Friday, July 10, 2009
Surtax
To the surprise of no one, "key House Democrats decided Friday to raise taxes on the wealthy to help pay for health care legislation."
The Ways and Means Committee plan calls for a 1% surtax to kick in starting in 2011 at annual income levels over $350,0000 for couples and $280,000 for individuals. Another surtax rate will be be levied at incomes over $500,000, and a third rate for incomes over $1,000,0000, though the higher rates have not yet been determined. In a nice bit of irony (though it wasn't intended as such, I suspect), Charlie Rangel (D-NY), the committee's chairman, fleshed out the details for AP.
The committee's expectation is that the plan would generate $540 billion over ten years, covering about half of the estimated cost of the health plan. I would be interested in seeing the calculations underlying those forecasts, in terms of the number of filers at the different surtax levels and the aggregate AGI that is thought to exist in those brackets (presumably sufficient to generate about $54 billion per year on average over the course of a decade). The problem with any static analysis (especially with respect to income), of course, is that behavior can change pretty quickly that could make the forecast quite inaccurate, particularly for those in the highest surtax bracket, who have access to the best planning advice. Right now, on the IRS website, 2006 is the most recent year for which a detailed breakdown by AGI level is available, though perhaps the committee has early data from 2007 or 2008. I think it is safe to say that the number of filers and the aggregate AGI in the first surtax bracket of $350,000 to $500,000 must have decreased significantly over the past several years, if for no other reason than the massive layoffs on the financial industry, especially following last September's credit meltdown.
It would also be a surprise to a couple living in Boston, San Francisco or Manhattan, with a joint annual income of $400,000 (and taking home perhaps $200,000 after federal, state and local taxes) that the government considers them "wealthy" enough to contribute another $500 (1% of $50,000). That's an airline flight not taken or a party not thrown at a restaurant, which might be a small price to pay to provide all citizens with health care, but it will have ripple effects elsewhere in the economy. I wonder if that effect (that is, consumer spending by the "rich" that now won't happen because of the surtax) is baked into the assumptions.
UPDATE: Please see Megan McArdle's post on the proposed surtax (the link actually takes you to the follow-up post, for a reason). While my example of the couple making $400 large (equivalent to her single friend making half that) may not engender any sympathy, it wasn't intended to do that, but merely point out that the couple wouldn't consider themselves "wealthy" by their standards, and because of that self-perception, their behavior might change because of the surtax (setting aside that they may well have knowingly voted for it). I was raising the issue of the effect of lowered consumer spending from the first surtax bracket, and questioning whether the contractionary effect of that is being considered. I am not sure that the same effect on consumer spending would be as pronounced in the third surtax bracket ($1 million +, although we don't know the rate yet), but it probably translates into slightly less private capital made available to VCs, which in turn means less funding for start-ups and early stage companies, and a lower rate of resulting job growth, all happening at the margin. While good 'ol Corrado Gini would be pleased that commenter BBC is using his nearly century-old metric of relative mean difference, does anyone other than the perhaps quite sizable core of President Obama's base want us to become Sweden (with a 0.23 GC)? Also, as Megan points out, and I thought was implicit in the geography I suggested, "there really is a disconnect between the lifestyle being taxed in Manhattan and Omaha at similar levels of income," because of the differences in costs of living, especially rent or real estate prices. Suffice it to say that a couple making $400,000 in Orem, Utah, would be living extremely well, but on West 83rd Street off of Central Park West, not so much. Heck, people in the middle of the third quintile of income -- really, any of us -- are "wealthy" in comparison to nearly anyone who lives in South Asia or Africa or many other parts of the world.
26 Comments:
By 
Cap'n Rusty, at
Fri Jul 10, 10:12:00 PM:
It doesn't seem to add up. The Democrats say the "surtax" will generate $54 billion each year. The surtax is 1% of income over $280k for singles, $350k for marrieds. If one percent of the amount of income above those thresholds is $54 billion, then there has to be $5.4 trillion in taxable income above those thresholds. Ya think?
By Who Struck John, at
Fri Jul 10, 10:12:00 PM:
Congress won't take the effective method to raise taxes on the wealthy, which is to eliminate loopholes and shelters. Why? Because they get paid to put in those shelters.
