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How Congress is making the rich richer in one graph

Annie Lowrey* catches a very nice graph from the Democrats on the Joint Economic Committee that compares tax rates on the rich to their share of the nation's income. As you can see, as their incomes have gone up, their tax rates have gone down.

Income-inequality-6.png

Or maybe I should rephrase that to say that as their tax rates have gone down, their incomes have gone up. There's truth in both.

By Ezra Klein  | September 15, 2010; 12:28 PM ET
Categories:  Charts and Graphs, Inequality  
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Comments

Ezra, do you think Reagan was wrong to lower the top rate from ~70% and do you support raising it to that level?

Posted by: cdosquared5 | September 15, 2010 1:03 PM | Report abuse

I think we need a graph of peoples incomes with college degrees.

I'm guessing it would look the same.

Posted by: marteen | September 15, 2010 1:11 PM | Report abuse

Apples and bowling balls.

The top marginal rate applies to many, many more people than 0.1% of the population.

Not to mention the argument for cutting taxes for the rich is never that the rich "need the money."

Posted by: angrydoug1 | September 15, 2010 1:18 PM | Report abuse

I think you need to look not just at the top marginal tax rate, but at the preferential 15% rate for dividends and capital gains. If you are a magnate with $100 million in stock that pays 2% in dividends, the difference between 39.9% (the old top rate) or even 35% the current top rate) and 15% is considerable. Even saving 5% on the exercise of stock options is important. Letting the rich have more to make more with has been crucial in widening the gap.

In my view the top rate needs to be about 40-42% so that, combined with state income taxes, just over half the compensation given top executives would go to the gov't. This provides an incentive to keep earnings within the corporation where they are plowed back into the business. That is what helps the economy, not having rich people buy more vacation homes abroad or luxury yachts in the Caribbean.

Posted by: Mimikatz | September 15, 2010 1:19 PM | Report abuse

The problem with this analysis is the entire paradigm, as evidenced by the phrase "their share of the nation's income".

A nation doesn't have income. The national income is a statistic representing the sum of all the individual incomes. It's not like the country as a single entity goes to work and then comes home and issues everyone their allowance out of the national income.

The rich making more money may change the distributional percentage, but in and of itself, doesn't reduce anyone else's income.

And your final sentence

"Or maybe I should rephrase that to say that as their tax rates have gone down, their incomes have gone up."

is a perfect example of the supply side theory of taxation. Reducing marginal rates will spur those in those brackets to produce more and thus make money and perhaps stimulate the economy in so doing.

A better title for this post would have been "How Congress is allowing the rich to make themselves richer in one graph"

Posted by: jnc4p | September 15, 2010 1:26 PM | Report abuse

--"This provides an incentive to keep earnings within the corporation [...]"--

I think it's sweet that you want to mind other people's business for them by codifying "incentive[s]" into the law.

I propose a tax (say about 90%) on busybodies. If you want to mind other peoples' business, that's the price you have to pay for the privilege of it, and the people you want to bother are still free to ignore you. Sound about right?

Posted by: msoja | September 15, 2010 1:31 PM | Report abuse

Page 4 of the CBO report below shows that near the end of the Bush/GOP Congress years - and before the Great Recession hit - the rich were fairly taxed.

http://cbo.gov/publications/collections/tax/2009/summary_table_2006.pdf

You can see the top 1% of earners made paid about 29% of all federal taxes (including FICA!) while they only made about 18% of the income. So dollar-for-dollar, the rich paid about half-again as much tax as the population as a whole.

Where's the scam? The rich clearly paid their fair share.

Note several differences with Ezra's info and mine:
1. He referred to partisan politicians' claims, I used nonpartisan analysts'.
2. He mentions a marginal tax rate of one type of tax, I mentioned the total collected federal tax. Loophole adjustments are thus figured into my numbers, and not Ezra's.
3. He referred to conflicting datasets - the richest 0.1% and those paying the top marginal tax rate (more like 2%); I was consistent with the richest 1%.

Ezra's charts show some sloppy reporting. Clean it up, and the conclusion looks rather different.

Posted by: angrydoug1 | September 15, 2010 1:33 PM | Report abuse

"fair share". right. completely arbitrary personal judgment on "fair" there isn't it?

Let us review. What was the top marginal tax rate during our halcyon days of great prosperity, productivity, business investment/expansion, middle class expansion and all around Great America for which the "conservatives" express such great affection? The 1950s and early 60s?

What was it again? 40%? 60? ooooo, that's right. http://en.wikipedia.org/wiki/Income_tax_in_the_United_States#History_of_top_rates.5B21.5D

85-90%

Why is this not still on the table? The Republican Overton strategy of course. Stop falling for it and put the full range of options back on the table....

Posted by: bikemonkey | September 15, 2010 1:55 PM | Report abuse

Of course, if one actually looks at the graph, there is a lot of fluctuation in alleged "income inequality" without matching fluctuation in the underlying tax rate. Maybe things are more complicated than simple-minded collectivists hell bent on stealing as much as they can from their fellows would like to admit.

Posted by: msoja | September 15, 2010 2:05 PM | Report abuse

"Let us review. What was the top marginal tax rate during our halcyon days of great prosperity, productivity, business investment/expansion, middle class expansion and all around Great America for which the "conservatives" express such great affection? The 1950s and early 60s?"

You mean before Lyndon Johnson's government health care industry complex?

Is repealing Medicaid on the table?

Posted by: krazen1211 | September 15, 2010 3:30 PM | Report abuse

bikemonkey,

I'll take tax rates from 1955 if you agree to give me tax collection levels and spending levels as a percent of GDP at all levels of government from 1955 as well. It would be a huge improvement indeed. Lower would be preferrable, but somehow I doubt we'll ever see the levels of the 1950s ever again.

As an aside, Congress isn't making the rich "richer" - it is merely making them less poor. It is as if the thief, rather than stealing your entire wallet, decides to hand you back a $20 and declares that he "made you richer".

Posted by: justin84 | September 15, 2010 4:23 PM | Report abuse

This graph looks a whole lot like a graph of the stock market.

Posted by: chase-truth | September 15, 2010 8:03 PM | Report abuse

I would love to see a graph going back 100 years or so. I bet it was equally high if not higher around 1900 and in the 1920's.

Posted by: cristo | September 22, 2010 1:35 AM | Report abuse

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