The Economist no longer buys the anti-European hype | 69 comments (69 topical, 0 editorial, 0 hidden)

This data is available at the IRS site. Download the following Excel spread sheet shown on this page

Individual Income Tax Returns with Positive Adjusted Gross Income (AGI)
Number of Returns, Shares of AGI and Total Income Tax, AGI Floor on Percentiles in Current and Constant Dollars, and Average Tax Rates
Classified by:    Selected Descending Cumulative Percentiles of Returns Based on Income Size Using the Definition of AGI for Each Year
Published as:    SOI Bulletin article - Individual Income Tax Rates and Tax Shares, Table 5
Tax Years:    1986-2004

"Tax Years: 1986-2004" will download the spread sheet.

As you will see, in 2004 (the most recent tax year for which these statistics are available, the top 1% of taxpayers paid 36.89% of Federal Income taxes. That is the largest % paid from 1986-2004 by this income group. From this same factual data, you will see the same statement is true for the top 5%, top 10%, top 25% and top 50%. The top 50% paid 96.7% of the tax bill in 2004, the highest % over the 1986--2004. The US federal tax system has become more progressive over the last 18 years. It's just incredible that you are ignoring the data.

You referred to "lower taxes for the rich" above in the thread. But the truth is that Federal tax rates are lower for all income levels in the US,,,and the cuts have resulted in a more progressive tax system,,,with the wealthier tax payers paying a higher % over time.

You are suggesting that tax policy dictates income distribution, and it's only one factor in determining income distribution. Tax systems can become more progressive, and at the same time income distribution become more unequal, if the higher wage earners increase their before tax incomes more than the rest of the population.

And of course there are other taxes that are less progressive in America--but in general they have not changed, so there is no significant change in tax impact from these taxes. and there are other taxes that are less progressive in Europe, like the VAT's which are 15--20% in many European countries.

Here at ET we don't say that Europe is necessarily doing better but that there is a definite focus on the numbers that make Europe look worse, and thus that it is in "crisis" and needs "reform".

That is certainly not true in this discussion, where you mistate the facts and the impact of US tax policy.

by wchurchill on Sun Dec 3rd, 2006 at 02:23:26 AM EST
[ Parent ]

Re: Thanks (none / 1)

As you will see, in 2004 (the most recent tax year for which these statistics are available, the top 1% of taxpayers paid 36.89% of Federal Income taxes. That is the largest % paid from 1986-2004 by this income group. From this same factual data, you will see the same statement is true for the top 5%, top 10%, top 25% and top 50%. The top 50% paid 96.7% of the tax bill in 2004, the highest % over the 1986--2004. The US federal tax system has become more progressive over the last 18 years. It's just incredible that you are ignoring the data.

A quick remark without going into too much details. From the IRS data it's clear that increase in tax bill of the first 1% is driving much of the increase for other top percentiles, just because top 1% pay so much of the total tax. Therefore, a quick and dirty test of progressivity trends in the US tax system would be compare the changes in total income share of the top 1% with the changes in their total wage bill.

by Sargon on Sun Dec 3rd, 2006 at 03:45:08 AM EST
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I think you'll find this data on the downloaded Excel spreadsheet--not that you would necessarily want to go there, as it will pull you into a lot of details. But for example, if I'm interpretting the data sets correctly, the "adjusted gross income" for the average person in the top 1% in 2004 earned $328,049 in 2004, and the floor on the 1rst percentile was $173,663.

It would appear the income of the top 1% went up roughly 10% in 2004, versus more like a 3% rise in the top 50%. If this interpretation of mine is accurate (and I'd like to spend a lot more time with the data, but just can't right now), my hunch is it is because of the 2001 tax changes to capital gains law, coupled with a stock market that had risen since the 2000/2001 crash, allowing some to sell stock and take capital gains.

Personally, would like to see the capital gains data separate from the income data. I feel rather strongly that low capital gains taxes are necessary for a robust economy, as I've commented elsewhere on this thread. But if you have low capital gains, it does mean more after tax income for the wealthy, who tend to own the assets--so it works against income distribution goals. But this is a case where the benefits of not having constraints on the movement of capital, so that capital goes to the most promising investments, has definite positive impact on all income classes--imho.

by wchurchill on Sun Dec 3rd, 2006 at 11:04:49 AM EST
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Why are tax breaks on unearned windfall gains necessary for a healthy economy? Other than the loanable funds fallacy, that is?

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Sun Dec 3rd, 2006 at 07:32:15 PM EST
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Very good question.

first, let me state a principle that hopefully you will find logical. and some background first. Investments are a big part of what drives a capitalistic society--actually any society, socialist as well. Factories have to be built to produce goods, and that requires investing money in them. The same for investments of R&D. You want people to make the choice to take some of their money, and rather than spending it today, invest it in the future.

