You Can't Soak the Rich

http://online.wsj.com/article/SB121124460502305693.html

by divia • 17 years ago

58 81 17 years ago

online.wsj.com

lionhearted4• 17 years ago

I agree with the article's conclusion, but not necessarily its premise. Not sure "Hauser's Law" stands up, or is it just statistical coincidence?

But yes, raising tax rates can certainly decrease tax yields. Take one of my closest friends. He's 28 now. He's a college dropout, and self-made millionaire as of age 24. Amazing guy. He was grossing about $800,000/year in his age 24/25/26 years. He was netting out mid/low six figures, and paying $50,000-$150,000 each year in various taxes. Working (no kidding) 80+ hour weeks. Often more.

I've seen people cite the top marginal tax rate as being in the 90% range post WWII. But mobility has increased so much since then. My friend is an incredibly resourceful dude, as you can imagine. He's a good person. America wants him here, or at least should. But if the government now wanted, after writeoffs, interest deduction from taxes, etc, say... $400,000 per year from him - he'd be long gone. There's enough countries where you can get a "welcomed exceptional people" visa by putting enough money in the bank, or a resident's visa by buying a property. Dubai being one such place.

So yeah, he'd be long gone if the government wanted to tax him more. Now, I can't speak to whether that's fair, or right, or if he's neglecting his patriotic duty by not being willing to stick around in the USA even if it wasn't a smart move for him financially. But it's the way it is. He grits his teeth and pays what he has to because he reckons he'll make more money here doing it that way. If that were to change, I reckon I'd be visiting him in Hong Kong, Dubai, or wherever else pretty fast. He and I both travel pretty regularly, and both of us have lived abroad some. Heck, I'd probably leave if taxes got high enough too.

nazgulnarsil2• 17 years ago

I think this is becoming more and more true as globalization reduces the sedentary habits of business. when you're selling things over the internet, what incentive do you have to stay in a highly taxed region?

jbjohns8• 17 years ago

Personally I would like to see things get to a point that people switch countries as often as they switch jobs. Anything that would force countries to compete with benefits vs. costs. Many people talk about market forces driving inefficiencies out of the market place. I don't think the Government should be so shielded from this. I would like to see the government be the best it can possibly be and no government is anywhere near that atm IMO.

numair4• 17 years ago

As an American citizen, you are taxed globally. Now, you may think that you can simply renounce your US citizenship, burn your passport and call it a day, but as of 1986 the IRS is able to come after you for taxes for up to 10 years after renunciation of citizenship. In addition, tax information is now shared with INS, so you can be barred entry from the US or end up getting carted off to somewhere you don't want to go if you don't have all of your ducks in a row.

Perhaps you're thinking of starting an offshore company, and keeping your money there. Well, you've got to file a special form each year with the IRS for each entity of this sort, as they are known as "Controlled Foreign Corporations." Failure to provide the IRS with this information once again causes you to run afoul of US laws, which once again puts you at risk of punishment from the country that is globally known as "the world's policeman."

You have to remember that you are a citizen of the world's smartest country. They have pretty much thought of everything.

lionhearted4• 17 years ago

Ah, I expected someone to make this comment eventually. It's true that the United States' tax code is the only one in the world that sets tax on its citizens living in foreign countries, transacting business in foreign countries, with foreign citizens, foreign suppliers, doing business with no connection to the United States. Brits in particular have a good laugh at our international tax code. They simply don't believe it when I try explaining it to them.

Anyway, as someone that knows quite a few expats and international businesspeople - practically speaking, it doesn't always go down like you say.

ckinnan• 17 years ago

The global taxation feature of the US code is a double taxation on income, as you typically pay taxes in the foreign jurisdiction as well (There are tax treaties that reduce this double taxation in many jurisdictions, but only to a certain amount). It also applies to US businesses that operate globally and is a major reason so many multinationals move their headquarters offshore. The US, I believe, is one of only two countries in the world that taxes citizens globally, the other being Israel.

jibiki• 17 years ago

> world's smartest country

South Korea?

jbjohns8• 17 years ago

>you may think that you can simply renounce your US citizenship, burn your passport and call it a day, but as of 1986 the IRS is able to come after you for taxes for up to 10 years after renunciation of citizenship.

