Posts
Chart #1 uses data crunched by the Congressional Budget Office from calendar year 2016. It's a comprehensive measure of average tax rates: total federal taxes (income, social security, corporate, excise) divided by comprehensive household income (including transfers).
Chart #1
Chart #2 shows the data used to create this chart, plus similar datapoints going back to 1979. Note how the progressively of our tax code has become much higher over time. For example, in 1979 the lowest income quintile paid an average of almost 10% of their income, whereas by 2016 it was less than 2%. The average tax rate of the top 1%, in contrast, dropped only marginally over the same period, falling from 35.1% to 33.3%. Note also that the overall progressivity of the tax code increased sharply after 2012.
Chart #2
Chart #3 shows the sources of federal income taxes by income shares for 2016. This also demonstrates how our tax code has become more progressive in recent decades. The top 25% of income earners paid almost 90% of all federal income taxes, and the top 50% of income earners paid 97% of all federal income taxes. The bottom half of income earners, meanwhile, paid only 3% of all federal income taxes. Is it fair for the top 1% of income earners to pay almost 40% of all federal income taxes? Note also that the top federal income tax rate today is much lower than it was in 1980, yet the share of income taxes paid by the rich has steadily increased. In this sense, the Laffer Curve does work: cut taxes on the rich and watch them pay more.
Chart #3
This all plays directly into what the Framers called a "tyranny of the majority," where the vast majority of the population seeks to redistribute an ever-larger share of the income of a small minority. It's not good. Shouldn't everyone have some skin in the tax-paying game?
I'm working on more posts, and hope to get them up soon. The short version is that I'm still optimistic, though I expect only average returns on risk assets this year. Last year was pretty exceptional!
16 comments:
Well, yes, progressivity has increased over the years as it relates to the income tax. But the payroll tax, which accounts for a full 38% of the UST's inflows, is decidedly regressive. We actually cap the amount of income subject to the payroll tax! This makes about as much sense as paying social security to billionaires. Think of it. We tax a 20 year-old with a low-paying job so we can give some of the benefits to the mega rich. Shameful.
@Grechster, it wouldn't surprise me that many, if not most of the mega rich to whom you refer have *never* paid payroll taxes and are thereby ineligible to collect Social Security and related benefits. This would be the case if most/all of their income has come from equity/bond distributions and capital gains, professional fees, inheritance, real estate, crop sales, and the like. And if they ran their own companies, they may have taken only a token salary of $1/year.
Scott, do you know if there are stats that would clarify this? It might help Grechster feel better if my hunch is correct.
Re Social Security: Above all, let's be clear that SS is a scam. It's a tax masquerading as an annuity, an annuity that is overseen by politicians instead of actuaries. The return on investment the average retiree receives is dismally low compared to almost any other alternative. Given a choice, any rational person would choose to opt out of social security in favor of directing his social security deduction to a real investment vehicle.
In theory, social security is not a tax but a defined benefit plan. It's not necessarily regressive, since what you receive in retirement is proportional to what you pay in. The cap on income subject to the SS tax makes sense in this context, because the maximum payout is also capped. But don't forget the medicare tax of 3% or so on all income which is not capped—this was a disguised way of eliminating the social security income cap. In my lifetime I've paid more in Medicare taxes than I have in SS taxes, yet I receive absolute ZERO benefit from having paid far more than the average person. In addition, what I pay every month to medicare now that I'm over 65 is almost 10 times more than a low-income person. I paid an order of magnitude more in taxes than a low income person for medicare yet I have to keep on paying 10 times more for the rest of my life. That is regressive???
Social Security in practice can be terribly regressive, however. That's because your SS benefit is not an asset and can't be transferred via inheritance to a another person, whereas an investment account can. SS benefits received are dependent on how long you live. Lower income workers tend to have shorter life spans, so they tend to receive less. That goes for several minority populations as well. It's a rotten deal no matter how you look at it.
And lastly, don't forget that SS benefits are taxable at marginal income tax rates, which can be very high for millionaires and billionaires.
Great post, but gadzooks, personal and corporate income taxes have become a domestic and international shell-game Gong Show.
The figures posted above should also have an asterisk: they are reported income and adjusted gross income. You can sail the Queen Mary through such blind spots. With a loose rudder.
Actually, I don't think income should be taxed at all. Place taxes on consumption, land, pollution and imports.