Take that a step further, you would ideally like them to invest in businesses, or in factories, that are going to do well. It's not so much that you want that investor to do well, though you might,,,,but more that he invests in good businesses that will grow, produce jobs for the local economy, be competitive on a worldwide scale,,,,,etc., etc.--be good for society.

Following that idea, you would like investors to be able to move their investments into those industries that are growing, and where their investments might create wonderful businesses that would compete effectively in the world, provide wonderful products for the world, but also create new high paying jobs for the local economy (or maybe the country, like the US, France, UK, etc.). Create businesses that have long term competitive advantage--technology companies in the US, and medical device companies (make angioplasty products) might be good examples.

So you want investors to be able to move some of their money from the older investments, into the new future--and of course there is risk for them as they do it, because you're never sure the "new" will be successful. Investing always has some risk, along with great opportunity for gain.

So let's say you were an investor in the 1900's, and you had been wise enough to invest in the auto industry. You put $10,000 into the auto industry, and it was a huge winner and you stuck with your investment for 25 years,,,it grew to $10 million. The auto industry still looks good (no one back then saw the wipe-out coming from Japan), so you're getting dividends every year at 3%,,,,$300,000,,,you can sell a little stock along the way for new cars or whatever. But you're a pretty happy camper.

but you see this new thing--integrated circuits, computers. Sounds a little crazy back then, certainly risky,,,,,but could it be another "auto" success? You are tempted, and you think of taking $5 million out of your auto investments and buying Intel, or Apple, or Wang (whoops), or IBM, or a little of all of them. But you have to sell $5 million of the auto investment to buy $5 million of the computer investment. I think the ordinary income tax was 50% or so, and the capital gains tax was 40% or so back then. so to sell $5 million of auto stock, for which you had paid $5,000 (half the original investment of $10,000), you would have to pay a capital gain tax on $4,995,000,,,,and at a 40% capital gains tax rate that would be a tax bill of $1,998,000, and let's round to $2 million to make the rest of this easier.

So one choice is to pay the government $2 million in taxes (lowering your net worth from $10 million to $8 million), keep $5 million in autos and have a new investment in computers of $3million. The computer stocks need all the money they can get to grow, so they're not going to pay any dividends,,,,so you're annual dividend income falls in half,,,$150,000, not the cushy $300,000 you had. You've watched these computer stocks,,,you know they are risky, but have a huge potential payout if successful--but it's nerve racking as they drop 15% then go back up 20%, etc.

But the other choice is to stand pat,,,don't sell the auto stock,,,keep your net worth at the $10 million level,,,,don't pay $2 million in taxes,,,,and stay with the good life.

So it is not a clear choice,,,back then,,,,(now we know, in retrospect the right decision). but you can look at it as the investor having a choice of paying 0 taxes, by just keeping his auto stock. Versus paying $2 million in taxes, and changing his investment structure.

I would argue that from a society standpoint, we want strong incentives for investors to be willing to take risks,,,,and move their investment dollars into some of these new things. With investment dollars going into a lot of new things,,,some turn out to be big winners--new jobs, competitive advantage for, in this example, the US. But also many of those investment dollars turn into nothing, because many new things don't work. but, this is what drives growth.

so, when I put on my hat of wanting our economy to do very well on the world wide stage, I say something like the following from my comment:

But this is a case where the benefits of not having constraints on the movement of capital, so that capital goes to the most promising investments, has definite positive impact on all income classes--imho.

and

I feel rather strongly that low capital gains taxes are necessary for a robust economy, as I've commented elsewhere on this thread.

But, I admit that when I think about wanting less variation in income distribution, this doesn't help, thus the comment

But if you have low capital gains, it does mean more after tax income for the wealthy, who tend to own the assets--so it works against income distribution goals.

Two different perspectives that need to be balanced into economic growth policies, tax policy and income distribution policies.

by wchurchill on Mon Dec 4th, 2006 at 12:35:24 PM EST
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And a way to balance the two aims is probably not to tax gains so much when they're moved around assets but to tax them when they get moved into spending money ...

by Colman (colman at eurotrib.com) on Mon Dec 4th, 2006 at 12:40:45 PM EST
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I agree, that is a good suggestion. The only possible downside would be the administration of the taxation. In the current US tax code there is a provision for this to happen when you sell shares bought in a very small start-up company, and down the road sell and reinvest the proceeds into another small start-up company. It was a great concept, and though it sounds simple, when I did it, it turned out to be somewhat of a nightmare to keep track of. But it might be easier with publicly traded companies and online trading. you would just have to be able to administer it well and catch people who tried to cheat using the system--unfortunately, not everyone is totally ethical, and that seems to be particularly true when it comes to taxes.

by wchurchill on Mon Dec 4th, 2006 at 02:53:03 PM EST
[ Parent ]

You conflate investment in real assets and ... (none / 0)

.. purchases of financial assets. Much of what is counted for as "investment" in that shell game is buying and selling used financial assets.

