Wednesday, June 28, 2023

Guest Post: Tax the Rich.

Tax the Rich. Tax them more.

Let me tell you how it will be
There's one for you, nineteen for me
'Cause I'm the taxman
Yeah, I'm the taxman
Should five percent appear too small
Be thankful I don't take it all.
"Taxman" George Harrison of The Beatles, 1968

The USA has a progressive income tax. High income people pay a higher percentage of their income than do lower income people. It redistributes wealth. Guest Post author Michael Wallace says it should be more progressive and redistribute more wealth.
Mitt Romney famously said 47% of Americans were "takers." He was referring to the reality that almost half of Americans essentially pay zero federal income tax. They pay sales taxes, Social Security taxes, utility taxes, fees, tolls, and more, but not much in federal income tax. Only 3% of federal income taxes paid are paid by the bottom half of Americans.

Michael Wallace's Guest Post proposes that the current tax rates become more progressive, with incomes drawn from the wealthiest and given to the poorest. Marginal tax rates used to be much higher than now. 

Postwar America was a time of relative equality between rich and poor. There was an ethic of "we are all in this together" coming out of the war experience, when the entire country was pressed into service. The lives of wealthy people depended on the military service of young men and women in uniform and on factory floors. An enlisted man in Europe, North Africa, or on a ship in the Pacific wasn't a "taker."  By 1980 Ronald Reagan put voice to the new ethic: The government is the problem and income redistribution is theft from hard-working Americans.
Michael Wallace is a college classmate. After college Wallace joined the Peace Corps and then returned to obtain a Ph.D. from the JFK School of Government. He retired in 2018 and enjoys daily walks with his dog Layla.

Michael and Layla have visited my farm and vineyard twice. Layla runs around, sniffing for ground squirrel scent, and digs holes. 

Guest Post by Michael Wallace 

My previous post (June 24) was about the persistent inequality of income in the United States and redressing this problem by redistributing income after it is acquired. That post recommended the amounts of income that could be redistributed with great absolute benefit to the poorest 40% (the two lowest quintiles) of the population and little relative cost to the richest 40% (the two upper quintiles). That post recommended what to do, not how to do it.

 

The “how” is easy.  We have an income tax system, and every year some people receive refunds from that system, often because they have paid more tax than they owe.  Redistributing income can become one of the objectives of the income tax system, in addition to the goal of providing the money that funds government activities.  Government services funded by the income tax would simply expand to include a more equitable distribution of income.

 

However, redistribution should not be an annual activity, taking place only once a year.  People who receive large lumpsum payments are likely to spend them quickly and come up short of funds for other needs soon thereafter.  It would be much better to redistribute this money each month, like a paycheck or Social Security payment.  This additional redistribution could simply be an expansion of the current Social Security system.

 

On the contribution side, the Internal Revenue Service already has a quarterly tax payment mechanism that could be expanded to include these payments into the redistribution system. The table below shows 2021 mean US annual incomes by quintile, revised incomes after redistribution, and the total and monthly redistribution amounts.

 

             Household Annual Income Distribution

Quintile

Mean

Revised

Redistribution

 

 A

Total (B-A)

Monthly

Lowest quintile

$14,859

$41,795 

+$26,936 

+$2,245

Second quintile

$41,025

$52,571 

+$11,546 

+$962

Middle quintile

$70,879

$70,879 

$0 

$0

Fourth quintile

$115,462

$103,916

-$11,546

-$962

Top quintile

$269,356

$242,420

-$26,936

-$2,245

Tax Policy Center

The numbers in the table above show the mean values for the households in each quintile.  In practice, household values would fall on a smooth upward-sloping curve so the income for a household at the top of one quintile would be little different from the income for a household at the bottom of the next quintile above.

 

I think this redistribution would make us a better and happier society.

 


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18 comments:

Mike Steely said...

The Brookings Institution found that 44% of workers in the U.S. have a median income of about $24,000. That isn’t even a living wage for a single adult – one of the reasons we have so many homeless. Meanwhile, the top 1% are making over $823,000 and the top 0.1%, $3,213,000.

There’s a correlation throughout history between extreme income inequality and revolution.

Rick Millward said...

"People who receive large lumpsum payments are likely to spend them quickly and come up short of funds for other needs soon thereafter."

Yes, they will immediately run out and buy a boat.

M2inFLA said...

Interesting, but...

