November 2, 2013
Posted by Jay Livingston
Taxes on the rich were a big issue in Obama’s first term. The Bush tax cuts that had lowered the top rates were set to expire, and Republican lawmakers and media voices were fighting hard on behalf of the wealthy (a category most of them belonged to).
Under the Obama proposal, the Bush tax-cut* rate of 35% for those at the top would have returned to 39.6%. That was on paper. In fact, the superwealthy actually paid nowhere near those rates. In the Times today (
here), James B. Stewart reports on the plight of the 400 wealthiest American in 2009. They saw their adjusted gross income decline, on average, from $320 million to $200 million. And the percentage they paid in come taxes did go up. But not to 35%.
(Click on an image for a larger view.)
The rate the very rich paid rose from about 16% to 20%. The slightly less wealthy – the top .01%, average income $1.4 million – paid a rate of 24%, higher than the top 400 but still well under the official rate. That 24% rate was also the average for the poorest of the rich, the 1% with incomes of at least $344,000.
Economists like Greg Mankiw have risen to defend the wealthy, arguing that if rich people’s taxes rise – i.e., revert back to the levels of the 1990s – the rich will become lazy. With the government taking another 4 cents out of each dollar, rich will not work so hard, and then where would we be? (As I pointed out [
here], Mankiw himself was anecdotal evidence to the contrary. He was writing articles claiming that marginal tax rates were key incentives for the rich; Mankiw is a rich economist, but he was getting paid peanuts or nothing at all for his work in writing them. That is, even with an incentive of $0, we was writing op-eds rather than playing with his kids.)
Those “high” taxes of the 90s – back before the Bush tax cuts – didn’t seem to keep the rich (or anyone else) from working. Unemployment was low, and the economy was doing just fine thank you. I find it hard to believe that if the top rate returns to pre-Bush levels, Dustin Pedroia will start heading for the dressing room after the seventh inning or that Tom Hanks will confine himself to minor parts that involve only a few days on the set or that traders at Goldman will start taking Fridays off.
But what about the effects of increased marginal rates on people who struggle to make ends meet?
The Congressional Budget Office has released figures showing what happens when poor and middle-income people increase their income.
For the poor, increased income brings the loss of government benefits – Medicaid, SNAP (food stamps), and the like – and an increase in the various taxes paid. According to a
2012 CBO report , at about $27,000 the amount paid in taxes exceeds the value of government benefits, and disposable income rises more slowly than actual earnings.
The CBO also calculated the marginal* tax rates on people from the 10th percentile to the 90th.
The X-axis is calculated as a percentage of the official poverty line – about $11,500 for a single person, $19,500 for a family of three. So 300% of those figures would be about $34,500 and $58,500 respectively. It is those earners just above the poverty line who pay the highest marginal rates.
The more recent October, 2013 update breaks down the increased costs of these higher earnings, separating the higher federal taxes from the other costs – the higher state and local taxes, federal payroll tax, and the loss of SNAP benefits.
The graph shows the marginal tax rates for people earning less than 450% of the poverty line (i.e., less than $51,700 for an individual, less than $88,000 for a family of three). As the report concludes:
In 2013, 37 percent of low- and moderate-income taxpayers who have earnings face total marginal tax rates—including federal and state individual income taxes, federal payroll taxes, and the phasing out of benefits from the Supplemental Nutrition Assistance Program—between 30 percent and 39 percent, and over 20 percent of that group face marginal rates of 40 percent or more.
The issue of tax rates and means-tested programs is complicated (see Nancy Folbre’s columns at the Times
Ecomomix web page, for example). But it is curious that those who were prominent in their concern over the disincentive effect of an increase in marginal rates on the rich are silent or even enthusiastic when it comes to increased marginal rates on the poor.