There is no less reason for those who have experience capital gains to a substantial extent due to the overall growth of the economic system to pay a tax out of the income flow they are appropriating than there is for those who receive labor or rentier income.

Indeed, there is arguably more reason, because the total amount capital gains is more dependent on economic growth than the total amount of income earned.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Mon Dec 4th, 2006 at 01:37:31 PM EST
[ Parent ]

Re: You conflate investment in real assets and ... (none / 0)

It may be easier to see this if you think of the new investment as being in a start-up computer company--a company that is doing research, building a new plant, hiring employees,,,,and won't make money for years. Perhaps you would see the new company as a "real" asset. In that case the holder of the auto company, let's say GM, stock, faces the very same decision I outlined. Sell $5million of GM shares, pay $2million in taxes, invest the remaining $3 million,,,,,and his net worth is now $8million rather than $10; his dividend flow which he lives off of is $150,000 rather than $300,000; and some might think the $3 million he invests is in a highly risky asset--in fact it is,,,we just know with hindsight that it is the way to go. many startups fail, and you lose it all. One element of the decision for the investor is that in one option he can pay 0 taxes, and stick with his original investment. In the other option he can pay $2 million in taxes, and lower his net worth to $8 million, and hope the new investment will more than offset that.

I'm just trying to demonstrate the way the economic incentives work,,,and show that capital gains taxes work against the free flow of investment dollars, which is a key component of what drives the economic growth, new jobs, etc, in our society. The higher the capital gains tax, the more the incentive to stick with your current assets with large unrecognized capital gains; the lower the capital gains tax, you are more likely to move your investment dollars around to the most promising investments, which are likely to drive economic growth.

You said above

to pay a tax out of the income flow they are appropriating than there is for those who receive labor or rentier income.

There is an important distinction here between these two. With a capital asset, there is no income flow--so is not a question of a tax being paid. The owner holds the asset, and it may grow or decrease in value,,,,,but there is no transaction to be taxed. (Except in the case of a dividend being paid on a stock, and in that case the income flow is taxed.) Labor and rentier income are in fact income flows, generating cash, and that in most systems are when taxes are applied. In general, owners of capital assets have invested that money, and are foregoing the spending of those investment dollars. Rentiers are collecting rents, and can spend the cash as they please; same with laborers. (Note most people are both--investors and laborers.)

The policy argument I'm trying to focus on is the different investment incentives, and consequences, of taxing the gain on capital assets. If capital gains are taxed at 70%, there is an enormous incentive to hold onto assets; at 50%, less so; at 25% less so; at 15% much less so; and at 0%, money goes to the most productive assets. (there are many more issues, and I'm using simple examples to focus on this point.)

by wchurchill on Mon Dec 4th, 2006 at 03:29:04 PM EST
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Re: You conflate investment in real assets and ... (none / 0)

If capital gains are taxed at 70%, there is an enormous incentive to hold onto assets; at 50%, less so; at 25% less so; at 15% much less so; and at 0%, money goes to the most productive assets.

At 0% money goes to the assets expected to be most lucrative, which is by no means the same as the assets that prove to be most lucrative, and given the varying shares of both public and private benefits and public and private costs, even investing and gaining the most lucrative investments is certain to be different than the most productive allocation.

And this is all in the part of the financial system that merely passes money around ... you are talking about pure financial intemediation. In a monetary production economy, depository institutions are able to generate new purchasing power, and so depository institutions (principally commercial banks) can provide finance directly if there are credit worthy borrowers and the central bank is not throwing monkey wrenches into the system in pursuit of an antiquated monetarist ideology.

In the end, new purchasing power must be created in order to finance the mobilization by commercial enterprise of new productive resources in order to expand productive activity, and new purchasing power is created either by government deficit spending to expand the supply of fiat currency or by increase leverage of credit-money created by banks on fiat-currency held as reserve assets, or a combination of both.

No amount of dollars chasing shares or dollars chasing corporate debentures in the US is going to make up for the massive current account deficit (past 5% of GDP in 2005 on a five year moving average and still plummeting down) which is destroying domestic purchasing power faster than breakneck on-book and off-book deficit spending can create it. And escalating indebtedness as a share of GDP is steadily undermining the overall quality of the aggregate commercial bank asset base.

A 70% capital gains tax is a red herring in discussions in the US, where capital gains taxes reached their peak at just under 50% in the late 70's and were all the way down to 28% by 1992, before the radical right wing attack on public non-military spending got underway in 1994. So take a level of 30%.

You have three pure coin toss, purely speculative investments, which therefore yield no income except through capital gain. One yields a gain of 9% on tails and 11% on heads. A second yields no gain on tails and and 20% on heads. The third loses 10% of its value on tails and gains 30% on heads. The expected return in all three cases is 10%.

Since these are purely speculative investments, if there is any risk aversion at all, these are not stable payoffs, and stock demand=supply adjustments result in a shift in those returns so that the higher the downside risk, the greater the average return.

