The Folly of Soaking the Rich


The chart Andrew Stiles referred to Friday (from an earlier post by Veronique de Rugy) shows only the start of how counterproductive it is to increase taxes on the wealthy. As a result of lower tax rates on the top income earners, not only do they pay a much larger share of all taxes, but they pay much more taxes total — and revenue to the government has increased. This is because lowering taxes on the rich creates more rich people and richer rich people. The federal government gets much more revenue if you impose a 40 percent tax on a large number of very wealthy millionaires than if you impose a 70 percent tax on a small number of less wealthy millionaires.

Every tax has a “revenue-maximizing” point well short of 100 percent. If a tax is set higher than its “revenue-maximizing” point, overall tax revenue to the government will decrease. This is the basic theory behind the Laffer Curve, which states that when taxes are zero percent, revenue to the government is (obviously) zero, but when taxes are 100 percent, revenue to the government is also zero, because by taxing all the income of a particular group of people, you kill all economic activity in that group, so you’re left with nothing to tax. Between those two extremes is a curve whereby revenue to the government rises as you increase taxes from zero percent, but begins to fall as you approach 100 percent taxation — that’s the Laffer Curve.

Arthur Laffer and Ford Scudder explore this phenomenon at length in their brilliant series The Onslaught from the Left. In keeping with what Veronique pointed out, they write, in Part II of the series:

In the year Ronald Reagan took office (1981) the top 1% of income earners as reflected by the Adjusted Gross Income of all tax filers paid 17.58 % of all federal income taxes. Twenty-five years later, in 2005 the top 1% paid 39.8% of all income taxes, representing a greater than doubling of the share of tax payments made by this group.

But even more to the point, from 1981 to 2005 the income taxes paid by the top 1% rose from 1.59% of GDP to 2.96% of GDP.  In addition to the huge rise in the percent of GDP paid in income taxes by the top 1% of income earners and the more than doubling of the share of taxes paid by this group was the huge absolute increase in real taxes (2005 dollars using the GDP price deflator [in other words, adjusting for inflation – ML])  from 1981 through 2005.  In 1981 total tax payments from from the richest 1% were $98.84 billion, while in 2005 the top 1% paid $368.13 billion in taxes; that’s a 288% increase in 25 years.  In rough numbers, that means that each of the richest 1% of filers in 1981 paid a little over $100,000 in 2005 dollars, while in 2005 each filer on average paid over $288,000.  And remember that’s inflation-adjusted dollars.”

This astonishing statistic is explained by a simple fact. As a result of reducing taxes on the rich, the rich got much richer — so much so that they wound up paying nearly four times as much total tax (and nearly three times as much tax per rich person) as when taxes were higher.

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If we gathered all the money the ‘rich’ had, we would not even make a dent in the debt we owe…

The Liberals/Progressives spend spend spend spend and spend without ‘thinking’ about where the money will come from, and they don’t really care just as long as “they feel good” . Then when the Liberals “tab” is due and they don’t have any money to pay up for all the ‘programs’ and ‘Big Government’ they created, they ‘go after the rich’ to pay ‘their fair share’, which by the way will ultimately include the middle class…

Class warfare for votes… this is where liberalism has brought us…via Obama and the Progressives.

Go Herman Cain!!

For those who pretend to understand the Laffer Curve, may I suggest the following sources of criticism:

(etc., etc., etc.–search ‘Laffer Curve’ for more examples)

@Liberal1 (objectivity):

Uh…for those who wish to pretend to engage in serious debate, may I suggest that you a) not use Wikipedia as a source and, b) read, follow, and comprehend the points of the source materials that you link prior to presenting them for reference.

Otherwise you come off looking like a fool. Again.

I just wish that we could avoid exaggeration and hyperbole.

There’s a difference between “progressive taxation” and “soaking the rich.”

A great example of “soaking the rich” was a measure which California voters approved to assess a 1% tax surcharge on people making more than a million a year to support mental health care. This was a disgusting initiative and I voted NO. Sadly, it passed.

