US tax rate history - A return to the glory days

[Al68]

Even though I'm an investor now, and would see my profits drop, it strikes me as illogical for the richest people to pay the same tax rate as the poorest.

Me, too, but that's not the reality of the situation. Even in that example, the rich paid proportionately higher taxes than the poor, and that example was nonsense.

In reality, rich people don't just pay proportionally more, they pay a much higher percentage in taxes, and a disproportionately higher share of the total tax burden. This has been shown repeatedly in this forum, but here's the same link to CBO data I have provided many times: http://www.cbo.gov/ftpdocs/88xx/doc8885/EffectiveTaxRates.shtml.

Of course that still ignores the fact that the bulk of taxes collected "from the rich" is not taken from their pockets, it's taken from their investment capital. Unlike the poor and middle class, rich people invest most of their money. Capital gains taxes in particular come from the investment capital of rich people, not their pockets or fat cat cigar funds.

 

[russ_watters]

Even though I'm an investor now, and would see my profits drop, it strikes me as illogical for the richest people to pay the same tax rate as the poorest.

Like your comment above about payroll taxes, it is only illogical if you consider a lot of different forms of received money and taxes paid to be identical. The reason people talk about the federal income tax differently from the payroll tax is the federal income tax is what you pay to fund the normal functions of government. The payroll tax is basically funding a federally run insurance and investment company. The reason that it is important to separate SS, in particular, from regular taxes is that it was sold to the American people as a retirement savings plan, where what you pay in determines what you get out. If the pay-in is divorced from the pay-out, it just becomes another type of welfare. I'm sure liberals and poor people would love that, but it would be a much harder sell for conservatives and middle class+. And the reason including it makes the numbers seem less skewed is because the rich are mostly ineligible for the program.

 

[OmCheeto]

Me, too, but that's not the reality of the situation. Even in that example, the rich paid proportionately higher taxes than the poor, and that example was nonsense.

In reality, rich people don't just pay proportionally more, they pay a much higher percentage in taxes, and a disproportionately higher share of the total tax burden. This has been shown repeatedly in this forum, but here's the same link to CBO data I have provided many times: http://www.cbo.gov/ftpdocs/88xx/doc8885/EffectiveTaxRates.shtml.

Of course that still ignores the fact that the bulk of taxes collected "from the rich" is not taken from their pockets, it's taken from their investment capital. Unlike the poor and middle class, rich people invest most of their money. Capital gains taxes in particular come from the investment capital of rich people, not their pockets or fat cat cigar funds.

Ok then. Round and round we go.

As I've pointed out before, from your link, the top 5% of wage earners take home, after taxes, in one year, what the bottom 20% take home, after taxes, in 20 years.

I would do the math, as to what the deficit would now be if we'd kept multiple tax brackets. With the top one being at around 50%, but I've been summoned to the river.

And nothing, absolutely nothing, trumps life.

Salam

 

[Al68]

Ok then. Round and round we go.

As I've pointed out before, from your link, the top 5% of wage earners take home, after taxes, in one year, what the bottom 20% take home, after taxes, in 20 years.

I never said otherwise. You just pointed out something that neither supports your position nor refutes mine in any way.

The reason we go "round and round" is that after I showed your first claim to be utterly false, you just switched to a completely different claim, as if your second claim were the one in dispute, or supported your first claim in some way. Neither is true.

 

[turbo]

Ok then. Round and round we go.

As I've pointed out before, from your link, the top 5% of wage earners take home, after taxes, in one year, what the bottom 20% take home, after taxes, in 20 years.

I would do the math, as to what the deficit would now be if we'd kept multiple tax brackets. With the top one being at around 50%, but I've been summoned to the river.

And nothing, absolutely nothing, trumps life.

Salam

Please don't be too sensible. You'll be called a Marxist Commie.

 

[Al68]

Please don't be too sensible. You'll be called a Marxist Commie.

Only if he uses the word "sensible" to mean considering a large portion of privately created wealth to be a collectively owned resource.

