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Taxing the super-rich

I'm very sympathetic to the idea that there should be more tax brackets as you travel higher and higher up the income scale. There's not an obviously good reason why someone who makes $30,000 and someone who makes $40,000 should be taxed at different rates, but someone who makes $400,000 and someone who makes $40,000,000 are in the same 35 percent bracket.

Well, I guess there is one good reason: The rich have better lobbyists than the poor. So I'm interested by James Surowiecki's -- and Matt Miller's -- argument that you could reshape the politics of taxes by cleaving this undifferentiated mass of wealthy earners who are currently all clustered in the same 35 percent bracket. It would be a lot easier to fight the super-rich than to fight the super-rich, the really rich, the pretty rich, and well-off. But when you're talking about raising the 35 percent bracket that affects everyone making more than $375,000, that's what you're talking about. If you were just creating a new bracket above $1,000,000, the politics might be a bit easier.

But not that much easier. Remember: We haven't even been able to close the hedge fund loophole.

By Ezra Klein  |  August 9, 2010; 2:52 PM ET
Categories:  Taxes  
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Comments

Rich folks also have snazzier economic theorists to make the abstract case.

Posted by: bdballard | August 9, 2010 3:03 PM | Report abuse

One other thing that might help would be to persuade commentators to be more precise about the distinction between the average tax rate and the marginal tax rate. Obviously, Ezra Klein understands this difference very well. Nonetheless, the original post makes it sounds as though someone earning $400,000 would pay the same tax rate as someone earning $40,000,000, which is not the case at all.

Posted by: QuiteAlarmed | August 9, 2010 3:07 PM | Report abuse

AGAIN a family of 5 in rural Iowa making $250,000 a year is Jed Clampett rich.

the same family of 5 in NYC is NOT rich.

This could work if Dems were smart enough to separate the rich but alas these are the Dems.

Posted by: visionbrkr | August 9, 2010 3:07 PM | Report abuse

Disastrous policy if this rationale is applied to capital gains

Posted by: cdosquared5 | August 9, 2010 3:24 PM | Report abuse

why should capital gains be taxed at a lower rate than the money the guy makes pumping gas, fixing your plumbing , roofing your house?

paris hilton pays a lower rate than the local janitor.

disgusting.

Posted by: newagent99 | August 9, 2010 3:45 PM | Report abuse

One of Ezra's best suggestions ever! Ezra, I suggest you compile a list of tax increases that would be better on both policy and political grounds than talking about raising taxes on families making more than $250k - it could help drive the conversation that these DC numbnuts have. Some suggestions:

#1. Yours - Obama should talk about raising taxes on those making more than a million dollars well before he mentions some marginal increases on income over $250k.

#2. Deductions - many are ripe for the repealing.

#3. Making entitlement programs fair by making rich people pay for them out of all their income, not just the first $100k (possibly including some softening of the rate between 100k and 200k to help out the upper middle class a bit.)

#4. A capital gains tax hike, possibly massaged so that it only hits people with strong investments, not teachers with small 401k's.

#5. As you said, close hedge fund loophole, see #4.

#6. Financial transaction tax, dividends, etc.

You can probably think of many more. I would love to see the numbers graphed to show how much revenue this kind of package of tax hikes would bring in as opposed to the relatively paltry amount that would come in due to raising the rate on income between $250k and $500k by 4.6 percent - since this narrow slice of the well-off play a relatively small role in the revenue increases but seem to loom large in the public messaging against the tax hikes (oh, the pain small business will feel! etc.)

Posted by: michaelh81 | August 9, 2010 3:45 PM | Report abuse

Why not judge Top Chef the same way. When a chef-contestant makes an awesome dish, penalize him: the better he cooks, the lower his score. If he does a really good job, boot him out of the competition entirely.

We could do the same for basketball, baseball, and football -- the better you play, the lower your score.

That's only fair right? It's not like a rich man and a poor man pay the same thing for a loaf of bread.

Posted by: rmgregory | August 9, 2010 3:55 PM | Report abuse

By the way, here's a link to "Soak the Rich, Lose the Rich" by Arthur Laffer:

http://online.wsj.com/article/SB124260067214828295.html

Posted by: rmgregory | August 9, 2010 4:14 PM | Report abuse

The solutions are easy:
1) Let tax cuts expire.
2) Institute a tax for Medicare Part D (which should have been paid for initially). Or, put it on the ballot -- want Part D? Pay for it. That's the deal. Stop paying via deficit.
3) Get out of the Middle east, $2 trillion is enough. (Though, I'm sure we'll be back, since there's no will for innovation RE energy... and the incumbent energy firms are too powerful to allow any.)
4) Negotiate under Part D.
5) Do a public option, with teeth.
6) Put the defense dept on a diet, especially contractors (not soldiers).