But restoring marginal tax rates to the levels of the 90s (i.e. top marginal tax rate of 39%) isn’t soaking the rich. It’s progressive taxation. I’m personally in favor of rescinding all of the Bush tax cuts — to middle and low income Americans, as well as to the wealthiest Americans. Do that, and the deficit/debt problem is mostly solved and the rest can be solved with some relatively modest tweakings.

For goodness sake, the top marginal rate was 91% under Eisenhower and was 70% from Kennedy until Reagan.

91% is soaking the rich. 70% is soaking the rich. 39% is progressive taxation.

– Larry Weisenthal/Huntington Beach, CA

For goodness sake, the top marginal rate was 91% under Eisenhower and was 70% from Kennedy until Reagan.

I keep seeing you repeatedly bringing up these high marginal rate figures…yet you’re not mentioning the very small sliver of people who actually fell into those categories. Of course, the 91% and 77% numbers you cite were the marginal rates, not the effective rates. There’s a huge difference between the two.

In the interest of intellectual honesty, I have to point out that you also failed to mention the tax atmosphere of that era which featured:

unlimited charitable contribution deductions for gifts including appreciated stock and other property, prepaid interest deductions, installment method of accounting, myriad deductions, oil and gas drilling tax incentives, 25 percent capital gains, an absence of the Alternative Minimum Tax, and numerous other “incentives” that reduced the effective rate to one lower than today’s for any high-income earner who chose to avail themselves of sophisticated planning.

@Aye: You make perfectly valid points. Here’s a challenge for both of us:

What percent of total US federal taxes (since we are talking Obama here) were paid by the top 1% (or 2%) in the following decades:

00s? (Bush years)
10s? (Obama years)

As I write this, I don’t know the answer. But I’ll wager that the current Dem/Obama proposals will still result in less soaking of the rich than that which was in place for most of the pre-Reagan years and for the Clinton years.

But maybe one of us can find some hard numbers.

P.S. It’s a tradition at our house that, every July 4th, we watch the great musical film “1776” (if you’ve never seen it, you are in for a treat some day, when you get around to watching it). Anyway, the film has a great line (film made in 1972 and play probably written a decade before that):

“Americans would rather protect the possibility of becoming rich, than face the reality of being poor.”

– Larry Weisenthal/Huntington Beach, CA

You’ll lose that wager, Larry. While this chart about the top 1% from USgovernment spending only goes back to mid Reagan years, the increase of burden by the top 1% earners is higher, not lower, as a percentage of GDP.

Chart 2: The Top One Percent’s ShareThe top one percent of income tax filers has seen its income increase from 6.4 percent to 14.3 percent of GDP in the period from 1986 to 2007. But the share of federal income tax paid has increased from 25.7 percent of all individual income taxes in 1986 to a 40.4 percent share of the total in 2007 with a notable dip to 33.7 percent in the recession year of 2002.

In contrast, the lower half of income taxpayers have seen their share of tax burden decline over 50%, from 6.5% during the Reagan years to 2.9% in 2007.

@mata: To be fair to you, you answered my question exactly as I asked it, but your chart is misleading.

The rise in percent of total taxes paid by the top 1% rose sharply in the Clinton years (in which marginal tax rates on the top 1% were increased and during which the income gains by the top 1% continued to exceed those of the bottom 50% by a considerable amount). Note the flat percentages during the Reagan/Bush41 years and during the Bush43 years, when the percent of total taxes paid by the top 1% remained level, while the income gains made by the top 1% relative to the top 50% increased substantially.

And, as you acknowledge, your numbers don’t go back before 1986. I’d double down on my wager that the percentage of total revenues contributed by the top 1%, divided by (normalized by) the percent of personal income enjoyed by the top 1% would be considerably lower under the Dem/Obama proposals then they were during both GOP and Dem administrations in the 50s, 60s, and 70s.

– Larry Weisenthal/Huntington Beach, CA