 

[turbo]

Only if he uses the word "sensible" to mean considering a large portion of privately created wealth to be a collectively owned resource.

Wealth earned under a highly regulated and protected economic system should be taxed. The people that benefit the most from our economic system should be taxed proportionately to support that system. Anything less is welfare. And the "right" hates welfare, right?

 

[Al68]

Wealth earned under a highly regulated and protected economic system should be taxed.

Nice logic. Impose unwanted regulations, then try to claim that people owe money for the privilege of being regulated. Is that a joke?

Of course maintaining law and order, etc. has a cost, but nobody is objecting to the rich paying that cost, since that is what they benefit from.

The people that benefit the most from our economic system should be taxed proportionately to support that system. Anything less is welfare. And the "right" hates welfare, right?

You're making no sense here. The U.S. has no taxpayer supported economic system in any sense relevant to this issue. The economic system in the U.S. is supported within by private wealth creation.

You seem to have everything backwards in some incomprehensible way, and a gross misunderstanding of how capitalism works.

 

[russ_watters]

Wealth earned under a highly regulated and protected economic system should be taxed.

[regardless of the characterization of "highly regulated and protected"] It is! Posting that the rich make a lot of money doesn't say anything useful at all unless the implication is that we need to take a lot more of that money from them than is already taken.

The people that benefit the most from our economic system should be taxed proportionately to support that system. Anything less is welfare. And the "right" hates welfare, right?

Oy.

1. The tax is to support the government, not the economic system.
2. They are already taxed more than proportionally - are you suggesting we switch to a flat tax? How would the lower half that pays no federal income tax now respond to that?
3. IMO, the people who "benefit most" are the ones who get benefits without paying for them, not those who pay for the benefits that are then given to others for nothing. It's a twisted way of thinking to say that those who pay are getting the benefits while those who get the benefits (those actual money pay-outs) aren't.

 

[russ_watters]

Ok then. Round and round we go.

As I've pointed out before, from your link, the top 5% of wage earners take home, after taxes, in one year, what the bottom 20% take home, after taxes, in 20 years.

What does that have to do with anything? We know the rich are rich. The issue is how much to tax them and everyone else. It's almost like you are saying that you think it is unfair that the rich are rich.

Honestly (both of you!): Do you consider it fair that roughly half of our population is exempt from paying taxes to support the primary functions of the federal government? Heck, ironically, Obama only works for the rich, since they are the ones who pay his salary! The poor pay him nothing!

 

[Al68]

Honestly (both of you!): Do you consider it fair that roughly half of our population is exempt from paying taxes to support the primary functions of the federal government?

At this point, if the top 10% only had to pay 100% of the cost to support the (constitutional) primary functions of the federal government, that would be a monstrous tax cut.

That's what's so absurd about those red herring arguments: the bulk of the federal budget has nothing to do with actually funding government at all, much less just funding its legitimate primary functions.

 

[WhoWee]

Wealth earned under a highly regulated and protected economic system should be taxed. The people that benefit the most from our economic system should be taxed proportionately to support that system. Anything less is welfare. And the "right" hates welfare, right?

Let's be honest - ok?

Personally - I want to be free to earn obscene amounts of money - is that (now) wrong in America? I want my family to enjoy life and prosper under a blanket of security.

The flip side - I could care less about making sure illegal immigrants and (2nd and 3rd generation of) welfare recipients have HUD/Section 8/food stamps/free education/Medicaid, EITC, and etc.

The American dream used to be a goal of success - IMO - now it's to get onto the Government dole (shame - shame - shame - shame - shame!).

 

[Ivan Seeking]

Nice logic. Impose unwanted regulations, then try to claim that people owe money for the privilege of being regulated. Is that a joke?

What in a free market prevents "too big to fail"?

And saying that we should allow market corrections that destroy the global economy is not an answer.

 

[Ivan Seeking]

[regardless of the characterization of "highly regulated and protected"] It is! Posting that the rich make a lot of money doesn't say anything useful at all unless the implication is that we need to take a lot more of that money from them than is already taken.