If you really want to raise money, don't raise the top end; eliminate the exemption for muni bonds. The exemption distorts capital investment (through a tax incentive for investing in local government bonds), encourages malinvestment (by lowering the cost of bonds to local government, thereby encouraging more government projects, and encourages gentry policies on the part of elites (by favoring established money, which can maneuver into tax-exempt bond income, over earned income and entrepreneurial income -- personally, I'd rather have the monied classes earn their wealth through risktaking or working than through collecting tax-free interest, wouldn't you?).
By Purple Avenger, at
Fri Jul 10, 10:35:00 PM:
then there has to be $5.4 trillion in taxable income above those thresholds.
Hey, it Charlie Rangel, and he's on a roll. Don't mess with him.
By JPMcT, at
Fri Jul 10, 11:04:00 PM:
"That's an airline flight not taken or a party not thrown at a restaurant, which might be a small price to pay to provide all citizens with health care"
The two mistaken assumptions in this statement:
* That's the end of the surcharges
* all citizens will achieve appropriate healthcare
Sorry, TH. I am surprised in your trust of the Federal Government not to take a source of revenue and abuse it beyond usefulness.
The "brand" of healthcare under this plan will be cheap, mediocre and rationed. It will not even be enjoyed by well over 30 million of the alleged 41 million Americans who "lack" insurance.
Good Luck finding competent physicians who will work for this calamity. It won't be me...and THOUSANDS of others.
By EliRabett, at
Fri Jul 10, 11:30:00 PM:
By 
, at
Sat Jul 11, 12:09:00 AM:
A little reality to the party please:
Over the last 40 years, the Gini coefficient for disposable income in the United States has increased almost constantly. A (Republican) Princeton economist and member of the President's Council of Economic Advisers (a tax policy expert btw) pointed this out to me in the OEOB in 1991. The US Gini coefficient went from approximately 39 in 1968 to 47 in 2006. No other industrialized democracy (Japan/Western Europe) has a Gini coefficient above 35 - most have coefficients in the low 30s.
To put this in different terms, in 1968, the top quintile of households earned 43% of income in the United States; by 2001, the top quintiles earned 50.1% of income.
Now one might say, well, that is just the natural order of things. But that would have to suppose that the top quintile has become smarter, more skilled, better able comparitively speaking, than the other 4 quintiles, and enough so that they now "merit" about 1/6 more per capita of the country's income than 40 years before. Not bloody likely.
There are other similar measures. In 1950, the top 5% of earners earned about 50% more than those at the 80th percentile and about double those at the 60th percentile. In 1970, those at the 95th percentile earned a bit more than 56% more than those at the 80th percentile and a about 114% more than those at the 60th percentile. In 2007, those at the 95th percentile earned about 75% more than those at the 80th percentile and 162% more than those at the 60th percentile. (Holy expanding Gini coefficient boy wonder - it's not just magic!!) All these figures are in constant dollars (2007). Indeed, those at the 80th percentile in 2007 were just at or below the level that those at the 95th percentile had attained in 1970, 38 years before. Those at the 60th percentile were still BELOW where those at the 95th percentile were in 1960, 50 years earlier.
The example in this post is almost laughable. Don't cry for me Argentina!! For chrissakes. Some people are just .... not trained to look at facts in the way their postgraduate degrees should have taught them. To have a household income of $400K, one is well, well beyond the 95th percentile. Indeed, if one's after-tax household income is $200K, one is collecting after tax more than those at the 95th percentile collect before tax.
The IRS reports that the greatest increases in household income have occurred in the top percentile. (The top 1%.) From 1977 to 1994, after tax income for the bottom 3 quintiles all declined. It rose by 4% for the 4th quintile. It rose by 9% for the 9th decile (those in the bottom of the top quintile). It rose by a whopping 25% for those in the bottom 4% of the top 5%, and increased by 72 fricking percent (yep boys - that's right, after tax) for those in the top percentile. The figures AFTER TAX (mind you) are starker from 1979 to 2004.
One of my friends, who posts here regularly, is fond of noting how much tax the top 1% pays. Yep, buster, that's because from 1979 to 2004, the bottom of 60% of earners by household in America have increased their annual after tax incomes by a WHOPPING 56 basis points a year - god help us they might drive an extra 5 miles on their next vacation. The top 1% has increased its after-tax income at 8 times that rate, which with compounding, represents a substantial relative gain. (The trend was in the opposite direction from 1928 to 1970.)