(Why imports? Because East Asia and Europe subsidize exports and they always will and that's the way it is.)
Best of luck to everybody in 2020 and I look forward to many more posts by Scott Grannis.
By the way, Apple is hitting all-time highs.
Given a choice, any rational person would choose to opt out of social security in favor of directing his social security deduction to a real investment vehicle.
That would be true if said rational person were financially literate. For a complex set of root causes, the vast majority of Americans are not (and arguably, many are actively discouraged from achieving that level of awareness). If financial literacy were essentially universal in the USA, a lot of our common perverse incentives would be seen for what they are.
Instead of taxing the rich they should tax capital inflows and prevent the current abuse by foreign markets.
There has to be some redistribution of wealth to households in order to balance the economy, one way or the other.
Great post, but gadzooks, personal and corporate income taxes have become a domestic and international shell-game Gong Show.
The figures posted above should also have an asterisk: they are reported income and adjusted gross income. You can sail the Queen Mary through such blind spots. With a loose rudder.
Actually, I don't think income should be taxed at all. Place taxes on consumption, land, pollution and imports.
(Why imports? Because East Asia and Europe subsidize exports and they always will and that's the way it is.)
Best of luck to everybody in 2020 and I look forward to many more posts by Scott Grannis.
By the way, Apple is hitting all-time highs.
1. Calculate, actuarially, how much is needed today to fully fund the current liability for future promised payments by Social Security.
2. Subtract from this the +/- $2.5 Trillion in the SS "trust fund."
3. Finance the balance by selling special-issue 50-year bonds at 2.5%.
4. End all Social Security Taxes.
5. Replace with mandatory payroll deductions, matched by employer contributions, into individual retirement accounts managed by a non-partisan agency like the CBO, and invested like a lifecycle (target date) fund.
6. At retirement age, allow tax-free distributions. For people who die with account balance, half goes to heirs, the balance goes to cover expenses of agency managing the program.
Add'l idea: Before calculating current liability of existing system, change retirement age of the program by extending it 1 month for each year away from Full Retirement Age. So, a 60-yr old would have retirement age pushed back 7 months, and a 30-yr old would have it pushed back about 3 years. Given current life expectancies we should do this anyway, but it would also reduce the cost of bonding out the current liability of the program.
Unknown said "Subtract from this the +/- $2.5 Trillion in the SS "trust fund."
What SS trust fund?
But I like the idea overall.
Bob
Scott, I greatly appreciate this post but even more I appreciate your response to Grechster---very insightful.
I am older than you---age 73---and I have pretty much paid the maximum into Social Security all my life, after growing up poor and working my way through college. I paid for private school for my three children and for more grandchildren. I have also paid high real estate taxes to fund public schools. I am not in the top 1%, not even in the top 19%. At age 73 I have kept my business going so as to provide employment for four other people, all much younger than I am. I am on SS and Medicare and I pay myself a FICA salary >$52,000. So I am still paying in ~14% of my salary to SS and ~3% to Medicare. In addition, I have the maximum cost for Medicare taken out of my SS each month. So my Medicare premiums are high, and I am paying into SS money that neither I nor any member of my family will ever have returned to the benefit of the one who earning the money. I am having a hard time seeing the regression in the SS/Medicare tax system.
I have often argued against the SS annuity (defined benefit) system. Indeed, it is not only a robbery of the "haves" but also of the "have nots." Many a poor person will have nothing to pass on to their heirs, but they will have had ~14% of their income taken by the government over the years with no promise of anything going back to their heirs if they die before beginning SS withdrawals. If SS became an asset, there would be wealth to pass on, possibly for even the poorest of our citizens. Such a ponzi scheme is deplorable and could only be practiced by the federal government. Happy New Year to all, and may 2020 be filled with prosperity for all.
WealthMony, re "I am having a hard time seeing the regression in the SS/Medicare tax system." What you describe is exactly the sort of thing I'm referring to, with a regressive system being one in which the low- to upper-middle class bear exceedingly high effective tax burdens—much more so than what the 1-10% face. And to repeat, SS is a scam, for everyone. Just about everyone would be better off with a more free-market oriented system.
My heart goes out to you. You are among the many who toil mightily to support others who don't, and who in addition suffer the burden of the higher taxes passed under the guise of making sure "the rich" pay their fair share.
