Income Mobility & Futility of 'Soaking the Rich'

I've previously and repeatedly demonstrated that, contrary to progressive myths, income is not increasingly concentrated among a static upper class, nor are the poor getting poorer, in part because such arguments:

• confuse individuals with statistical categories;


• ignore government transfer payments;


• wrongly compare unbounded (the top 1 percent) and bounded (the lower 80 or 50 or 20 percent) categories; and


• disregard substantial income mobility, including earnings reductions among the top quintile and most of the top 0.01 percent.

Relatedly, and contrary to the bleating of President Barack Obama and billionaire Warren Buffett, raising taxes on the rich -- popularly called the "millionaires tax," though some proposals would cover couples with annual earnings of $250,000 -- won't close the budget deficit. (In a no doubt entirely unrelated development, the tax returns for Buffett's investment company, Berkshire Hathaway, are under IRS audit for years 2002-2009, see 2010 Annual Report at 54 n.15.)

The top quintile are the only earners paying a disproportionately greater share of total Federal taxes as compared with income (for 2007 figures, see CBO chart 2; Carpe Diem), and the top 1 percent actually paid a greater share of Federal income tax during the Bush Administration as opposed to the Clinton years. In any event, upper earners soon will be hit with tax hikes as Obamacare phases-in.

Shocking news: I was right on all counts. Based on the most recent (tax year 2009) IRS data:

1. The "upper class" is melting, as documented by the Wall Street Journal:

   In 2007, 390,000 tax filers reported adjusted gross income of $1 million or more and paid $309 billion in taxes. In 2009, there were only 237,000 such filers, a decline of 39%. Almost four of 10 millionaires vanished in two years, and the total taxes they paid in 2009 declined to $178 billion, a drop of 42%.
   
   
   
   Those with $10 million or more in reported income fell to 8,274 from 18,394 in 2007, a 55% drop. As a result, their tax payments tanked by 51%. . .
   
   It's an old story: The best way to produce income equality is to destroy trillions of dollars of wealth. Everyone loses, but the rich lose relatively more than the poor and the middle class. By that measure, if few others, Obamanomics has been a raging success.

2. The number of "mega-rich" (annual earnings of at least $10 million) nosedived, as charted by Carpe Diem's econ. prof. Mark Perry:
   
   
   


3. The Federal budget deficit cannot be ended via dramatically increased taxes on the "rich." The Congressional Research Service projects (at XI) the fiscal year 2011 Federal deficit will be $1,284 billion. So, as Steve McCann shows in American Thinker:

   If the nation were to go down the road of increasing the tax rates or eliminating deductions on [those earning over $1 million/year] and create a 25% higher effective tax rate of 30.5%, the additional revenue to the Treasury would be $44.1 Billion. Still $1,055.9 Billion [NOfP note: McCann was using the CBO's April deficit estimate] short of mitigating the deficit. A 40% higher effective tax rate of 34.1% would generate only an additional $70.3 Billion.
   
   That assumes a static number of taxpayers would continue to earn over $1,000,000 per year. In fact, the number of taxpayers in this group changes almost yearly and as an absolute certainty this variation would become far worse if the effective tax rate were to be raised dramatically particularly when factoring in already high state and local taxes. . .
   
   Therefore the reality is that other income groups would have to be included in any tax increases if Obama and the Democrats are insistent on "revenue enhancers."
   
   In 2009 there were 3,688,000 filers in the $200,000 to $1,000,000 AGI sector. They paid $256.8 Billion in individual income taxes out of a total Adjusted Gross Income of $1,237.4 Billion or an effective rate of 20.8%. Were the effective rate to be raised by 25% to 26.0% an additional $64.9 Billion would be realized.
   
   The largest AGI group is the $75,000 to $200,000 in annual income. In 2009 there were 24,986,000 filers paying $292.8 Billion in income taxes out a total AGI of $2,792 Billion. (Effective rate of 10.5%).
   
   A comparative chart is as follows utilizing the 2009 statistics:
   
   
   
   These three income groups account for 65% of the total Adjusted Gross Income recorded in the tax filings in 2009 and 84% of all income taxes paid.
   
   As the deficit in 2012 is estimated to be in excess of $1,100 Billion and near that amount again in 2013, there are simply no way raising income tax rates or eliminating so-called loop-holes for the "rich" will generate anyway near enough income even if one assumes no change in tax paying behavior.

   Of course, because the "static" scoring of tax hikes is contrary to rational economic behavior and historical experience, the actual increased revenues from raising taxes would be even lower than depicted by McCann.
   
   In fact, as the Tax Foundation reports:

   Even taking every last penny from every individual making more than $10 million per year would only reduce the nation's deficit by 12 percent and the debt by 2 percent. There's simply not enough wealth in the community of the rich to erase this country's problems by waving some magic tax wand.
   
   Finally, to put everything in perspective, think about what would need to be done to erase the federal deficit this year: After everyone making more than $200,000/year has paid taxes, the IRS would need to take every single penny of disposable income they have left. Such an act would raise approximately $1.53 trillion. It may be economically ruinous, but at least this proposal would actually solve the problem.

Conclusion: The rich aren't getting richer. So, per force, "soaking" them won't solve the Federal budget gap. Just as I showed this spring. As the WSJ concludes:

[The] disappearing millionaires go a long way toward explaining why federal tax revenues have sunk to 15% of GDP in recent years. The loss of millionaires accounts for at least $130 billion of the higher federal budget deficit in 2009. If Warren Buffett wants to reduce the deficit, he should encourage policies to create more millionaires, not campaign to tax them more.

(via reader Warren via Washington Examiner; NetRight Daily)