Holy let them eat cake!!
By , at
Sat Jul 11, 12:10:00 AM:
(continuation)
In fact, the greatest determinant of income, education, has moved in the other direction decisively. In 1940, only 25% of Americans had a high school degree; in 1970, the figure was just over 50% (52.3%), and by 2000, the figure had climbed to 80%. (There is almost one-to-one link between education and income....)
Similar changes occurred in those holding at least a bachelors degree. In 1940, less than 5% of Americans held one; in 1970, it was about 11%; in 2000, it was just under 25%.
Another explanation is that the structure of the economy has become such that the top quintile is better able to capture that income.
Yeah. just maybe. That could be it.
How has charitable giving changed over the last 25 years among the top 1%. I doubt it has increased at a rate or 175%.
Let them eat cake.
By Purple Avenger, at
Sat Jul 11, 12:16:00 AM:
so that they now "merit" about 1/6 more per capita of the country's income than 40 years before. Not bloody likely.
Of course you factored in the huge influx of low earner immigrants (legal or otherwise), that skew the median to the left right? Right?
By , at
Sat Jul 11, 12:43:00 AM:
I don't think you understand the data very well and the effects of population growth and immigration on the figures.
So let's keep this simple. Between 1974 and 2004, the after tax income of someone at the 60th percentile increased about 21% (total). Someone at the 80th percentile about 29% (total). Someone at the 95th percentile about 100%. Someone in the 99th percentile 179%. That means the after-tax income of the top percentile has tripled; doubled for the next 4%; and for the bottom 80% of earners has gone up less than a modest 30% (which is less than 1% per year CAGR).
Go ahead. Lop off the bottom quintile. Assume they are illiterate immigrants with no earning power. Now use the math you took in college to find upper and lower bounds for the maximum amount by which the quintiles moved (for share of US income) and you'll see ..... well, I'll let you figure that out, with your college math background. (You did take a math course in college, right? You're not just spouting out the word "skew" without understanding how applicable it is or isn't? Right?)
BBC
By , at
Sat Jul 11, 02:39:00 AM:
I've recently seen much more massive taxes proposed. They're talking about applying the Medicare portion of the self-employment tax to non-earned income i.e. interest, capital gain, and rental income. That's a cool 3.9% from the first dollar with no cap.
By , at
Sat Jul 11, 08:05:00 AM:
Corncob ... ok, try this then. Let's assume that the 'bottom' workers make less because (a) we've been exporting the lower end jobs, and (b) a lot of these jobs are held by illegals, or 'legal' workers like painters, landscapers, etc. who work for cash. They're the poor by their tax return, but with money in their pocket by cheating the tax man.
Even if it's true, giving people more for free does not solve the problems of this great country. When half the population need only wake up to get paid, we have a growing threat to our way of life. Hell, all an aggressor needs to do is keep pushing new sifts into the country and to have patience. We will fail by our own weight. US Capitalism will implode not because it doesn't work, but because it's just not worth it anymore.
By Robert Arvanitis, at
Sat Jul 11, 08:06:00 AM:
First, let's clear up a basic premise: Billy Bob Corncob agrees we want equality of opportunity, not equality of outcome.
Second, let's get the right benchmark. BBC should consider the interesting piece by Brink Lindsey at Cato: http://www.cato.org/pubs/wtpapers/Nostalgianomics.pdf
Finally, BBC must continue to the logical conclusion and tell us how the top decile has found new and ever-more effective ways to bilk the rest of us.
PS: BBC's initials; coincidence? Maybe. Maybe not.
By , at
Sat Jul 11, 10:00:00 AM:
In my view, the primary intent of the communists and thieves who run the democrat party is to destroy the middle class in American. Rangel, a racist thief, picked those numbers just because the target group is so small. This is a trial balloon! When the final legislation is drafted, the surcharge and income levels will be variables with authority to increase the 1% to up to 3.5% and decrease the family income from $280k to $150K to be vested in some health care czar.
It isn't about funding health care, it is about destroying the middle class. We'll first see the Mugabe Obama administration and then, the Pol Pot Obama administration.