Does this represent the most productive financial intermediation for the economy as a whole? Of course not. Those who are induced to hold the riskier positions not only accept the higher volatility of return, but they also impose greater risk of insolvancy on the system as a whole.

We therefore should lean against the wind in these markets. We should increase the inducement to hold the lower risk investment, and reduce the inducement to hold the higher risk investment, to reflect the systematic bias in social risk exposure.

And evidently, the more these assets are held by large Ownership Unions with lives of indefinite extent, the more it is necessary to lean against the wind, since a large Ownership Union is able to diversify its financial holdings and reduce its exposure to stochistic risk, which permits it to adopt a profile that exposes the national economy to substantially higher levels of systematic risk.

Now leave the radical right wing wet dream of returning to the 1920's in blind faith that it does not entail returning to the early 1930's, and put capital gains taxation of 30% in place. The first two flips have equal value, a 7% gain, but the 1:2 10% risk of a loss is no longer compensated by a 1:2 opportunity of a 30% pre-tax gain, when that is a 10% loss against an aftertax 21% provides an average 5.5% return. The greater the risk the speculative invester exposes the economy to that he or she will lose his or her shirt, the greater the penalty imposed on that anticipated pattern of returns by the capital gains tax.

The flaw in the capital gains tax, of course, is that of taxing the capital base due to inflation. Given that the rapid turnover of assets imposes greater social costs than lower turnover of assets, and given that this is a penalty that compounds over time, I am strongly in favour of permitting indexation of capital assets for all assets held five years or more.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Mon Dec 4th, 2006 at 06:07:56 PM EST
[ Parent ]

Re: You conflate investment in real assets and ... (none / 0)

The flaw in the capital gains tax, of course, is that of taxing the capital base due to inflation. Given that the rapid turnover of assets imposes greater social costs than lower turnover of assets, and given that this is a penalty that compounds over time, I am strongly in favour of permitting indexation of capital assets for all assets held five years or more.

Well I agree with that.

A 70% capital gains tax is a red herring in discussions in the US, where capital gains taxes reached their peak at just under 50% in the late 70's and were all the way down to 28% by 1992, before the radical right wing attack on public non-military spending got underway in 1994. So take a level of 30%.

You know that today's capital gain rate is 15%, right?

Since these are purely speculative investments, if there is any risk aversion at all, these are not stable payoffs, and stock demand=supply adjustments result in a shift in those returns so that the higher the downside risk, the greater the average return.
Does this represent the most productive financial intermediation for the economy as a whole? Of course not. Those who are induced to hold the riskier positions not only accept the higher volatility of return, but they also impose greater risk of insolvancy on the system as a whole.

I wouldn't start here in the discussion of public equities. I would say the following:

Many public companies need money to grow. They can grow through internally generated cash, borrowing from banks or the public markets, or secondary offerings in the public equity markets.
Investors who buy public equities (includes pension funds, university endownments, individual investors, etc) absorb all available information, and bid the price of a company stock to what they view as the appropriate price. Simplifying here a little, but the price of a company is best viewed as it's PE ratio. If a company is viewed as being able to grow its earnings fast in the coming years, it will have a high forward looking PE--the market is willing to pay more for its earning, because the future earnings stream is expected to grow.
This allows the high PE companies to issue new stock in a secondary offering, and give up less of the ownership of the company to the new shareholders--ie: the offering is less dilutive to existing shareholders. So owners of the high PE company, through their surrogate owners being management, can raise funds for their company with, say, a 50 PE, as opposed to a slower growing company with a PE of 10.
I imagine you will disagree with the following, but I believe the free markets, through the stock market, have the most accurate view of future growth and companies that will grow. Therefore, I think the best method to allocate capital is through the mechanism that I just described above--ie: the companies with the best opportunities as viewed by the market get equity funds with less dilutive offerings. So I view these processes as efficient as we are going to get. Improvements can come with more timely information available to all, and cleaning up the financial markets, which has happened over the years, in general--ie. no unfair advantages to any inside players.

thus from only the viewpoint of effective capital and equity markets, I would want to move the capital gains tax to the lower levels. When I think of the income distribution aspect of things, it pushes me higher on the tax rate. I would think the current 15% with your concept of inflation adjustment for the cost basis would be about right,,,IMHO.

by wchurchill on Mon Dec 4th, 2006 at 07:11:27 PM EST
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Re: You conflate investment in real assets and ... (none / 0)

I'll leave the issues of "used financial assets", "real" assets to the text books. When does a company like Intel, originally a small company developing and manufacturing products, turn from a "real" company into a "used financial asset". Today's Intel still develops and manufacutes products--is it a "used fiancial asset" because it is a publicly traded company, or because it is big? It seems to do the same things, only on bigger scale. And it has chosen to be a public company so ownership can be diversified to the public, and so it can raise money to grow more quickly and easily.

by wchurchill on Mon Dec 4th, 2006 at 03:36:03 PM EST
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Re: You conflate investment in real assets and ... (none / 1)

You'd be best off dusting off one of those textbooks. The majority of financial transactions in share markets are sales of existing stock, and are not new equity investment into the company.

