Business Insider’s Henry Blodget has a blog post – Sorry, Folks, Rich People Actually Don’t ‘Create The Jobs’ — that contains this interesting claim:
The middle class has been pummeled, in part, by tax policies that reward “the 1%” at the expense of everyone else.
I dunno. Let’s take a look at average tax rates since 2000 through 2009, using data from the Tax Policy Center. Back in 2000, the top 1% paid an average total federal tax rate — including income, payroll, and imputed corporate taxes — of 32.4%. But 2009, that had dropped to 28.9% — a decline of 3.5 percentage points.
What happened to the average tax rates of other income levels? They declined ever further. The middle fifth of the income distribution saw its average total federal tax rate fall by 5.4 percentage points to 11.1%, while the rate for the bottom fifth fell by 5.8 points to 1.0%. It’s worth repeating: The US has the most progressive tax code of any advanced economy since we tax income rather than consumption. Indeed, the top 1% pay 37% of all income taxes.
I guess Blodget would like to raise income tax rates even higher. But income tax rates are already above Clinton-era levels and may well be approaching the point of long-term diminishing returns. At the same time, total capital incomes taxes are among highest found in advanced economies.
Recently billionaire bond investor Bill Gross offered tax reform that Blodget might like:
I would ask the Scrooge McDucks of the world who so vehemently criticize what they consider to be crippling taxation of the wealthy in the midst of historically high corporate profits and personal income, I would ask them to consider this: Instead of approaching tax reform from the standpoint of what an enormous percentage of the overall income taxes the top 1 percent pay, consider instead how much of the national income you’ve been privileged to make. In the United States the share of pretax income going to the top 1 percent has more than doubled from 10 percent in the ’70s to about 20 percent today. By reducing the 20 percent of national income that these Golden Scrooges now earn, by implementing more equitable tax reform that equalizes capital gains, carried interest, and nominal income tax rates, we might move up the list to challenge more productive economies such as Germany and Canada.
And here is the response from AEI tax expert Alan Viard:
Well, he’s right, of course, that the income inequality has risen over the last couple of decades, but I’m not sure that his conclusions really follow from that fact. He’s really glossing over a number of important issues.
So to deal with the capital gains rate first, because it was specifically mentioned, a lot of capital gains, at least half of them, are capital gains on corporate stock. And the problem there is that corporate income has already been taxed once at the corporation level. If you imagine a corporation that’s doing an investment that they’ve issued stock to finance, they’re going to pay corporate income tax on those profits. The official corporate tax rate is 35%. On average, the effective rate is probably about 25%. It’s more for some companies. It’s less for others, but on average about 25%.
And then, any portion of that income that gets paid out in dividends is taxed in that form to the stockholder. And any portion that’s reinvested gives rise to a capital gain. And it’s taxed in that form to the stockholder.
So when you look at either the capital gains tax or the dividend tax, that’s income that’s already been taxed at the corporate level. So to say that there should be the same individual tax on that income as there is on other income, it really doesn’t hold up because that other income has not been taxed at the corporate level, while the dividends and capital gains have been.
That basic fact is not mentioned in the quotation.
Now, obviously, it’s raising some broader issues there too. How much should high-income groups pay towards the cost of government? How much had government spent total? How much should other groups pay and so on?
I do think there’s a tradeoff there. I mean, we all understand that high-income groups do have a greater ability to pay. Our federal tax system has a significant degree of progressivity built into it with the high-income groups paying a higher fraction of their income than others. And that’s true for overall federal taxes — not just for income taxes, but including in there the Social Security and payroll – the Medicare payroll taxes as well.
And then, of course, a significant part of the federal budget goes to transfer payments that are predominantly paid out to middle income and lower income households. So we have quite a bit of redistribution going on.
Should there be more? Should there be less? Well, I don’t know that I have a definitive answer to that, but I would say that redistribution is costly. It undermines incentives to work. It undermines incentives to save and invest, especially when you’re doing it through the kind of income tax system we have today.
So I think a lot of caution should be exercised before we adopt this kind of recommendation.