By , at
Sat Jul 11, 10:20:00 AM:
Hope and Change sure became Spend and Tax awfully fast.
By , at
Sat Jul 11, 10:36:00 AM:
Does everybody understand that high skilled labor is now just as fluid as capital. I do 98% of my work over computer and phone, there is little reason to stay in a county that chooses to punish success. Labor, like capital will flow out of this country as the system becomes more regressive. Just like it has in Europe.
By , at
Sat Jul 11, 10:41:00 AM:
From Link,
Keep focused here.
We already have massive projected deficits: $1.8 trillion this year alone; $7 trillion over the next few years. These deficits will only go up if the economy stalls -- which is more likely than not.
You could impose a 100% tax on incomes over $200,000 and not close this gap. Reread that last sentence slowly. Many states also have their own permanent structural deficits and have started to impose new millionaire taxes on those making more than $200,000 to $250,000.
Meanwhile Rangel is talking about imposing a new tax increase to cover new spending for new benefits.
Worse still is what Randian points out. There's serious talk of eliminating caps on payroll taxes. Once this has been done, expect the rate tables to be jacked significantly in coming years. This will be necessary to put even a small dent in the aforementioned deficits. The math will quickly show that the working rich don't make nearly enough to close these deficits -- you'd need to jack rates a lot on everyone making more than $100,000, or even $70,000.
So Obama & Co will make us all equal pigs through deficits and tinkering with the tax code. The deficits are already so big that anyone with half a brain and a napkin should have known this was coming. This should have been obvious to us -- or pointed out to us by MSM -- back during the campaign. It was never about Joe the Plumber wanting to make $250,000 -- it was about Joe the Plumber getting hit with confiscatory taxes for anything over $70,000.
The flaw in Obama's plan is the assumption that the economy is one big pizza pie that magically gets delivered to our door every day ... so it's all about giving everyone their fair slice. You have to be a shithead bubble boy like Obama to believe that. In the very short term you can take slices from some and redistribute. Very quickly however the pie gets smaller -- forget any toppings -- and then one day the delivery boy decides he'd rather go surfing.
The truly rich own things -- and so can avoid income taxes -- and so will manage through this quite well thank you very much. But who in his right mind would want to be entrepreneurial or work extra hard to get ahead. The lesson is to get a lazy ass government job with a pension, or go into a cash business.
I thought we learned this lesson as early as Jamestown -- collective gardens don't work. The Soviets liquidated the Kulaks and everyone starved -- except for the more equal pigs.
Link, over
By Dawnfire82, at
Sat Jul 11, 11:01:00 AM:
BBC: You focus a lot on percentiles. Percentiles, as critical thinkers should know, are woefully prone to manipulation and misinterpretation.
What you don't mention is the vast increase in the quality of life for even the very poor of this country. An Indian once observed about the US that 'the roads are paved, the electricity only goes out in storms, and poor men can be fat. This is paradise!'
This is not a feudal wasteland, where an overclass of all-powerful nobles lord their wealth over starving peasants. Our peasants do pretty well, and most people aren't peasants anyway. Fictional quotations from Marie Antoinette do not serve when the poor eat cake regularly, and get fat from it.
Your primary point here seems to be that because the rich are rich, then they deserve to be plundered in order to finance goodies for everyone else. 'Such and such percentage of people own such and such percentage of wealth. Let's take it!' (and you're dripping condescension for anyone who questions this)
Consider... what systemic changes or even damages might result from such redistribution? How would you suggest keeping people from fleeing what they view as repressive taxes? (whether they are or not is completely irrelevant; if they don't want to pay, they will leave. Ref: Maryland, California) When the taxes taken from 'the rich' dry up, what will happen to the goodies that that money funded? Will the goodies be canceled? Or will taxes be expanded to the non-rich (or newly rich, if you measure by percentage!) to keep the goodies? What will happen to American business? We're a capital-heavy country, and our greatest industries require large amounts of capital (i.e. large amounts of wealth concentrated in relatively few individuals) to even imagine working... when you take away that capital, what will happen? Especially in relation to foreign businesses in countries that do not flog themselves with the scourge of liberal guilt, like India, Brazil, Russia, and China?