New equity investment into the company is investment in real assets, precisely when it is used to acquire real assets.

However, most "investment" does not finance the acquisition of new real assets ... most nets out inside the financial sector, with a holder of a financial assets swapping with a holder of money: neither an increase in financial assets nor an increase in liquidity, just a change in the distribution of an existing stock.

These are all neoliberal fantasies, repeated to provide ideological cover for the "promotion of saving", and to distract attention from the fact that on average, those that have money to save have more money than those that do not have money to save, and that "inducements to save" are a fancy way of saying welfare for the rich.

The Japanese acquire the services of very clever people to perform their financial capital allocation, just as the pommies and we yanks acquire the service of very clever people to perform our financial capital allocation. However, rather than paying them a slice off the top of the sums they are managing, they pay them a comfortable upper middle class income working in a Ministry, and they get that clever capital allocation for a small fraction of the cost that we pay for a casino system that allocates capital with a minority of its time and effort.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Mon Dec 4th, 2006 at 05:26:37 PM EST
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Sorry, meant "total tax bill"

by Sargon on Sun Dec 3rd, 2006 at 12:17:29 PM EST
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If I understand you, you are relating this group's taxes to their income, which would be the average tax rate for the group. This is also an exhibit on the Excel spreadsheet--but with some caveats. First, the tax rate is computed based on the tax bill divided by "adjusted gross income". Second adjusted income and the taxes include ordinary income, capital gains and dividend income--which I'd prefer to see seperately. Third, if what you mean by "total tax bill" is intended to include all other taxes--state tax, sales tax, estate tax, gasoline tax, etc. etc. etc.,,,,it is not that. Fourth, particularly as you move to the lower income groups, the concept of using adjusted gross income becomes problematic--because deductions such as child credits, dependents are available to this group, represent a larger % of income, and since they are deducted before the tax rate calculation, don't even show up in these figures--ie imply a higher tax rate for these grouups due to the impact of the deductions.

That being said, the exhibit shows tax rates have gone down for all groups shown on the exhibit.

by wchurchill on Sun Dec 3rd, 2006 at 01:21:16 PM EST
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What was their share of combined Income and Payroll taxes? You continue to sidestep the shift of tax burden on income in the US from Income Tax to Payroll Tax implemented by Presidents Reagan and Bush (as opposed to Resident Bush) in the 1980's, when Income Tax is a much larger share of the taxes on income paid by the top 10% and a much smaller share of taxes on income paid by the median taxpayer.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Sun Dec 3rd, 2006 at 07:37:02 PM EST
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Please feel free to provide this data and present the analysis. I am not sidestepping anything, I'm simply commenting on data I have seen which presents Federal income taxes and income broken into various income categories.

I would like to see different data included as well:
-social security and medicare, as you suggest
-total income rather than adjusted gross income since some income levels are eligible for personal deductions, child care deductions, supplement to income with the "earned tax credit", and other income levels are not.
-state and local income taxes
-property taxes
-cigarette and alcohol taxes
-gasoline taxes
-sales taxes
-and the myriad of other taxes which have different effects on different levels of income

If you could find that data, link us all to it, and provide analysis,,,I would be very interested as I'm sure others would.

by wchurchill on Mon Dec 4th, 2006 at 03:58:19 PM EST
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I am not sidestepping anything, I'm simply commenting on data I have seen which presents Federal income taxes and income broken into various income categories.

I just presented you with data. Add 12.4% to the marginal tax rate paid by those earning under $94,200, and add 2.9% to the marginal tax rate paid by those earning over $94,200.

Now, tell me that you believe it leaves the distribution of income tax paid by income quartile unchanged. No, of course you know that looking at the full incidence increases the share paid by the lower quintiles and reduces the share paid by the upper quintiles.

And qualitative information is still information. I told you that income inequality has increased. Therefore if the upper 20% face the same average tax incidence, that means that they have evaded the increase in tax incidence that they ought to pay as a result of acquiring a large share of the national income. That is straightforward, and pretending to fail to see it is simply a rhetorical ploy.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Mon Dec 4th, 2006 at 06:37:32 PM EST
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Ah, but you are picking and choosing from the list I gave to you. You also know that the higher incomes lose deductions available to the lower incomes, and those are deductions from income. Adding up exemptions, child care deductions, etc.to the incomes may more than offset the add-back of social security and medicare.

also, I don't think I buy your use of the employer's share of those contributions. And even if one did believe that, one would have to add those back to AGI as income. You are suggesting subtracting the employer's share from an income that doesn't include that amount as income. What kind of sense does that make? et tu,

That is straightforward, and pretending to fail to see it is simply a rhetorical ploy.

I'm sure you also know this.

