Tax the Rich — really, seriously.

“François Hollande, the Socialist challenger for the French presidency, has launched a surprise offensive against top earners, proposing a marginal tax rate of 75 per cent on incomes above €1m a year – a level far in excess of top rates elsewhere in Europe.” — Financial Times 28 February

Is Hollande mad?  Perhaps extreme; but he has the right idea.   When President Obama is pilloried for proposing to repeal W’s tax cuts for the rich, thus raising the top rate on the wealthy from 33% to 39%, one of the attacks on this policy is that this measure will have only a minor impact on the deficit, at best.

That’s true enough — but that is because an increase from 33% to 39% is thinking too small.

In 2010, the richest 1% of American taxpayers received 24% of national income.    What does that mean?  Not much until you put it into dollars.  That year, gross national income was 12.55 trillion dollars.  That means the richest 1%, approximately one million households, took home a total of 3 trillion dollars, averaging about 2 million per year each.

On that income, they paid 24% in federal taxes, or 720 billion dollars per year.  That rate, of course, is less than the marginal income tax rate paid by folks making $35,000 per year!

So let’s say we we doubled the income tax paid by the top 1% — to 48% per year (that is not near what Hollande is proposing, of course.  It is the same as the top income tax rate in that overtaxed, stricken poor economic performer known as “Germany.”  No wonder Romney hates the idea of the US becoming like Europe.  It’s not the economic performance he’s talking about, it’s the tax rates on the rich!).

If we did that — essentially raising the marginal tax rate on the highest incomes from 33% to 48%, removing the preference for capital gains, and perhaps increasing the estate tax a bit — the yield to Uncle Sam would be an extra $720 billion per year, or 7.2 trillion over ten years.  That would cut the annual federal budget deficit by 80%, or pay downover halfthe entire national debt in ten years.

So here is a proposition for Obama to sell — let’s increase the marginal tax rates on those earning over $500,000 per year (essentially to top .7 %) to 48%, and end the preferential treatment of capital gains on income over $500,000 per year as well.  Let’s then sell it like this to the average American:   “Without any tax increase at all for 99.3% of all Americans, and without raising taxes to over half of what anyone earns, and without raising US taxes for even the richest Americans any higher than those in our competitors like Germany, we can reduce the annual deficit by 80%.  We can do all of this by only increasing the taxes on those making $500,000 per year from 33% to 48% (less than it was under Eisenhower, Kennedy, and Reagan’s first term). That will almost eliminate the federal deficit, and save you and the U.S. Government seven trillion dollars over the next ten years.  Can we do it?  Yes we can!”

Of course, the death shrieks from the GOPS will reveal that the Republicans don’t care about deficit reduction at all; they only want to reduce the deficit by shrinking government spending, so they can justify even more tax cuts for the rich.

The US, like other rich countries, faces problems of adjustment to an aging population and rising pension and health care costs.  But in the short term, we do not have a meaningful deficit or spending problem.  We have a tax revenue problem — so much money is going to a tiny group of super-rich, and they are able to achieve such a low net rate of taxation on that income, that the government is starved of revenue.  We can nearly make the federal deficit go away by a modest, reasonable increase in the taxes paid by the super-rich.  So tax them; really, seriously.


About jackgoldstone

Hazel Professor of Public Policy at George Mason University
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2 Responses to Tax the Rich — really, seriously.

  1. David P. Echevarria, Ph D (Finance) says:

    “On that income, they paid 24% in federal taxes, or 720 billion dollars per year. That rate, of course, is less than the marginal income tax rate paid by folks making $35,000 per year!”

    My tax tables (Single / Married filing individually) indicate that rate for income above $33,950. The average tax rate for $35,000 (taxable income) is 14.11%. Your comment is both misleading and dishonest.

    • David, you have a PhD in finance. So perhaps you overlooked that my comment specified “the marginal income tax rate..” The marginal rate, as you know, is the rate earned on each additional dollar of income. So there is was nothing dishonest in what I wrote. The average tax rate, as you correctly noted, is less than the marginal rate.

      To me, it remains striking is that the average tax rate paid by many people earning over $1 million per year is still less than the rate paid on each additional dollar of earnings for those with wages above $35,000. Thus if I earn $35,000 per year, and I work overtime and earn an additional $1000, my tax rate on that extra income is 4.2% in social security tax, 24% federal income tax, and in many areas additional state income taxes. So it’s at least 28.2%. But if a hedge fund manager gains an extra client and makes an additional $1m per year, his tax rate (or hers) on that additional income is only 15%, or just over half the rate I pay. You may think that is fine and fair, but I do not.

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