No, that this country was built on a top marginal tax rate two and almost three times higher than what we have now, and capital gains taxes twice what they are now, does. That is what suggests that we should take more money from the rich - precedence, a history of success, and the model on which we built the often mentioned "American dream". Things have really only gone to hell in terms of debt since Reaganomics ruled the day. There is no evidence that today's historically low tax rates have done anything but to help destroy the country.

 

[russ_watters]

Does the growing fraction of people who pay no federal income tax imply to you a similar trend that should also be reversed?

 

[Al68]

What in a free market prevents "too big to fail"?

Competition. The lack of competition due to regulation causes the "too big to fail" problem.

No, that this country was built on a top marginal tax rate two and almost three times higher than what we have now, and capital gains taxes twice what they are now, does.

Total nonsense. This country was built from nothing to the greatest nation in history with NO INCOME OR CAPITAL GAINS TAX WHATSOEVER.

Then other nations started catching up after we started the income tax. You're not seriously trying to claim we taxed ourselves into prosperity, are you?

 

[Ryumast3r]

Competition. The lack of competition due to regulation causes the "too big to fail" problem.Total nonsense. This country was built from nothing to the greatest nation in history with NO INCOME OR CAPITAL GAINS TAX WHATSOEVER.

Then other nations started catching up after we started the income tax. You're not seriously trying to claim we taxed ourselves into prosperity, are you?

Income tax was introduced in 1913. The United States was NOTHING compared to the rest of the world until after World War I (You could argue a little before that, but really... we just had a nice looking navy that couldn't really do jack), and even then, we only caught up/out-did the rest of the world During/After World War II.

 

[WhoWee]

Income tax was introduced in 1913. The United States was NOTHING compared to the rest of the world until after World War I (You could argue a little before that, but really... we just had a nice looking navy that couldn't really do jack), and even then, we only caught up/out-did the rest of the world During/After World War II.

Didn't the so called "Robber Barons" play a role in growing the economy and power of the US?

 

[russ_watters]

Income tax was introduced in 1913. The United States was NOTHING compared to the rest of the world until after World War I (You could argue a little before that, but really...

The US had the world's largest GDP by 1900: http://www.ritholtz.com/blog/2010/08/history-of-world-gdp/

 

[Ryumast3r]

The US had the world's largest GDP by 1900: http://www.ritholtz.com/blog/2010/08/history-of-world-gdp/

India was a part of the British Empire at the turn of the century 1900's. The chart does not make note of that fact, and probably doesn't include Canada, Africa, Australia, parts of the Middle East, and the Pacific Islands that were a part of the British Empire. However, I do not see any list of what is "Britain" on that list, so I can't be sure.

It also doesn't note whether or not it includes French territories, American territories, German territories, etc.

Edit: Saying we were nothing was a mistake, but the fact is, we weren't recognized as the top dog until after the 1913 Tax was put in. My point is that you cannot really say it's because of this tax that we declined in world standing. I don't think you can also necessarily say that it's because of this tax we became #1, but we certainly didn't lose this spot because of the tax.

 

[mheslep]

http://www.ggdc.net/maddison/Historical_Statistics/horizontal-file_03-2009.xls" The American colonies started from essentially zero infrastructure and savings in comparison to Europe at the time. After which, the US/American colonies progressed as follows:

GDP per capita and rank against all other European nations
1700: $527, colonies last behind all European countries
1820: $1202, US above European average, rank 7th out of 30 European countries.
1851: $1806. Great Britain is 1st in the world, remains 1st in Europe for the next half century.
1880: $3184, US second behind Great Britain (now UK). US completes world's greatest suspension bridge and transcontinental railroad.
1905: $4642, surpasses the UK for 1st.

