Wednesday, April 27, 2011

The Trouble With Taxes

Liberal Kevin Drum talks about spending restraint, but the centerpiece of his plan is raising taxes:
letting the Bush tax cuts expire in a couple of years and then raising tax rates by about four or five points of GDP over the next 20 or 30 years. Done reasonably and fairly, I just don't believe that an increase this gradual would be wildly oppressive.
Now, as risky as it may be, I'm willing to increase some taxes in order to close the Federal budget deficit. But the Atlantic's Megan McArdle shows why Drum's plan would be a disaster (footnotes omitted):
But looking just at the federal income tax makes no sense. In order to raise taxes to the 25% of GDP that Kevin wants, all taxes need to rise by at least a third, not just income taxes: excise taxes, corporate income taxes, payroll taxes. And we're talking about rising from the Clinton level, not from the current effective tax rate level. That's going to be a lot more than 5%. . .

So our baseline would be returning effective tax rates on the top quintile to around 28%; effective tax rates on the middle quintile to 17%; and effective tax rates on the bottom quintile to 6%. Then we raise each tax rate by a third to 37%, 23%, and 8%, respectively. The current tax rates? We don't know exactly (the data only go up to 2007), but a rough estimate is 25%, 14%, and 4%.

In other words, for the poorest 20% of Americans (who make less than $20,000 a year, with an average income of $11,500), taxes go from about $460 to about $920. For the middle quintile (making an average of $50,000 a year), taxes go from around $7,000 to over $12,000. For those in the top quintile, with an average income of $167,000, taxes jump from a $41,000 to $62,000.

Turn it around and look at the effect on incomes: after tax incomes drop from $11,040 to $10,580, in the lowest quintile; from $43,000 to $38,500 in the middle quintile; and from $125,000 to $105,000. And the higher you go, the stronger the effect is; for the top 1% (which starts at AGI of $400,000), you reduce their minimum income from a bottom of roughly $275,000 to perhaps $210,000, either through taxes, or through lower capital income as a result of higher corporate income taxes.

Can this be done? Maybe. Probably, at least on the lower tiers, who don't respond to tax rates the way the wealthy can. But it won't be easy or moderate. I'm sure there are a number of people in my readership where two spouses take home $125,000 between them. How easily can you guys chop $20,000 out of your budget? And though the percentages are lower, in practical effect it's even worse for the bottom: if you're making minimum wage, $460 is several weeks worth of paychecks.
As Instapundit says, "How many people, given the choice between massive cuts in the federal budget, and cuts like these in their own budgets, would choose to cut their own?" But they don't really want to cut spending. . .


Anonymous said...

Roy said:
"They don't really want to cut spending." I've always found amusement in willful denials of the result of ponzi schemes. Unfortunately for my laughter, this time the joke's gonna get me, too.

OBloodyHell said...

Anyone else want to become a Kiwi?

Carl said...

How about a Qatari?: no income or sales tax at all.

OBloodyHell said...

Ummm, no alcohol, no porn, and a good chance of getting attacked by some Islamic nutjob group?

North Island or South Island?

They also speak English.

And... #4




word verif is "outch"