I have another comment which I'll withhold, because I want to review the mission of the social security program before I make the comment.

by wchurchill on Mon Dec 4th, 2006 at 07:25:30 PM EST
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Sure you can speculate that there are round about effects that shift things from the direct effect, but its just speculation. Instead of looking at the total share from the top 20% of income earners, consider that they are the recipients of more than 46% of total income.

These are the CBO tax incidence figures for 2001:

Effective tax rates by quintile (1st to 5th, then overall average)

Individual Income Tax:
-5.6, 0.3, 3.8, 7.2, 16.3; 10.4

Corporate Income Tax:
0.3, 0.4, 0.7, 0.7, 2.8; 1.8

Social Insurance Income Taxes:
8.3, 9.4, 9.5, 10.4, 7.1; 8.4

All Federal Taxes (includes Excise and "other" ... income taxes are about 92% of the total, and indirect taxes about 8%):

5.2, 11.5, 15.1, 19.2, 26.7; 21.4.

So the tax incidence on the top quintile is about 1.2 times the tax incidence on average. And the payroll taxes are not "maybe they are regressive maybe they are not", they are regressive. That is the segment of the income tax system that has replaced the progressive corporate income tax.

And why is the top 20% of income earners, recipients of more than 50% of income in 2001, the recipients of that income? Because they are disproportionate beneficiaries of the present system. That is why they hold more than 90% of financial wealth in the US.

The purpose of taxation is to prevent the inflation that would occur if the government were to spend and inject purchasing power without then taxing and destroying all or some of that purchasing power.

The heaviest penalty of inflation falls on holders of financial assetts, which are the wealthy. Since the taxation exists first and foremost to protect their wealth from runaway inflation, it is only fair for them to pay a higher effective rate of tax than those who hold little wealth.

And indeed, if they hold in excess of 90% of wealth and only pay 75% of total income tax, they are getting their wealth protection at a discount.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Tue Dec 5th, 2006 at 07:56:34 PM EST
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Re: Thanks (none / 0)

As to social security

Does the tax cap make the system regressive?
Much of the sentiment to raise the cap comes from the perception that the Social Security tax is regressive. People with earnings above the cap pay less tax proportionally to their income than people below it. This is true because the tax is a flat rate of 12.4 percent on all earners (employer and employee share combined). But for the vast segment of the workforce -- the roughly 95 percent of workers whose earnings fall below the cap -- the tax is a proportional one. Some would suggest that the tax is modestly progressive within this group because the Earned Income Tax Credit (EITC)--which lowers income taxes for qualified persons--was partially intended to offset the Social Security bite on low-income workers.[4]
People also overlook the fact that Social Security taxable earnings lead to Social Security benefits, which are derived by applying a progressive formula to the earnings record on which the tax was levied. While the highest covered earners pay lower Social Security taxes as a proportion of their income, they also receive the lowest return for their tax dollars. Thus, it can be argued that the regressivity of the tax is offset by the progressiveness of the benefits.
A recent analysis done by the Congressional Budget Office (CBO) shows that people born in the 1940s, with lifetime earnings in the lowest fifth of the income ladder, can expect to get lifetime benefits equal to twice their lifetime taxes. In contrast, people in the highest fifth of the income ladder would get benefits equal to only 60 percent of their lifetime taxes (see following table).
It is interesting to note that because of the tax-to-benefit link, the most ardent supporters of the social insurance nature of Social Security reject the idea of taxing all earnings. They fear two things:
that the low returns on the additional tax dollars that high earners would pay will give further impetus to allowing people to opt out of Social Security, thereby crippling the system for those who remain, and
that enormous and, in some eyes, unconscionably high benefits would be paid to people with large amounts, perhaps millions of dollars, in other income. But to tax them further without paying those benefits would only intensify the pressures for an optional system, or for shifting to a means-tested general revenue financed system.
Comparison of Lifetime Payroll Taxes and Benefits
(Workers Born in 10-Year Period 1940-49)
Average lifetime payroll taxes    Average lifetime benefits    Ratio of lifetime taxes to lifetime benefits
All workers born from 1940-49    177,000    137,000    1.29 to 1
Lowest fifth of earners    28,000    58,000    0.48 to 1
Middle fifth of earners    175,000    142,000    1.23 to 1
Highest fifth of earners    348,000    214,000    1.63 to 1
Source: CBO, Updated Long-term Social Security Projections, March 2005. Taxes and benefits are expressed in present values as of age 60.
Thus, whether the tax cap is fair is more complicated than simply alleging that its existence creates a regressive incidence of taxation.

there are a lot of issues to be discussed regarding social security. it is effectively a pension program that takes money from one group and redistributes it to another. I'm frankly fine with that as a social program, but to then call it a regressive tax? I'll just leave it with the last sentence above on the SS issue, "Thus, whether the tax cap is fair is more complicated than simply alleging that its existence creates a regressive incidence of taxation."

by wchurchill on Tue Dec 5th, 2006 at 11:25:20 PM EST
[ Parent ]

Social Security mimic a pension system ... (none / 0)

... but an actual, real, funded pension does not hold the liabilities of the corporation that has the pension liabilities as the assets that fund the pension. Well, an actual, real, funded pension not set up on the Enron model, at any rate.