Redistributionism destroys wealth. It's just a matter of time and details. (population flight? disincentives to business? hindrances to entrepreneurship? bloating entitlements? who knows?)
By JPMcT, at
Sat Jul 11, 11:13:00 AM:
Link has it right.
All the mental masturbation about "higher math" and quartile ratios is designed to make people think they are being taken advantage of by the "wicked old rich".
This kind of mental floss has been bandied about for years and ignores the BIG GORILLA in the room...that the economy is not the same sized PIE! The ratios may lean this way and that...but it is irrelevant if your raw income increases and your disposable income also improves.
Whether we use the pizza pie or apple pie analogy, the point is the same...torturing the data by applying RATIO LOGIC to a constantly shifting and usually expanding GNP is disingenuous and misleading.
Sure the rich get richer. Hell...who cares if EVERYBODY GETS RICHER!!
Obama economics will lead to more equal ratios...perhaps that will satisfy the snarky comments about math made by BBC.
Of course, in the process of equalizing ratios...we will all go broke...ALL OF US!!!
By , at
Sat Jul 11, 01:18:00 PM:
Link again,
One of the standard leftist defenses is that Obama inherited this mess from Bush-Cheney ... and they have a point. Not enough to justify Obama & Co's current cynical profligacy, but Bush-Cheney were profligate too. A point worth exploring.
Germany has shown the way to one course of action we could take. Germany has taken the moderate centrist approach of putting a hard cap on growth in social spending -- it can't grow faster than the overall economy. What an amazing concept for working up a budget -- actually factoring in expected revenue when you work up a list for spending, rather than making revenue just an afterthought.
But our political dynamic won't allow for the German way. Our two parties represent themselves, not "we the people." I think it was Elise who recently asked the spot on question "why are the Democrats in such a rush to enact so much problematic legislation at a time when our economy is reeling?" Part of the answer is that those in Congress live in an isolated bubble -- either red or blue -- far removed from us real folk and even from reality. Shitheads like Obama and Pelosi and Barney Frank actually think they can magically legislate outcomes -- that the world beyond their bubble doesn't factor, including things like math and science, and even reason. Bush-Cheney made different mistakes but in a similar way. They all want to make people in their bubble happy -- the rest of us don't figure except for when they have to competitively bullshit us every two and four years.
Our unfolding economic crisis is really a crisis over failed government brought on by two parties who don't give a rat's ass about "we the people." Everything that went bad can be traced back to government.
I don't see a centrist consensus solution being reached by our two parties. The Republicans can't sell cost cutting. Even if they tried, after Bush-Cheney they have no credibility. Elections in 2010 and 2012 won't be enough for us to address our huge fiscal imbalances. The train wreck has to happen first. Developing ...
Link, over
By , at
Sat Jul 11, 02:09:00 PM:
Worse still is what Randian points out. There's serious talk of eliminating caps on payroll taxes.
It's not merely about eliminating caps on payroll taxes. They're seriously considering applying payroll taxes to income that has been historically exempt from payroll taxes (with no cap, of course).
By , at
Sat Jul 11, 02:11:00 PM:
This is not a feudal wasteland, where an overclass of all-powerful nobles lord their wealth over starving peasants.
That's where we're heading, with the government class the nobility. As long as government salaries and retirement benefits are indexed to CPI they can cause as much inflation and depression as they want without hurting themselves.
By , at
Sat Jul 11, 03:45:00 PM:
From Link,
Randian is spot on with both points.
On payroll taxes, it's an important distinction. There'll be no place left to hide from future confiscation. You shouldn't count on keeping much from your IRA in ten years. For the moment the Dems only want to create a brave new framework, while we're sleeping. In their mind it doesn't matter who's in power when the bill comes due -- they don't think their constituents will pay. Notice that Rangel proposes his healthcare surtax to only take effect in 2011. Further to this, everything Obama wants is paid for with post-dated checks.
The Economist's cover story is "California or Texas" ... that the US must chose to follow the path of one or the other. I actually think we've already unwittingly collectively pulled the lever for California. Choosing to be California isn't a viable long-term option. It leads to a collapse of the private sector and a failed state. I can't figure out the deeper significance of California paying in IOUs not dollars. If the US instead borrowed the dollars and gave it to California, what'd be the difference? Isn't California "coining money," a power expressly given to the federal government by that inconvenient document, our Constitution.
