Vijay K. Mathur
Published in Standard-Examiner, Ogden, Utah, June 15, 2012
Right-wing
conservative media pundits, journalists, and their sympathizers in the Congress
and think tanks, bombard us with constant one-liners that federal income tax
rates are too high, and the cure for our unemployment problem is lowering
federal income tax rates. Obama administration has proposed increasing tax
rates on the rich and lowering the rates on middle- and low-income Americans to
raise revenue. But the followers of Grover Norquist's "no tax increase
pledge" in the Congress have constantly opposed raising tax rates on the
rich.
This opposition to
raising tax rates on the rich follows the same old reasoning that increasing
taxes on the rich will reduce growth, increase unemployment and hence decrease
tax revenues. Therefore, one questions if this stand on taxes is based upon sound
economic analysis or is it just old political and bipartisan rhetoric meant to
misinform Americans about the effect of increasing taxes on the rich? A recent
major study published in the Journal of Economic Literature, March 2012, by
Emmanuel Saez, Joel Slemrod and Seth H. Giertz (SSG), provides very convincing
evidence that increasing marginal income tax rate (rate when income exceeds an
individual's tax bracket by an extra dollar) more than the current 35 percent
rate for the top 1 percent of income earners will increase federal government
revenues.
SSG find that under
very reasonable assumptions, supported by vast literature on tax issues, when
one combines maximum federal and average state income tax rates, Medicare and
average sales tax rates in the U.S., the top marginal tax rate on ordinary
income as of 2009 is 42.5 percent, the estimated revenue maximizing tax rate is
72.2 percent and the estimated corresponding top federal income tax rate is
68.4 percent. These estimates are substantially higher than the current top
marginal tax rate of 35 percent. It should be emphasized that no one in the
Obama administration is proposing such high rates.
But the data shows
that very high federal marginal income tax rates from 91 percent to 68.8
percent did exist from 1952 to 1981.
President Obama has
proposed for 2013, a 39.6 percent marginal tax rate for those households with
incomes of $388,350 and over, according to the Wall Street Journal.
In 2009, 22,000
millionaires paid only 15 percent of their income in income taxes. SSG does
recognize that high tax rates on the rich produce behavioral responses that
include actions like reducing hours of work, career choices, timing of
compensation or accepting non-taxable compensation, tax avoidance or tax
evasion. However, SSG contends that for most rich people, where behavioral
responses are concentrated, responses to higher individual income tax rates
include a shift away from taxable individual income to other forms of income
such as corporate income, deferred compensation that is taxable at a later
date, stock options and dividends.
SSG also claims that
estimates are affected by the tax system that allows different rates for
capital gains and dividends, and a host of deductions and tax credits.
Even with the current
complicated tax system, the primary message from the study is that increasing
the top tax rate, as President Obama is proposing, will not be detrimental to
the economy and will increase tax revenues.
There is no doubt
that the current tax system would be much better for the economy if many tax
deductions, credits and other loopholes are substantially reduced. In addition,
increasing tax rates on capital gains and dividends (constituting a large
fraction of income of the rich), combined with substantially reduced corporate
income tax rates, will provide a significant boost to businesses and the
economy. Our tax/expenditure system has become skewed in favor of the rich and
wealthy and does not much encourage human and physical capital accumulation and
R&D; its effect also shows up in the skewed distribution of income.
SSG data show that
since 1981 marginal tax rate on the top 1 percent has declined substantially,
and precisely at that time their income share has started increasing
dramatically. Tax Policy Center data show that in 2008 only 59 percent of the
top 400 adjusted gross income (AGI) taxpayers paid the marginal tax rate of 35
percent and over and none paid effective average tax rate of 35 percent and
over. SSG admits that inequality of income between the rich and non-rich may
not be due only to the tax system.
However, starting in
1986 the sharp drop in marginal income tax rate on the top 1 percent
accompanies the dramatic jump in their income share. At the same time, the next
9 percent in the income distribution, who also got a tax break starting in
1981, only gained a modest increase in income share. It is hoped that Americans
pay attention to objective facts on taxes and about our current tax system and
not be persuaded by empty rhetoric on the right based on ideology, emotions and
twisted facts.
Mathur is former
chairman and professor of economics and now professor emeritus, Department of
Economics, Cleveland State University, Cleveland, Ohio. He blogs for the Standard-Examiner at http://blogs.standard.net/economics-etc/