An actual, real, funded pension is based on the underlying fact that the organization holding the pension liability cannot simply issue new money, but must intermediate money already in existence in order to meet its contractual obligations.

The government is under no such finance constraint with respect to its own fiat-currency. Its domestic constraints are real, not financial ... the ability and willingness of others to produce goods and services in return for purchasing power, for one, and the impact of its actions on employment, price stability, national economic development, distribution of opportunity, and distribution of income.

Thus when the government holds in one hand as an asset a liability on itself, which it promises to pay out of the other hand with a financial asset consisting of its own liability of a different kind, it is on the one hand not funding anything, in any real sense, and on the other hand there is in itself no intrinsic financial harm to the interests of the future beneficiaries (unlike the Enron analogy), since it is not in the position of requiring an asset base.

Social Security is PAYGO on its own functions direct transfer between the current generations paying in and the generation(s) receiving payment. Since the 1980's, it also collects a surplus on top to shift the tax burden from progressive corporate income taxes to regressive payroll taxes.

And it does so because the top 20% of income earners have more than 50% of the annual income, and since they have more than 90% of the total financial wealth, on average it seems likely that they have more than 90% of the income available to be saved (including of course the income from holding wealth which creates a self-perpetuating aristocracy of wealth). And with that comes the ability to buy the policies that allow them to take a free ride on everyone else.

Certainly under the current US regime's economic underdevelopment policies, with a current account deficit exceeding 6% of GDP, there is not an abundance of aggregate Saving available to offer the entire population the opportunity at wealth accumulation, and given Corporate income earners first crack at retaining earnings for corporate savings and wealth-income's inside track on being recycled into wealth accumulation, there is very little Aggregate Saving available annually to the remainder of the population to allow them to acquire financial wealth.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Wed Dec 6th, 2006 at 08:53:11 AM EST
[ Parent ]

Re: Social Security mimic a pension system ... (none / 0)

I'm with you down to here:

Social Security is PAYGO on its own functions direct transfer between the current generations paying in and the generation(s) receiving payment. Since the 1980's, it also collects a surplus on top to shift the tax burden from progressive corporate income taxes to regressive payroll taxes.

I would have preferred that SS surpluses were "banked", probably invested in the US stock markets in an index fund. It was a little late, but both Clinton and Bush suggested programs that would have started doing that (I prefer Clinton's). But our wimpy leaders, particularly Congress, have always "kicked the can down the road" until forced to do something. But SS is what it is, what we've made it, and the leaders that we've elected have done--both sides of the aisle, liberals and conservatives. There are no heroes here.

And yes it pushes the burden down to the younger generations, particularly with the baby boom bulge getting ready to retire.

But as the article I quoted points out, SS is just not regressive. I think it's even worse than the article points out, since the higher wage earners have their SS payment deducted from their earnings; then they pay the higher federal (and state) income taxes on that money they didn't get; then they get 60% of the money they put in; and they pay taxes again on that 60%. If you do the math on that at a 35% tax rate, it shows they lost their entire SS contributions--40% they just don't get, and the 60% they do get got eaten up by the two tax bites. I'm not crying for the high income earners here,,,I'm very comfortable with this redistribution of income. I just don't like people pretending it's a regressive tax that benefits the high income earners--that's just not true.

If you are also suggesting the rest of the budget should be balanced over the years, I agree with that. There are a number of ways that could have been achieved--lower government spending, higher personal income taxes, higher corporate income tax, more excize taxes, etc. etc. I don't agree with your choice of a higher corporate tax, because of the economics arguement that you are taxing the money twice. The corporation pays money on the earnings, and then what is distributed as dividends (as opposed to reinvested in "real assets" <snark> in the business), is taxed again.

So we double tax social security as I showed above (which I agree with as social policy), we double tax with the "death tax" (which I agree with as social policy as long as the levels are adjusted upward, which i expect will be the compromise in 2010), and we double tax corporate earnings (which I don't agree with, not on the basis of social policy, but on the basis of not allowing free markets to operate to the overall benefit of our society).

by wchurchill on Wed Dec 6th, 2006 at 01:56:12 PM EST
[ Parent ]

Re: Social Security mimic a pension system ... (none / 0)

The argument against simply using the government's money issuing power to fund social insurance is that if the economy is in an inflationary environment, this injection of liquidity destabilizes the economy. So in line with the payments being made, which creates purchasing power, an equivalent amount of purchasing power should be destroyed via taxation.

The idea that the government has to "fund" spending of one class of its own "IOU"s by either demanding some of its IOUs back or by issuing a different class of its "IOU"s in order to bribe holders of large amounts of its IOUs to hand them over is a quaint holdover from previous economic systems.