Actually, they can only do this if you give up your passport for tax purposes. If you have more than $2 million in assets then it is automatically assumed you are giving up the pass for tax reasons, otherwise it shouldn't be a problem.

> In addition, tax information is now shared with INS, so you can be barred entry from the US or end up getting carted off to somewhere you don't want to go if you don't have all of your ducks in a row.

This will be my biggest worry if I end up giving back my passport. Will the border patrol decide that anyone who is "stupid" enough to give up a US passport must be a terrorist? :)

>You have to remember that you are a citizen of the world's smartest country. They have pretty much thought of everything.

I hope this line is joking.

mattobrien5• 17 years ago

Small point: Dubai is finished. It is bankrupt. It was a classic boomtown. All of the building was done on debt. Foreigners are leaving their cars at the airport, flying out, so that they do not end up in debtor's prison (yes, Dubai has debtor's prison). Not exactly friendly to entrepreneurs - take a risk, take on some debt, and land in jail.

Every major country is going to have to spend to stop from falling into complete depression. Taxes will be higher everywhere. And the US will likely get through this crisis better than anywhere else. Having the reserve currency has its benefits after all. I really do not think going somewhere else to avoid higher taxes will make sense in the future.

didroe• 17 years ago

You've just got to pray that everyone keeps using Dollars to buy/sell oil and doesn't switch to the Euro.

gaius4• 17 years ago

Obama says he'll set policy according to the science... Let's see, shall we?

steveplace2• 17 years ago

I don't know if you've ever heard economists argue over what they call data, but it's a headache.

It's hard to call this "science" as we can never really get a control group going as that's politically feasible.

anamax5• 17 years ago

During the campaign, Obama said that he'd raise certain rates even if he knew that the result was less tax revenue.

gaius4• 17 years ago

Really? That seems to be a lose-lose proposition to me.

karl11• 17 years ago

I've never heard of this idea... I'm scanning econ blogs for the rest of the day to see if anyone comments on it.

davidw2• 17 years ago

http://en.wikipedia.org/wiki/Hauser%27s_Law

Has some more information. You won't find much commentary today, because the article is nearly a year old. In any case, this is basically just politics, so I flagged it.

DanielBMarkham3• 17 years ago

I disagree.

I think there is a lesson in pricing strategies here.

The trade of money for goods or services always follows a curve. Whether that is money for governmental services or money for startup services. It's an extremely important concept for strategic market positioning.

The argument of how it applies to government may be political, but the economics are assuredly not.

nazgulnarsil2• 17 years ago

Doesn't this call into question the premise of a Laffer curve? http://en.wikipedia.org/wiki/Laffer_curve

And if increasing taxation lowers GDP doesn't it follow that lowering taxation should increase GDP?

gaius4• 17 years ago

Reagan implemented that policy, but then got bogged down in bankrupting the USSR.

ericwaller• 17 years ago

The argument seems politically motivated. Lower taxes for the consumer tax brackets would be another valid way of increasing GDP (through an increase in consumer spending).

And the graph is meaningless at best. We'd expect to find a correlation b/w the average tax rate across the board and tax revenue as a percentage of GDP. Plotting just the top tax bracket in an effort to show no correlation is intentionally misleading.

zupatol• 17 years ago

And even if he had discovered a valid correlation for this period in this country, there is no reason for calling it a 'law'. There is no indication that the correlation will hold up in the future or in the rest of the world.

TobascoKid• 17 years ago

The 80/20 rule strikes again

watmough• 17 years ago

I'm not surely whether the full story is being told in this article.

The 90% tax may well act like a brake on wealth generation, but was only applied at the very highest incomes, not people on mid 6 figures. I bet the elimination of the top rate actually resulted in a large shift of taxation from the rich, to the middle-class, like you and me.

anamax5• 17 years ago

> I bet the elimination of the top rate actually resulted in a large shift of taxation from the rich, to the middle-class, like you and me.