All the above managed without a federal income tax.
(China and India did not reach the US's 1820 GDP per capita until the 1980's)

 

[russ_watters]

India was a part of the British Empire at the turn of the century 1900's. The chart does not make note of that fact, and probably doesn't include Canada, Africa, Australia, parts of the Middle East, and the Pacific Islands that were a part of the British Empire. However, I do not see any list of what is "Britain" on that list, so I can't be sure.

It also doesn't note whether or not it includes French territories, American territories, German territories, etc.

Edit: Saying we were nothing was a mistake, but the fact is, we weren't recognized as the top dog until after the 1913 Tax was put in. My point is that you cannot really say it's because of this tax that we declined in world standing. I don't think you can also necessarily say that it's because of this tax we became #1, but we certainly didn't lose this spot because of the tax.

I have an interpretation of that first part, but I don't think it really matters: I think by your edit, you would agree that the US went from nothing to being a superpower in about 100 years, right?

 

[Al68]

Income tax was introduced in 1913. The United States was NOTHING compared to the rest of the world until after World War I (You could argue a little before that, but really... we just had a nice looking navy that couldn't really do jack), and even then, we only caught up/out-did the rest of the world During/After World War II.

Russ and mheslep beat me to it, but that's just untrue, unless you were referring to military strength only instead of the economy in general?

My point is that you cannot really say it's because of this tax that we declined in world standing. I don't think you can also necessarily say that it's because of this tax we became #1, but we certainly didn't lose this spot because of the tax.

We can say that taxation is harmful to whatever is being taxed as a matter of simple logic and basic economics. You can't take a slice of a pie then claim it didn't leave less pie. But the effect of taxation is harmful in an exponential way, when the part of the pie being removed is the part used as "seed" to make future pies (ie taxing private investment profit).

Of course a tax may have a necessary purpose (such as national defense) that outweighs its harmful effect, but denying that the harmful effect exists is either fraudulent or ignorant.

 

[Al68]

http://www.ggdc.net/maddison/Historical_Statistics/horizontal-file_03-2009.xls" The American colonies started from essentially zero infrastructure and savings in comparison to Europe at the time. After which, the US/American colonies progressed as follows:

GDP per capita and rank against all other European nations
1700: $527, colonies last behind all European countries
1820: $1202, US above European average, rank 7th out of 30 European countries.
1851: $1806. Great Britain is 1st in the world, remains 1st in Europe for the next half century.
1880: $3184, US second behind Great Britain (now UK). US completes world's greatest suspension bridge and transcontinental railroad.
1905: $4642, surpasses the UK for 1st.

All the above managed without a federal income tax.
(China and India did not reach the US's 1820 GDP per capita until the 1980's)

It should be noted that all those dollars were real money dollars (gold coin, or silver coin/notes redeemable for gold), not fiat paper dollars that devalue over time due to inflation.

I only bring that up to point out that the dramatic increases in prosperity shown above are far more dramatic than they may appear at first glance.

 

[czelaya]

What in a free market prevents "too big to fail"?

And saying that we should allow market corrections that destroy the global economy is not an answer.

Too big to fail isn't brought about, in general, by free markets.

What does create too big to fail is corporatism.

But of course, the answer by interventionist is let's subsidize failing companies.

Case in point, GM. How many more bailouts are we going to give a company that continues to fail. If you want to talk about governments creating unfair business models that's a prime example.

Honda, Toyota, and so forth create above average cars: they continue to fight tariffs from domestic automobile makers. GM creates automobiles that aren't up to market standards, hey, it's OK we will throw money at you. Who creates the moral hazard?

 

[Ryumast3r]

I have an interpretation of that first part, but I don't think it really matters: I think by your edit, you would agree that the US went from nothing to being a superpower in about 100 years, right?

Aye, and we got stronger still over the next half a century, and I think many would argue, we're much farther ahead than you'd think we are.

 

[WhoWee]

Too big to fail isn't brought about, in general, by free markets.

What does create too big to fail is corporatism.

But of course, the answer by interventionist is let's subsidize failing companies.

Case in point, GM. How many more bailouts are we going to give a company that continues to fail. If you want to talk about governments creating unfair business models that's a prime example.