There is, however, no reason for it to "fund" future entitlements in financial terms, because the constraint on whether it can meet future entitlements is not a financial constraint. If there is adequate productive capacity to provide the goods and services, at terms of transfer that the working generations of that day can live with in return for the promise that they will be taken care of when they retire in turn, there is no problem.

Buying private sector securities is simply a means of inflating the value of those securities and provide additional commission income to those in the financial sector. That funding can never actually be allowed to be drawn down, because then that would depress the value of private securities.

If the government wishes to hold a claim on the private income stream of corporations, there is no reason to engage in a transfer of value from the lower 80% to the top 20% to do so. Regressive income transfers increase economic volatility, increasing the size of both economic upturns and downturns, and both excesses cause economic damage.

All it has to do it to demand that all corporations engaging in interstate commerce hand over a proportion of their debt and equity instruments on issue. Since corporations cannot function without the special privilage of limited liability that they are granted by government, they are in effect a limited extension of the powers of government into the private realm, and there is no reason they should not be required to pay for the privilage.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Wed Dec 6th, 2006 at 04:39:53 PM EST
[ Parent ]

Re: Social Security mimic a pension system ... (none / 0)

(btw, I didn't mean to imply that the funding of social security would be the only solution to the looming crisis--I don't think you took it that way, but just saying to clarify.)

There is, however, no reason for it to "fund" future entitlements in financial terms, because the constraint on whether it can meet future entitlements is not a financial constraint. If there is adequate productive capacity to provide the goods and services, at terms of transfer that the working generations of that day can live with in return for the promise that they will be taken care of when they retire in turn, there is no problem.

But isn't that highlighted point exactly the problem. The incredible size of the baby boomer generation has caused enormous problems (starting with class sizes exploding and school facilities not ready for the bulge 50 years ago) as it has gone through the demographic cycle. I'm under the impression that the combined impact of SS and Medicare, coupled with longer life spans and wonderful, but costly, new medicines and medical procedures, will not allow the generations following to pay for the boomers.

The argument against simply using the government's money issuing power to fund social insurance is that if the economy is in an inflationary environment, this injection of liquidity destabilizes the economy. So in line with the payments being made, which creates purchasing power, an equivalent amount of purchasing power should be destroyed via taxation.

This policy would use monetary policy to further aggravate and stimulate an inflation (the opposite of what central banks have learned to do to control inflation), and add to that a negative fiscal stimulus that would slow the economy and raise unemployment. I think you've shot both Friedman and Keynes with this policy--got 'em with one bullet.

Buying private sector securities is simply a means of inflating the value of those securities and provide additional commission income to those in the financial sector. That funding can never actually be allowed to be drawn down, because then that would depress the value of private securities.

There is an investment policy that would work here.

Some of the funding of social security could be done as it is today--a certain %.
An appropriately conservative portfolio approach would be used considering the needs of the retiring. This would certainly mean using more financial vehicles than US Equities. Liquid international markets with transparency should certainly be included. And the portfolio should have private bonds as well.
And I would think there would be a transition into this approach. you wouldn't take 50% of the "social security trust", such as it is, and put it into the markets tomorrow. And the great thing about demographics is that you can see what is coming--so you won't need panic withdrawals, as an individual might need.

But the approach would certainly relieve the stress on these pay as you go systems,,particularly with population bulges like the boomers.

by wchurchill on Wed Dec 6th, 2006 at 11:51:46 PM EST
[ Parent ]

Re: Social Security mimic a pension system ... (none / 1)

But isn't that highlighted point exactly the problem. The incredible size of the baby boomer generation has caused enormous problems (starting with class sizes exploding and school facilities not ready for the bulge 50 years ago) as it has gone through the demographic cycle. I'm under the impression that the combined impact of SS and Medicare, coupled with longer life spans and wonderful, but costly, new medicines and medical procedures, will not allow the generations following to pay for the boomers.

No piles of pieces of paper, no matter how high, and no sequences of entries in computer databases, with the most significant bit no matter how far to the left, helps with the problem.

There is no finance problem. There is a capacity to support a given retired population with a given working population problem, sure ... but neither trust funds where the government holds its own IOUs as if they were assets nor funds where the government holds promises from corporations and individuals to fork over government IOUs at some time in the future addresses that problem.

In the US, Energize America addresses that problem ... in Europe, Energise Europe would do. Reversing the other massive dependency, the dependency of the US Empire on the US Economy, would free up substantial resources to do so. But the issue is food and clothes and housing and heat and transportation, not financial assets.

In an economy where the government's IOU passes as money, the constraint on government spending is its impact on the economy ... there is no finance constraint of the sort that a business or a household faces in that system.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Thu Dec 7th, 2006 at 11:03:42 AM EST
[ Parent ]

The Economist no longer buys the anti-European hype | 69 comments (69 topical, 0 editorial, 0 hidden)

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