Follow these simple steps, we'll be in a much better position. Of course, the Rs will filibuster -- since corporate lobbyists won't like any of it. Maybe I should add 7) reform the filibuster!

Our political system has simply failed us. Colorado springs is probably in the dark because Grover Norquist wants them there. A stupid pledge card has prevented an entire party of clowns from being reasonable. What can you do?

Posted by: rat-raceparent | August 9, 2010 4:31 PM | Report abuse

"There's not an obviously good reason why someone who makes $30,000 and someone who makes $40,000 should be taxed at different rates, but someone who makes $400,000 and someone who makes $40,000,000 are in the same 35 percent bracket."

Several good reasons jump to mind.

1) Taxable income elasticity. In 2000, Gruber and Saez estimated the elasticity of taxable income to be 0.4, and in particular 0.57 for those with incomes over $100,000 (and less than 0.2 with those with incomes below that value).

http://www.nber.org/papers/w7512

Presumably, that value tends to rise as you move into the ranks of the uber wealthy, and have the most sophisticated tax avoidance strategies available. Getting Congress to put in and defend loopholes for your type of income (e.g. carried interest) is one of those strategies. People always bring up the 90%+ top tax rates under Eisenhower - I don't think that top bracket actually collected much in the way of tax revenue.

2) As has already been mentioned, the guy making $40,000,000 pays 35% on nearly all of his income, the guy making $400,000 pays 35% on a much smaller proportion of his income.

3) The top 0.1% already pays ~20% of federal income taxes by itself.

4) The more complicated and sliced and diced taxes become, the more energy is wasted trying to maximize tax efficiency and on compliance/accounting costs. While marginal rates in and of themselves may not be complicated, high rates breed loopholes.

5) As rates rise to 39.3%, and as you throw in medicare and state/local income taxes, marginal tax rates in many areas will be above 50% already. This is probably too high. Trying to increase rates by 10% or 20% on the highest earners is unlikely to bring in a whole lot of revenue.

By the way, I note that Gruber and Saez came to the same conclusion I have - low marginal tax rates and a basic income grant (or demogrant as they refer to it here), although for simplicity/effectiveness sake I'd prefer a flat tax with a demogrant, not a regressive one. A high marginal tax to pay back the demogrant could reduce work effort at the lower end of the payscale, unless the demogrant is too small to matter.

"Our estimates suggest that the optimal system for most redistributional preferences consists of a large demogrant that is rapidly taxed away for low income taxpayers, with lower marginal rates at higher income levels."

Posted by: justin84 | August 9, 2010 4:36 PM | Report abuse

Michaelh81, You wrote: "#4. A capital gains tax hike, possibly massaged so that it only hits people with strong investments, not teachers with small 401k's."

I think you have this wrong. I am fairly certain that all 401k withdrawals are taxed as income, not cap gains.

The reason for this, as far as I can tell, is to not allow regular workers to benefit from the tax system's preference for invesntement income over work income. Even our investment gains will be taxed more heavily than the investment gains of our masters'. Unlucky!

We're are getting hosed, by the ownership class.

Posted by: rat-raceparent | August 9, 2010 4:41 PM | Report abuse

rmgregory:

Taxes are not punishment. They're the price of civilization. Those who manage to draw lucrative earnings from civilization should pay into it at a similar rate. Would Bill Gates be a billionaire if he was born in a 3rd world hut? No, so clearly his presence in this society, the privileges accorded to him in his upbringing has something to do with his success in life.

Posted by: Scientician | August 9, 2010 5:05 PM | Report abuse

Yes but the super rich guy is paying 35% on basically all of his income while the pretty rich guy making $400k is only paying it on a small portion. Ezra, what are you views on the morality of an income tax rate above 50%?

Posted by: theo2709 | August 9, 2010 5:31 PM | Report abuse

"I think you have this wrong. I am fairly certain that all 401k withdrawals are taxed as income, not cap gains.

The reason for this, as far as I can tell, is to not allow regular workers to benefit from the tax system's preference for invesntement income over work income. Even our investment gains will be taxed more heavily than the investment gains of our masters'. Unlucky!

We're are getting hosed, by the ownership class."

Not quite. Here's how it works.

