Wednesday, July 15, 2009

Moar Tax Brackets! Woo!

While I probably would have preferred to finance the upcoming health care bill through either reducing deductions for high-income earners, or capping the deduction for employee-sponsored health insurance at some fixed number, socking it to the super rich isn't a bad idea. In particular, it appears that the House plan creates three new tax brackets above the current $250,000 threshold leaves plenty of room to tweak top marginal rates down the road.

One of the great magic tricks of the right-wing anti-tax crusade of the previous generation has been to convince the country that a key element to a simple tax code is having very few tax brackets. In reality, the real reason Americans spend so much time filling out IRS forms is the complications added due to deductions for college tution, being a parent, having out-of-pocket medical expenses, and so forth, as well as other idiosyncracies such as treating capital gains income different from wages. Historically, the tax code has been one of the primary methods of curbing income inequality; when the income tax was first created, the top marginal rate applied to exactly one person: J.D. Rockefeller. There's every reason to return to such tax treatment for extremely high incomes; the upper-upper-middle class of New York and California ought not to have political solidarity with the 400 or 1,000 richest taxpayers in the country.

10 comments:

Nathan Nicholson said...

$250,000 in New York isn't even the "upper-upper-middle" (if we're talking in cultural and cost-of-living terms, that is--percentilely speaking they're still well up there). Meanwhile, a quarter mil is still in the realm of something you'd get as a salary, whereas the incomes of people in the 7+ figure area come more from capital gains, putting them into their own solidarity category: the "CEO's tax rate is lower than his secretary's" club.

Neil Sinhababu said...

I'd have to imagine that if you take a bunch of money from all the well-off people in NY, it doesn't hit them as hard as it might hit people elsewhere, because they just stop overbidding each other for housing as much.

Dennis said...

Yeah, I'd complain a little bit here: this proposal does not specifically hit the super-rich. $1mm earnings per year is just plain old regular rich. Step it up to $10mm at least before you get super-. I think I saw a statistic that the top tax bracket used to be ~$76mm in today's dollars, which this is still far from.

And Neil, you're wrong on housing, if only because the people you're talking about don't actually find the cost of housing prohibitive even now.

Neil Sinhababu said...

Huh... so where is the marginal dollar going to go away from? Is it just less money saved?

Nicholas Beaudrot said...

Dennis, this starts to get into the question of what it means to be super-rich. I guess at $1m salary you might actually take commercial flights once in a while, so if your definition of super-rich is "always flies on private jets" it's not quite there. Also you probably can't own multiple properties worth millions of dollars; i.e. you can have a mansion in greenwich, but maybe only afford one of the smaller townhouses in Vale. So maybe we define an "ultra-rich" category of "people who fly private jets and have multiple vacation homes"

Still, at $1m in annual income there really isn't that much that's unavailable to you. You can send your kids to any private school in the country. You can pay cash for whatever car you want. You can afford to buy a house in pretty much any neighborhood in the country, and pay a small army of house staff to maintain it. You can have your own chef and driver. I guess if we had one more tax bracket for the "ultra-rich" at $3M or $5M or $10M--keep in mind at this point that even a number of highly successful sports players and movie stars wouldn't be hit at $10M--I'd be down with that too.

Dennis said...

So the WSJ's wealth blogger wrote a book about "Richistan," and he put the line dividing Lower and Upper Richistan around ten or twenty million in assets. Asking price for a private jet is ~$50mm, with operating costs well in excess of commercial flight. People making $1mm a year thus fly commercial all the time. Small armies of household staff are expensive too -- butlers start around $100k apiece. So yes, you can certainly have most of the things you mention, but you can't have more than one or two on $1mm. Bear in mind that these $1mm people are certainly plenty rich and I'm far from against taxing them, but $1mm and $10mm are really different numbers that go with different political interests.

As to movie stars etc., I actually do think that there's a real and important difference between them and the Paris Hiltons of the world (group A works, doesn't create a giant dynasty, mostly gets wage income rather than capital, can't buy sports teams, etc.) and that there's no reason not to accentuate that.

Nicholas Beaudrot said...

To clarify, when I say "army of household" staff I'm not talking about a butler ... I mean you can afford to have a driver, a cook, pay people to maintain your lawn/flowers, &c. They're at most part time employees for you.

Dennis said...

A driver and a cook probably aren't part-time, but I'll take your point.

low-tech cyclist said...

One of the big gripes in the late 1970s against having so many tax brackets wasn't the sheer number of them, but that they were so close together - and during that inflationary time, you'd be pushed into higher brackets even as your income merely kept up with inflation.

This was known as "bracket creep," and people quite understandably disliked it: their taxes were being raised, ostensibly because they were making more money, when they weren't actually any better off.

My takeaway from this is that the distance between brackets should increase geometrically as the rate goes up linearly.

But I'm all for lots of brackets. Hell, I think we should have brackets going into the billions, because in some years, that's how much income some people realize.

And I'm all for soaking the super-super-rich even more than the super-rich. I'd be for a 95% tax on everyone earning over $100 billion, even though that bracket's not likely to see any use soon: let's get it on the books so that it's already there when someone does make that sort of money.

Neil Sinhababu said...

Wait, Dennis, were you talking about the $1M or $10M people when you said they don't find the cost of housing prohibitive? Because I was responding to Nathan on the $250K front.