You lose.

The fraction of taxes paid by the upper 1% and 5% have gone up. (Yes, under Bush too.)

This isn't just a Federal phenomena - it happens at the state level too. A huge fraction of CA's income tax comes from a very small number of people. Their income is volatile.

jyu• 17 years ago

When searching around for Hauser's Law, I found this comment that directly addresses some of the issues in the WSJ article:

The problem I have with Hauser’s Law is that it doesn’t seem to include state and local taxes, which should raise the bar by quite a lot. Also, why should we look to the nation as a whole? To find out if there’s an upper limit, I think we should look at what state has the highest rate. For that matter, perhaps we should look at foreign countries.

While tax revenues may been fairly stable over the past 50 years, that doesn’t mean we couldn’t generate more if we wanted to.

Posted by edelfenbein at May 21, 2008 10:22 AM

mnemonicsloth• 17 years ago

On the other side of the macroeconomic coin, despite the standard political back-and-forth [1], government spending has also remained basically constant at 21% of GDP for the last few decades.

But now that may be changing:

http://www.marginalrevolution.com/marginalrevolution/2009/02...

[1] Thinking of the Democrats and Republicans as countervaling processes maintaining a homeostatic equilibrium that expresses the electorate's preference for a government that spends 20% of GDP is a good way to rehabilitate yourself if you've picked up the vice of excessive political involvement.

gabrielroth3• 17 years ago

Portfolio's Zubin Jelveh identified two major problems with Hauser's figures: (1) They don't include corporate tax revenue, which has dropped dramatically. (2) They DO include revenue from social security and other social-insurance programs, which aren't tied to tax rates and which have grown dramatically.

In other words, the appearance that tax revenue remains flat across the past 57 years of fluctuating top tax rates is a coincidence, to put it nicely, or an accounting fraud, to be a bit more accurate about it.

More details, including corrected charts, are here: http://www.portfolio.com/views/blogs/odd-numbers/2008/05/20/...

jmatt2• 17 years ago

The corrected charts and the author at that link say that it's inconclusive. Which is pretty safe to say.

Perot charts are interesting, more detailed and transparent. They cover areas you are worried about specifically the breakdown of different types of tax. If they are misleading they are transparent (enough) so that at least the user can figure it out. They cover a number of spending and tax issues:

http://perotcharts.com/category/charts/taxation-charts/

http://perotcharts.com/category/charts/

gabrielroth3• 17 years ago

He says it's "inconclusive" in the sense that the evidence doesn't prove what Hauser claims it proves.

spoiledtechie• 17 years ago

Did you know that more than 40% of the country DOES NOT pay taxes?

Someone should be taxing that 40%...

ryanwaggoner• 17 years ago

We are...it's called the lottery.

jimbokun2• 17 years ago

The problem is that is the 40% of the country with hardly any money, so there's not much revenue to be gotten from them, anyway. They also still pay a fair amount of more regressive taxes like social security, sales taxes, etc.

anamax5• 17 years ago

> They also still pay a fair amount of more regressive taxes like social security

Social security for low-income folks isn't so much a tax as a forced savings plan. For low-income folks, the return is pretty good. For higher-income folks, the return is lousy. For the rich, it's simply not a factor.

Note that the "regression" comes from capping the amount taxed, but the benefits are capped too. If you uncap the amount taxed and uncap the benefits, Ross Perot will be getting >$100k benefits and the system will have even more economic trouble. If you uncap the amount taxed and keep the benefits cap, it becomes yet another welfare program and folks are going to start caring about the 15%.

In the past, SS advocates have argued vehemently against turning it into yet another welfare program and have also opposed uncapped benefits. They argue that both will lead to decreased support for SS.

Are they wrong?

gnaritas3• 17 years ago

> Did you know that more than 40% of the country DOES NOT pay taxes?

Did you know that everyone who complains about that is ignorant and selfish and should have their taxes doubled for even trying to make the poor poorer?

