. It is a common argument; see Bill Gates.

We have the least progressive tax code among developed countries, so the crying about marginal increases on those with more wealth carry very little water (and very little sense).

As one poster pointed out, the low and flat tax policies have only made the disparities between rich and poor greater. And the simplistic assumptions by some economists have led to big problems for mainstreet. As Alan Greenspan admitted, there are flaws in a simplistic neo-classical viewpoint. He leared from his mistakes--others have not.

Anonymous said...

It is wrong to presume, as one poster states, that we live in a meritocracy. We do not. Academic studies show that about half of an individual's outcome is due to his/her own merit. Of course, not all cases are the same and some people excel. But, generally speaking, much of a person's success is determined by luck--what income bracket they are born into, what social context they live in, etc.

If you make $200,000 per year, and you believe that money should only belong to you, then you must think the critical institutions and services provided by local, state and federal governments grow on trees. Believe me, you would not be making $200,000 if those institutions and services were not provided (e.g., justice system that enforces laws and property rights).

Anonymous said...

We do not all pay the same percent of taxes on the same income. It is not just the incremental dollars that get taxed at a higher rate. I believe people who make more should pay more taxes, but they automatically pay more because everyone pays a percentage of their income. So, if I make $100 and my tax bracket is 49% as it currently is with federal and state taxes, that $100 leaves me with $51 to spend. If you make $100 and your tax bracket is 25% you have $75 out of your one hundred to spend. The person in the higher tax bracket is paying on their total income so if it is $200,000 they are paying $98,000 in taxes. If you are making $60,000 at 25% taxes, you will pay $15,000 in taxes. Why should the $200,000 person get less money from what they earned. You are not giving them incentive to work harder or try harder to earn more. Also, these same people usually don't qualify for most tax credits that the average American can get. In the top income brackets you don't qualify to take these same credits because of your income level. I'm not saying this isn't fair, I'm just saying your logic and information is incorrect. Case in point, you can't take your medical expenses or premium payments if you are paying for your own medical insurance by being self insured off of your taxes at all. Lower income earners can. The rich and smokers can't pay for everything.

Anonymous said...

Dr. Goss,

I disagree with your premise that increasing the tax rate on the rich from 35 to 39 percent will discourage work and entrepreneurship.

Many people don't know how our tax bracket system works (as evidenced by a previous comment). Using 2009 rates, a taxpayer whose taxable income is $8375 pays 10% on that amount, or $837.50. A taxpayer whose taxable income is $500,000 pays the exact same amount of money, $837.50 on his first $8375 of income. The 35% rate to which you refer is only paid on the amount earned above $372,951. The 35 percent is not paid on the whole amount.

So a rich person pays the same tax as everyone else up until a really large number, whether it is $200,000 or $372,951. Then, they pay a higher rate on anything additional. What it seems like you are arguing is that people would rather NOT keep 65% (or 60.5%) of that additional money and would rather they didn't earn any money over the $200K limit at all. This is, of course, absurd.

My argument is that people are always going to try and earn as much money as possible. And increasing the supplemental rate only 4.5 percentage points is not going to cause somebody to decide against opening his or her own business or continuing to work as a CEO and make them decide to work minimum wage to avoid the hassle of having an accountant fill out all the forms for them.

Thank you for your post.

Meister said...

Fair? Are you kidding? Goss is acting like this is sudddenly "unfair", but he forgets the liability was shifted/dumped on small business and those making under $200,000 in the last 30 yrs. These irresponsible tax cuts need to be rectified and quickly, and you can only tax those that are making enough to tax. Goss is forgetting about Reagan and Bush's idiotic tax cuts mixed with their insane spending that brought us this debt. Now Obama has to do something! No one seems to remember that Reagan nearly doubled taxes on small business, and now some are in denial that these businesses can not afford health care etc. The poor aren't going to pay off our debts, and debts need to be paid at some level. Of course I dont want to raise taxes, BUT you have a huge debt which ends up killing the middle class and lower middle class. Furthermore, the over $200,000 per annum earners "can" pay taxes, many under that put every dime back into the economy anyway. It is both unfair and unsound NOT to raise taxes on the over $200,000.00 earners until you can afford not to. I will happily pay it as a responsible American.

Anonymous said...

Meister,

Thank you for your post. It's nice to read someone who actually wants to help the cause rather than try to argue a way around it.

Reagan surely did do a great deal of harm reducing the high end tax rate by 40%. He did more harm convincing us government is always the problem. It clearly is not.