Honda, Toyota, and so forth create above average cars: they continue to fight tariffs from domestic automobile makers. GM creates automobiles that aren't up to market standards, hey, it's OK we will throw money at you. Who creates the moral hazard?

If you apply your logic to the welfare state whereby generation after generation stay on the Government dole - and continues to expand in size - eventually the system consumes it's host - doesn't it? GM should have been put through the Chapter 11 process - where a Federal judge would have sorted out union contracts and other bad agreements (for GM). Instead, the bond holders were robbed, the union bailed out and given the company, long established dealers lose their franchise and personal investments in favor of new and diverse dealers (not Republican?), and the taxpayers deprived of future tax revenues (approx $45Billion) - and the President gets to campaign on the "success" of his intervention. Please label this entire post IMO.

 

[SixNein]

When considering the best path to US solvency, it might be useful to consider the tax rates that helped to build this country.

Back when Kennedy took office, the top marginal tax rate was 91%. Today, it is 35%.
http://www.taxfoundation.org/publications/show/151.html

It appears to me that the incessant drive towards lower taxation, which imo has helped to bring the US to its financial knees, is unprecedented in the modern context.

In my opinion, the economic performance of lowering taxes is subject to the finances of the government and its status globally. I do not subscribe to the notion that lowering taxes will always be to the benefit of the economy. If a government has x amount of cash inflow and y amount of cash outflow where x=y, lowering the taxes will introduce a cash flow imbalance, and the government will be forced to provide a portion of its services on credit plus interest. So the government is taking out a bet on the future production and global status of its country. In the short term, such a tax policy can be beneficial because it gives companies an edge on competition; as a result, the future earnings of the nation can increase. But I only believe this policy is effective when the imbalance is allowed to endure for a short period of time. If such a tax policy is ran for too long, the budget imbalance becomes too outrageous to control because it grows exponentially. This effects everything from the value of the currency to the governments ability to adopt a new infrastructure and maintain its existing infrastructure. So the government is eventually put into a position of either punishing the economy through spending cuts and higher taxes, or it is faced with punishing the economy through default. Either way, its a bad situation.

So I'm inclined to agree with you that the tax policy of the United States has caused damage to the economy.

 

[Al68]

In my opinion, the economic performance of lowering taxes is subject to the finances of the government and its status globally. I do not subscribe to the notion that lowering taxes will always be to the benefit of the economy. If a government has x amount of cash inflow and y amount of cash outflow where x=y, lowering the taxes will introduce a cash flow imbalance, and the government will be forced to provide a portion of its services on credit plus interest.

No, it won't. Why do so many people think massive, expensive, ever-growing government is the only option?

I agree with you that government spending on credit is just as bad as (or worse than) government spending from taxation, but what those two bad options have in common is the problem: too much government spending.

Massive government spending is what hurts the economy, either by confiscating existing private capital that would otherwise be used to create more wealth, or by increasing its debt. Both of those options rob our grandchildren of their future, unless of course they wise up and decide they have no obligation to pay debts they didn't incur.

How long can government keep the dollar from crashing by obtaining more and more credit based on a promise to confiscate even more private wealth that hasn't even been created yet? (yes, that is how the value of the dollar is currently being propped up).

 

[talk2glenn]

I agree with you that government spending on credit is just as bad as (or worse than) government spending from taxation, but what those two bad options have in common is the problem: too much government spending.

Technically, this isn't quite true, assuming consumers can have access to the same credit markets as the government (a reasonable assumption). In fact, consumers are indifferent between policies: they are no better off if taxed now for spending today, or taxed tomorrow for spending today (government borrowing).

This indifference condition is a fundamental premise to contracyclical government stimulus.

But your point is spot on: too much spending, whether financed by taxation or borrowing, is a bad thing. The difficulty is in quantifying "too much". I actually wrote a paper on this topic, where I proposed using election outcomes as a proxy for consumer willingness to pay. Rational consumers of government spending will stop consuming at the point where the marginal gains are maximized. I think we can look at election outcomes over changes in government expenditures and/or effective tax rates as a proxy for this; consumers express a desire for more government consumption by electing progressives, and less by electing conservatives.