In response to crisis, the political fault lines should re-arrange creating divides between "those who get government checks" and "those who pay for them." This should happen, but may not. The young should join the latter, but may not achieve class consciousness. The Republican party should benefit from this realignment, but may be too pig-headed to take advantage.
On Randian's second point, it goes to my bubble boy thesis. Those in the inner circle of government think they're immune from the havoc they'll wreak. It's like having an endowed chair at a well-heeled university. You just have to be politically correct, coming and going -- the science department isn't even immune any more. In Obama-land, even the math profs have to say that 1 +1 = 3.
I'd make the centerpiece of the new agenda that no public pension be indexed for inflation, and that no elected official get ongoing benefits once out of office. Period. Obama can pay for his own security detail out of his book royalties.
Link, over
By , at
Sun Jul 12, 12:09:00 PM:
It's certainly instructive that the left tries hard to frame the debate in terms of "who makes too much", instead of the more straightforward, "why does the U.S. government spend so much". As Link points out in a different context California is a revealing case: a massive tax revenue machine that manages to still overspend.
The truth is, as any honest lefty would quickly admit, that government costs too much already. Corruption, patronage, whatever: the public employee unions have both the left and the right fighting pointlessly. If government were to become less expensive to administer, and if progressives were willing (even once!) to let one program die before starting another, then we could try many of their spending experiments without fiscal harm to the country. Instead, idiotic dissections of how close we have approached to the line of permanent damage to our economy and way of life replace honest discussions of the value of this piece of government or that piece. How about the Education Department? Can we kill it?
Find me $1 trillion of savings from past progressive campaigns and I'll happily discuss the merits of whatever new program the left wants. Until that time, please spare me the crusade to steal more money from the minority ;east able to defend themselves and most critical to future economic success (ie, those with investment capital at work).
By , at
Sun Jul 12, 10:43:00 PM:
I learned a lesson working with Marlin Fitzwater in Bush 41: Cave early, cave often
Your update is a nice try, but the fact is that income inequality has increased at a rate that threatens the fabric of the republic.
Apart from that, anyone (anyone) in the top 5% must be considered wealth. Anyone whose after-tax income would put them in the top 5% of those who before tax would be wealth are quite wealthy. They have benefitted from the tremendous economic machine that was the United States from 1983 until about 2007. (Look at the CAGR for the S&P 500 - a fair amount better than the 10.5% that is the long-term average.)
No doubt, you are correct. Taxes do reduce consumption. Government spending (a well-known result of macro-economics) crowds out private spending at better than a dollar for dollar exchange.
I don't care how a $400K a year couple THINKS of themselves. Anymore than I care how Nancy Pelosi THINKS of her views about national security. There is an outside reality. Reference must be made to that reality.
If we as a people (that's the way it works, even if I disagree, as I usually do) want healthcare for all, I think it is better to pay for it. And the marginal utility of the dollar for those at the top of the brackets is less than those in even the 80th to 95th percentile -- and by a fair margin. It's not even close.
Do you know what level of income puts a family of four in the 80th percentile?
Correct for SMSA (those figures are available) and I think you can then put in brackets the midwest number, using the "poor, downtrodden Manhanatan-ites" outside the square brackets.
Let me make another important point
The groundswell of anger in this country is populist in nature because of attitudes implied by posts like yours - in which the elites (of both parties) have lost touch with how most people live.
I commend to you, on a parallel note, WJB's Cross of Gold speech from the 1896 democratic national convention. Quite elegant and holds up well over time.
I'll try to find a couple links. Can't find my own blog. The nature of making it private in essence.
By Billy Bob Corncob, at
Sun Jul 12, 10:47:00 PM:
By , at
Mon Jul 13, 03:16:00 AM:
If we as a people (that's the way it works, even if I disagree, as I usually do) want healthcare for all, I think it is better to pay for it.
Just because a bunch of people want something doesn't make it moral or right.
And the marginal utility of the dollar for those at the top of the brackets is less than those in even the 80th to 95th percentile -- and by a fair margin. It's not even close.
It isn't remotely moral to argue that it's ok to take your neighbor's property because you think it has insufficient marginal utillity in their hands.