By the way, it's a lie, everyone pays taxes, 40% just don't pay income taxes which is but one of many taxes we're all required to pay. Implying that they don't pay taxes is despicably intellectually dishonest.

jacoblyles3• 17 years ago

Note: This was originally a little more harsh.

I don't think I am selfish and ignorant for worrying about the incentive effects involved when a majority of the voting public do not pay anything for the programs they vote for.

Of course, I am pretty poor right now myself (Grad school), so your suggestion that my taxes should be doubled doesn't really do a lot.

jacoblyles3• 17 years ago

Pretty soon, half of all voters won't be paying a dime to fund the spending programs they vote for. That sounds dangerous.

In Singapore, which has a large number of social programs, many programs have a copay to counter the "buffet mentality" that comes from handing out lots of free goods. Consumption is subsidized, but it is not free. I'd like to see us take a similar approach.

steveplace2• 17 years ago

I've got views on taxation that would get me crucified on reddit, but may have a more sympathetic ear on HN. Here's some examples:

1) Eliminating corporate taxes. Would increase employment, capital spending, and wouldn't leave too much of a dent in tax receipts.

2) Eliminating automatic payroll tax deductions. Have citizens actually write out a check every quarter. Very inefficient, but we'd start to see some major reforms in SS/Medicare as federal legislature starts to get calls from their constituents.

3) Cutting payroll taxes and offset revenue with energy taxes (gasoline and carbon).

jimbokun2• 17 years ago

I have read several times that many of the so called "socialist" European countries actually have lower corporate taxes than the U.S. (They have higher payroll and income taxes, of course.)

Offsetting other taxes with increases in energy taxes is close to the consensus opinion of economists, I think.

So, maybe too extreme for Reddit, but not so far out of the mainstream, perhaps.

jasonkester• 17 years ago

Have citizens actually write out a check every quarter

Have you actually met any citizens lately? I think you're overestimating the average person's ability to manage their finances. You know that idiot buddy of yours who only takes out $20 at a time from the cash machine so that he won't spend too much? That guy is orders of magnitude brighter than most regular people. Average people have this amazing ability to spend all of their money whenever they have any of it.

So yeah, you and me would know that we needed to keep $60k in savings until April to pay taxes with. Nobody else is capable of doing that math.

tptacek• 17 years ago

A different perspective:

http://www.fivethirtyeight.com/2009/03/missing-1000000-tax-b...

mattmaroon• 17 years ago

This was posted here months ago, and shown to be grossly inadequate then. It's entirely meaningless because you could plot anything on that graph and draw an identical conclusion. Surely there must be something that does fluctuate and effect the tax revenue as a percentage of GDP, but if you plotted it on a graph it would appear not to.

Moreover, top marginal tax rate is an all but irrelevant metric since the ultra-wealthy pay considerably lower due to capital gains.

ynniv• 17 years ago

As they say, there are lies, damn lies, and statistics. The article graphs the maximum tax bracket with the total tax revenue, with no account for the number of people in this bracket or the contribution of all other brackets in the system. Its understandable, since doing the right thing would require a lot of data and would look a bit like calculus (revenue being the area under the product of two curves), and would sadly be too difficult for many readers.

But we don't have that data, so let me hypothesize a situation where this analysis isn't the whole truth. Article states that we take the same revenue whether the rich are taxed at 90% or 30%. Lets say that the left of the graph has 1 person making $1,000,000 in the 90% bracket, and 1000 other people making $50,000 in a 25% bracket. Total tax revenue is $13.4M.

Now at the right of the graph, we have a dip where the top bracket is at 35%, so in the same situation, our revenue should have dropped to $12.8M but was instead stable! Money on trees! Except there is a simple alternative explanation, which is that the bottom tax bracket went from 25% to 26%. Unfortunately, data on this is not supplied by the article.

It should be easy to see that raising taxes will raise tax revenue (not accounting for accounting tricks employed generally by the rich). Plotting a small component against an unqualified whole data set is plain poor research, and the WSJ should be ashamed.

You Can't Soak the Rich

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