A really rich guy makes $1,000,000 in extra income, and pays, say, $300,000 in taxes. He then invests that income, and pays capital gains and dividend taxes over time.

Another person makes $100,000, and puts $10,000 in his 401k. He deducts that $10,000 from his taxes. The money in that account grows free from capital gains and dividend taxes. After 30 years, that money is worth, say, $60,000. The regular income tax is applied because the original $10,000 investment was deducted from income.

At the end of the day, the 401k shields an investment from capital gain and dividend taxation.

Posted by: justin84 | August 9, 2010 6:00 PM | Report abuse

If ultimately real wages are a function of productivity, then increases in capital are what will drive a higher standard of living. Hence, why most economists supported consumption based tax systems rather than taxing investment (capital gains).

Posted by: cdosquared5 | August 9, 2010 6:07 PM | Report abuse

Rat-race and justin84, good points. How do you like this suggestion - why not remove the notion of a capital gains tax and just tax income as income? That way you could tax capital gains at a progressive curve. Or, to address the issue of someone who inherits a lot and lives off the interest compared to someone who actually works, we could set up a progressive rate curve within the cap. gains tax, so the more you rely on cap. gains, the more you're taxed - possibly indexing that by age so older people can rely on investments w/o paying quite as much in tax.

Posted by: michaelh81 | August 9, 2010 6:14 PM | Report abuse

Ezra makes sense and I'm so tired of these "Oh noez" arguments of rich people fleeing the country. Either they're too ignorant to realize they were taxed up to 90% until the 80's or they have the laffer-able idea that they'll flee to some other country where they will pay... higher rates.

Also, there is no way a millionaire will change places with someone making $100K just to pay a little less income tax.

Make no mistake, the US is the greatest country to live in, as long as you're extremely wealthy.

Posted by: fakedude1 | August 9, 2010 8:57 PM | Report abuse

I have a better idea. How about those who think their taxes should be increased pay more in taxes. Like you Essie.

Posted by: mges123 | August 9, 2010 9:38 PM | Report abuse

This ignores the fact that the riches 1% of Americans own 50% of stocks and that many of them make their money this way and are not taxed at the income tax rate, but instead according to the 15% capital gains rate, resulting in a 17% effective tax rate for the highest income earners in America. Note that under Ryan's plan, this would decrease to 11%. The fact is, in America, once you get to a certain level, your effective tax rate actually decreases. Or, as Leona Helmsley once said, "Only the little people pay taxes."

This is why, as Warren Buffet once remarked, that his secretary pays a higher percentage of her income in taxes than he does.

If, you believe that the debt must be paid off to avoid the idea that the US is running a perpetual Ponzi scheme, this implies that taxes must eventually go up (or as economists often state it, there are no tax cuts, only tax deferments), the people in groups such as the Tea Party are effectively arguing that they would like to sign over a portion of their, and their children and grandchildren's income, directly over to the likes of their most hated enemy, George Soros.

Posted by: nylund | August 9, 2010 9:59 PM | Report abuse

--"[B]ut someone who makes $400,000 and someone who makes $40,000,000 are in the same 35 percent bracket."--

Lookit Klein drool. Other people's money. Man, what an aphrodisiac for collectivists!

Of course, Klein can't run around Dupont Circle waving a chrome plated shorty under the rich guys' noses, so he's all about forming a more amenable gang with some "more efficient" "Senate" rules to do the job for him.

Nice work for a girl from the sticks.

Posted by: msoja | August 9, 2010 11:11 PM | Report abuse

Of course we should have lots of progressive steps from $250,000 to $1bil. Increasing tax progressiveness requires it.

Posted by: TomCantlon | August 10, 2010 12:42 AM | Report abuse

Flat rates make better sense. Insulating too many people from the impact of taxes does not provide a sufficient disincentive to them demanding ever more of my money. We should get a supreme court ruling protecting us from unequal treatment under the law.

"This is why, as Warren Buffet once remarked, that his secretary pays a higher percentage of her income in taxes than he does."

This is simply not true. The owners of the company (aka shareholders) pay 35% corporate tax on profits. The dividends are then taxed again at 15% (for now, until people that want my money decided to increase it). So, $1 in distributed profit becomes $0.55 to the shareholder and $0.45 to pay for ridiculous wars, bureaucracy, overpriced medicine, income transfers, and many other things which are are actually quite useful.

If we had a town of 100 people and the mob came around to demand 90% of the richest family's income, while half of the people contributed almost nothing, the thievery would be unmasked.

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Posted by: devinjoel10 | August 10, 2010 3:33 AM | Report abuse

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