Friday, March 07, 2008

Tax Rates by Income Quintile

Numbers from CBO data.

Interesting looking at the breakdown of the various types of taxes.
Most progressive: Income Tax
Least progressive: Social Insurance Tax (Social Security and Medicare)


via Greg Mankiw

5 comments:

Audacious Epigone said...

What do you think of the fact that the tax on creating wealth is the most progressive? Philosophically, that sure seems perverse to me. I'd rather see the SS cap raised from $102k to 1,020k and a corresponding reduction in income taxation. Or simply a removal of the cap with some 'progressively-neutral' adjustment on the income tax side.

Fat Knowledge said...

AE,

When you say 'creating wealth', what are you referring to: income, savings, or something else?

I haven't really thought a whole lot on this topic, but off hand I am fine with the progressive nature of the income tax. I think for people making over $200,000 a year, it is the relative nature of wealth (compared to friends and family) that is more important than the absolute figure. You want to be able to show that you make more than you friends with fancier food, shelter, car and clothing. Increasing the tax rate on all high earners does nothing to change their relative ranking and therefore, I believe, does little to decrease the value they get from the money they earn.

I also think that savings rates are too low right now in the US, so anything we can do to encourage more savings would be good. Changing the tax code to do that sounds good to me.

Politically I think it will be easiest to raise the rate on the SS cap. You can make a compelling case that it is not fair that to put a ceiling on it. I would expect that this will be part of how the social security/medicare underfunding will be solved.

Personally, I would like to see working taxed less and physical resources like coal and oil taxed more.

Audacious Epigone said...

FK,

Income, specifically. Investment more indirectly, I suppose. An exchange of cash for some service provided or product created.

MensaRefugee said...

I think for people making over $200,000 a year, it is the relative nature of wealth (compared to friends and family) that is more important than the absolute figure.
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I dont think you would say that if you looked at foreign countries. India comes to mind.

How many Bill Gates never were because they decided on a cushy 100k engineering job instead of trying to make the big 1000k? How has the economy suffered as a result?

Personally, I have an idea that could make me 300k+ a year in the agricultural field - but why bother if I have to give a lot of it back as tax? Why take the risk? The road less travelled? I could just be a 70k a year engineer instead.

Fat Knowledge said...

Mensa,

I dont think you would say that if you looked at foreign countries. India comes to mind.

I am not sure I see your point here. If you are saying that if you are really poor that absolute levels of wealth matter, then I agree completely with you. The difference between $5,000 a year and $30,000 a year does make a difference based on the increase in material possessions you can buy. But, I think at some point, say $200,000, above that it no longer matters, as you already have enough food, clothing, medicine and housing to meet your material needs.

How many Bill Gates never were because they decided on a cushy 100k engineering job instead of trying to make the big 1000k? How has the economy suffered as a result?

Honestly, I don't believe that anyone making 100k makes a decision on whether to take a big risk on a new company based on whether the marginal tax rate above $100,000 is 30% or 45%. I believe both Gates and Buffet have stated they think the tax rate should be higher on upper income. Most successful entrepreneurs that I read about are motivated more by changing the world rather than making lots of money.

And to state why I think relative income/wealth is more important, I think Gates is a great example. He just moved from being the #1 richest man in the world to #3, even though he gained $2 billion in worth. I think he would much rather be ranked #1 (relative ranking) than have an extra $2 billion (absolute ranking). What is he going to do with that extra $2 billion anyways?

Personally, I have an idea that could make me 300k+ a year in the agricultural field - but why bother if I have to give a lot of it back as tax? Why take the risk? The road less travelled? I could just be a 70k a year engineer instead.

Would love to hear what your idea is, as I love hearing new business ideas.

But, let me get this right. If you were making $70k, lets say the tax rate is 33%, so you take home $46k. If you make $300k, lets say there is a progressive tax rate of 50%, so you would take home $150k. That would still be 3 times as much take home money. If the tax rate was the same for you (flat) at 33%, then you would take home $200k or 4 times as much. Would that really make that much of a difference? What exactly do you think you would be able to spend the extra $50k you take home on that would make your life so much better that it worth your while to take the risk?

I still think that most of the value in making $300,000 is that you can say you are in the top 1% of wage earners, that you can say you are making more than your friends and family, and the esteem from your colleagues in being successful.

You will have a slightly fancier house and car than your friends and be able to eat at slightly fancier restaurants. But, while those things are nice, I don't think they make people any happier, as they just adjust to them. The relative advantage on the other hand, I do think makes people happier. But, a higher tax rate on all rich people doesn't change their relative standings and therefore doesn't have an impact on their happiness.

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