1. How much should the income from tax-free municipal bonds and other investments, like ROTH IRAs be taxed?

2. At the state level, how much of that federal tax extracted from the upper quintiles be deductible from state income tax returns? (Note: states like Oregon, already limit how much of one's federal tax bill is deductible on the state income tax return)

3. Will that extra "income" received by the lower quintiles be subject to federal, state, and local taxes?

I understand the intent of this proposal, but the average taxpayer won't understand any of this at all.

Michael Trigoboff said...

Great idea, but now we need a political strategy to convince enough of the electorate that they want this to happen, one that will work despite opposition from those who don’t want it to happen.

Carolyn Shaw said...

Suppose someone has assets (liquid and non-) but no income (AGI). Would they be able to collect this payment? (Asking for a friend)

Mike Steely said...

The devil is in the details, but if this really is the world's wealthiest nation, it could be worked out. The problem is that probably doesn't matter how many of the electorate support it. 88% of the electorate support universal background checks for all gun purchases, but that doesn't cut any ice with Republican lawmakers.

Malcolm said...

I like this idea. I also think we should pay HIGHER taxes on capital gains. Why should people who work their butt off pay a higher tax rate than someone who sits on his butt, and merely has to cash checks every month?

M2inFLA said...

Carolyn, you bring up a good point.

To be qualified for the Oregon Health Plan in the past, only income was looked at, not assets. One could use those assets to pay their normal living expenses, yet still qualify for the OHP as they had no income.

Just have to be sure you have "no income", but just access cash assets they might have.

And as I wrote above, one might have investments that might provide nontaxable income.

Malcolm said...

I like this idea. I also think we should pay HIGHER taxes on capital gains. Why should people who work their butt off pay a higher tax rate than someone who sits on his butt, and merely has to cash checks every month?

Michael Trigoboff said...

Why should people who work their butt off pay a higher tax rate than someone who sits on his butt, and merely has to cash checks every month?

Possibly because capital is mobile, and we have to compete with other countries for it?

Michael Trigoboff said...

A political strategy has to take two things into account: numbers and intensity. The pro gun rights side makes up in intensity what it may lack in numbers. Look up the phrase “Molon labe” and then ask yourself if that intensity is matched going the other way.

M2inFLA said...

If it is so easy for the "rich" to make money while sitting on their butts, why don't those with hard jobs pursue an education, and use their smarts and study to do better. Brain work is hard in a different way.

Not everyone is successful with a labor job or a sitting on their butt job .

Yes, capital and money are mobile, and many who started with nothing have become successful, and even "rich". Some have also lost everything.

Malcolm said...

Michael, would you explain how “Possibly because capital is mobile, and we have to compete with other countries for it?” works? Otherwise it seems like a non sequitur.

Thanks, and have a great day!

Michael Trigoboff said...

Malcolm,

Capital gains taxes are paid on investments. Capital gains taxes reduce your return on an investment. If you could invest instead in another country where the capital gains tax was lower, you might get a higher return on your investment.

I would prefer to make my investments in America, but there is nothing other than my own preference forcing me to do that.

Joe Yetter said...

Yes.
A few years back, I did some research on progressive income tax rates; I was struck that Israeli economists had identified a mean top marginal rate of 67% as the most efficient, with not much loss of efficiency until one got to around 80% for a top marginal rate.
The conservative AEI has weighed in, inconclusively. But they provide links and references
https://www.aei.org/economics/what-is-the-optimal-top-marginal-income-tax-rate-probably-far-lower-than-70-or-80-percent/

Mc said...

Meanwhile, there are cities that propose letting corporations vote, like us citizens.

It wasn't ordinary citizens thay owned slaves in the US and tried to break up the country. It was the rich businessmen and corporations.

Michael Trigoboff said...

A great science fiction book, Space Merchants, describes a future in which we have the senator from Coca-Cola, the senator from General Motors, etc. 😀😱

Steve Law said...

As Carolyn Shaw and M2inFLA pointed out, neither capital gains tax rates nor income tax rates will affect the folks we want to tax. As explained in https://www.propublica.org/article/the-secret-irs-files-trove-of-never-before-seen-records-reveal-how-the-wealthiest-avoid-income-tax, the richest men in the country pay no or little income tax. The article attributed this to unrealized capital gains, but no doubt there are other ways to enjoy the fruits of your labor without incurring income at all. I conclude that, unless we have a wealth tax, we will not be able to tax the wealthy.