Since the end of WW2, the effective tax rate has been approximately 18% of GDP. Efforts to substantially increase it have been political failures, and efforts to substantially decrease it have been political failures (resulting in the election of the opposition party, whether the effort to change spending came through taxes or borrowing doesn't really matter). The current dire straights of the Democratic party are largely due, in my opinion, to the present vast disequilibrium: spending is too far out of whack with the optimal rate. Ironically, this was a big part of the Republican party's problems in 2006 and 2008; I think Democrats simply misunderstood voter intent. Spending has been slowly outpacing revenues for years, but voters were relatively tolerant of the phenomenon because of the combined recession, foreign wars, and slow rate. They've now reached a breaking point.

 

[WhoWee]

Technically, this isn't quite true, assuming consumers can have access to the same credit markets as the government (a reasonable assumption). In fact, consumers are indifferent between policies: they are no better off if taxed now for spending today, or taxed tomorrow for spending today (government borrowing).

This indifference condition is a fundamental premise to contracyclical government stimulus.

But your point is spot on: too much spending, whether financed by taxation or borrowing, is a bad thing. The difficulty is in quantifying "too much". I actually wrote a paper on this topic, where I proposed using election outcomes as a proxy for consumer willingness to pay. Rational consumers of government spending will stop consuming at the point where the marginal gains are maximized. I think we can look at election outcomes over changes in government expenditures and/or effective tax rates as a proxy for this; consumers express a desire for more government consumption by electing progressives, and less by electing conservatives.

Since the end of WW2, the effective tax rate has been approximately 18% of GDP. Efforts to substantially increase it have been political failures, and efforts to substantially decrease it have been political failures (resulting in the election of the opposition party, whether the effort to change spending came through taxes or borrowing doesn't really matter). The current dire straights of the Democratic party are largely due, in my opinion, to the present vast disequilibrium: spending is too far out of whack with the optimal rate. Ironically, this was a big part of the Republican party's problems in 2006 and 2008; I think Democrats simply misunderstood voter intent. Spending has been slowly outpacing revenues for years, but voters were relatively tolerant of the phenomenon because of the combined recession, foreign wars, and slow rate. They've now reached a breaking point.

my bold
If you limit the voting eligibility to people who actually pay taxes - you might be on to something?

 

[Al68]

Technically, this isn't quite true, assuming consumers can have access to the same credit markets as the government (a reasonable assumption). In fact, consumers are indifferent between policies: they are no better off if taxed now for spending today, or taxed tomorrow for spending today (government borrowing).

I agree with this in general, but the reason I said "or worse than" is the risk of the collapse of the dollar. Such an event would destroy the medium of exchange most commonly used in commerce, doing harm over and above the harm done by deficit spending that otherwise would be no worse than taxation.

 

[WhoWee]

This is post 278 - accordingly, has anyone explained how an increased tax rate will lure the $Trillions of investment capital out of offshore exchanges and derivatives back into US based property, plant, and equipment (jobs)?

 

[Char. Limit]

This is post 278 - accordingly, has anyone explained how an increased tax rate will lure the $Trillions of investment capital out of offshore exchanges and derivatives back into US based property, plant, and equipment (jobs)?

It won't. Nothing will. That money is gone and it ain't coming back. The fact is, unless we lower the minimum wage about... six dollars per hour, we are not getting those jobs back.

 

[WhoWee]

It won't. Nothing will. That money is gone and it ain't coming back. The fact is, unless we lower the minimum wage about... six dollars per hour, we are not getting those jobs back.

Wages are subject to the market forces of supply and demand - unless regulated by Government or locked-in by a union agreement or employment contract. The best way to increase wages for everyone is to reach full employment - where employees are in demand and can name their price. Politicians don't seem to understand this concept - IMO.