Mr. Grannis
After the long "vacation" I expected you to come back relaxed !
What happened ?
SS is not a "scam".
It is a senior citizen welfare program (transfer payment)
passed by Congress a long time ago.
Like all welfare programs, eventually people become
dependent, come to see the benefits as "entitlements"
and the programs become almost impossible to change,
much less end.
That is how socialism grows.
Quite a few retired people get a majority of their income from their SS welfare checks.
Since so few people save enough for retirement, or can't save
(check out how low the average taxable income is),
an SS check (or two, for a couple) keeps a lot of people
out of poverty, which is what welfare is supposed to do.
Without SS checks, I believe
there would be far more baby boomers living with their children
(which may, or may not, be good news for the children),
more people getting other forms of welfare, and
even more homeless people in California !
SS transfers money from working Americans to retired Americans,
and some "disabled" Americans, who allegedly can't work.
If too much money is coming in, as Reagan once decided was wise,
for no logical reason, it gets spent on other goobermint programs.
Working Americans are confident that they will get their share of SS in the future.
And many will eventually have parents getting SS checks.
There is some "scam-like" behavior, such as pretending employers pay half,
not the employees, and pretending there is a real trust fund, rather than
an accounting / legal entity called a "fund".
But some dishonesty is to be expected from politicians.
A surviving spouse can benefit from the spouses contributions
after a death, so there is some transfer of income streams
that are allowed.
SS isn't a scam, the design is out in the open. Yes, it's some weird fairy-monster of a wealth transfer tax designed to look like an annuity but also much more than that. Yes, I could grow that money so much more, but on the other hand, what is a guarantee worth? Most people are bad savers and bad investors, we'd just be throwing them to the wolves. So anyways, I really don't get the privatization proposal: since SS is a transfer tax, and if people move to private accounts, who takes the hit when there's no wealth being transferred? Sounds like a lot of old people end up on the street?
As someone in the top decile myself, I say cry me a river for my peers who pay 10x in taxes what the poor might. We also have 10x the disposable income. We also benefit from the stability that those taxes create. Do we get punished for being earners and savers? One has to remember first that we got rewarded for the risks we took. Only a society as free and open as ours enables anybody from any background to attain this. I'm happy to pay something back.
It seems to me "moral hazard" is the biggest threat to both the economy and our way of life resulting from MMT...despite the "prevailing level of interest rates" being historically low and benign...market failure and the subsequent misallocation of resources is off the chart...checks and balances of government and the free market economy have been overridden by unelected bureaucrats experimenting with MMT...only time will tell how this ends but one thing for certain just because nominal interest rates are historically low does not mean that there are not devastating consequences to this mass folly.
Jim--- plenty of businesses get wiped out, have you not been looking at the retail scene?
There was, after 2008, a bailout of banks, but the shareholders were wiped out. I contend that moral hazard was limited in that particular case.
One might argue that the Department of Agriculture promotes a misallocation of resources to the farm sector, as its entire purpose has been to help the agriculture industry. This is probably true, but on the other hand American farmers are highly regarded for their productivity.
Properly done, money-financed fiscal programs do not promote or save any particular industry, but rather keep aggregate demand growing within a defined geographic area, such as the United States.
As I always say, I would prefer to see MMT executed through tax cuts on productive behavior (people working or investing), rather than more federal welfare or warfare spending. One might even contend that the recent corporate income tax cut is a form of MMT, as it resulted in more fiscal stimulus, certainly in the early years of the tax cut.
BC, because of the USA’s unique position in the world of finance we don’t seem to get the benefit of market signals when imbalances occur…like the Japanese yen, the American dollar just seems to chug right along enjoying its advantage of being the world’s leading reserve currency despite huge federal deficits and misappropriation of funds…it seems to me to be a false sense of security …at some point prudence and fiscal responsibility will be needed but unfortunately when that day comes atrophy may have have already set in…in a free market economy interest expense is just a cost of doing business like labor or materials…the idea that nominal interest rates should always be low is foreign to me just as the idea that your deposit at your local bank is risk free and doesn’t, therefor, warrant a risk free rate of return. Unnatural interest rate cycles are part of an unnatural monetary theory that promotes reckless consumption over prudent behavior…”he that goes a borrowing goes a sorrowing” BF.
Post a Comment