Soak the rich? We’re already there

The Congressional Budget Office has looked at the tax data for 2007 and found, once again, that “the rich” already pay far more in taxes than everyone else.

CBO 2007 data graph 2

Source: CBO

The comparison here is between the blue bars, representing the share of all income reported, and the purple bars, representing the share of all federal taxes paid. The bottom four quintiles all have a high share of income relative to taxes paid; the opposite is true for the top 20 percent.

The progressivity of our tax code is also apparent in this graph of average federal tax rates by income quintile:

CBO 2007 data graph 1

Source: CBO

The average effective tax rate for the bottom 20 percent is below the trend line you’d expect from looking at the middle three groups; the average effective rate for the top group is above that trend line. So, tax rates are already skewed in favor of the bottom group and against the top group.

Here’s the eternal question for all those who want to skew rates even more, to raise taxes on “the rich” to pay for this or that government program: How much higher do you think the purple bar in the first graph can get, relative to the blue bar? I’d argue that every time the gap between those bars grows, the more people decide not to take the risk of making that investment or growing their business. And that’s a bad thing for the rest of us.

Now, separately, but relatedly:

Some people will look at these graphs and counter, That’s because the rich are getting richer while the rest of us are stuck! Just for them, here’s a graph depicting the change in inflation-adjusted, after-tax income:

CBO 2007 data graph 5

Source: CBO

First, on a very basic level: What does that top trend line loosely resemble? How about the Dow Jones Industrial Average, 1979 to 2007?

Percentiles 96-99 also reflect that DJIA trend line in a more muted way. Everyone in the 95th percentile and below has a much shallower, albeit steadier, trend line upward.

What does that tell us? Yes, it suggests that labor earnings have grown more slowly than investment earnings. But when was that not the case? And why would we want to change that? Of course we want to reward labor, but we also want to reward the investment in our economy that creates opportunity for labor — and the rewards are necessarily higher because the risks involved in investing are far greater.

Politicians who claim they can bridge this gap without collateral economic damage are selling the worst kind of populist snake oil. It simply isn’t possible.

What’s more, since about half of U.S. households have equity investments due to participation in things like 401(k) plans, the people in the sub-95 percentiles probably have unrealized gains that have risen in a way similar to the top two lines of graph No. 3. (I’d guess that the blue line would be a closer approximation of that, but it’s just a guess.) Increasing taxes on capital gains doesn’t hit only “the rich”; it will eventually hit about half of us.

What these figures don’t show us is how purchasing power and thus standards of living have changed. The cost of consumer goods has been falling over time, and inflation from the mid-1980s onward has been unusually tame — meaning standards of living have increased faster than income has. Jonah Goldberg recently wrote an excellent column about the growth in living standards, which you can read here.

These data won’t end the calls for taxing “the rich.” But they ought to shed some light on the wisdom of such a policy.

(H/t: Power Line)

296 comments Add your comment

CrazyInGA

June 29th, 2010
11:24 am

I’m not rich by a long shot and I am not poor by a long shot. And as a part of the middle class, I would say that the rich aren’t being soaked; but I am. :)

The rich are doing A-OKAY in my book; because you still have the title.

No More Progressives!

June 29th, 2010
11:32 am

This should cause the lefties to run screaming into the night.

Citizen of the World

June 29th, 2010
11:49 am

So the rich are getting soaked? Well, the poor are being drowned and the middle class are being screwed. So cry me a river.

Ronald H. Christ

June 29th, 2010
11:51 am

My trickle down has worked to perfection! And I got you poor slobs to feel sorry for the wealthy! Man, was i good, or what?

CJ

June 29th, 2010
11:53 am

Kyle: “We also want to reward the investment in our economy that creates opportunity for labor — and the rewards are necessarily higher because the risks involved in investing are far greater.

It’s worth pointing out that investment is subsidized by the government in that losses from bad investments can be deducted on our taxes. The result is that the government absorbs 25 percent of an investment loss, for example, for a person in the 25 percent tax bracket. In this respect, the government significantly reduces the risk of investment (it seems to me that anti-government types would be seeking to eliminate this deduction—let the free market reign and all that).

Responding to the assertion, that investment is riskier than labor, those who have been laid-off at any time in their lives would beg to differ (there’s always a risk of choosing to work for company A over company B because workers have less information to predict which company is more likely to let people go than investors who are trying to predict which companies would make better investments). Many who made most of their income from working have lost far more from being laid off in the form of lost income than they ever lost in any of their investments.

In addition, it’s true that investment creates labor. It’s also true that labor provides returns on investment. Generally speaking, we can’t have one without the other, and its wrong to elevate one above the other as Kyle and others tend to do.

Profits (i.e., capital gains) on such investments are their own reward. There’s no reason to subsidize investment any more than we already do when allowing tax deductions on investment losses. Taxes on profits from investment (i.e, capital gains and dividend taxes) should be the same as taxes on those who make most of their income from from getting up and going to work everyday—no higher and no lower.

CJ

June 29th, 2010
11:54 am

Oops. Forgot to close the italics. Sorry.

World B. Free

June 29th, 2010
11:55 am

I weep for the wealthy, the cross they bear reminds me of Jesus.

ByteMe

June 29th, 2010
12:01 pm

Of course we want to reward labor, but we also want to reward the investment in our economy that creates opportunity for labor — and the rewards are necessarily higher because the risks involved in investing are far greater

You wrote that like you mean it. And yet… let me know when investment is taxed at the same rate as labor. In our current lopsided tax structure, investment is taxed significantly less than labor. Tax them the same, neither is more “special”.

Thurston B. Howell III

June 29th, 2010
12:02 pm

I’ll have to sell the house in the Hamptons with this news.

Saul Alinski in da house. Da White House.

June 29th, 2010
12:02 pm

Most Democrat voters don’t pay taxes at all. Dead people, convicted felons, illegal immigrants, welfare baby mamas and high school drop outs.

Kyle Wingfield

June 29th, 2010
12:02 pm

How unsurprising is it that some of the liberals on here view economics in terms of sympathy?

CJ: I’d come closer to supporting you on ending that deduction than on increasing capital gains rates. Subsidizing risk is of course one of the main ways government contributed to the housing and financial crises…I’d prefer that investors have to weigh their risk-taking more carefully, and then reap the rewards for the ones that turn out well.

Saul Alinski in da house. Da White House.

June 29th, 2010
12:04 pm

“Well, the poor are being drowned and the middle class are being screwed. ”

Yeah, by Obama and his cult followers.

Citizen of the World

June 29th, 2010
12:05 pm

CJ, you’re my hero.

The Republicans do tend to downplay the importance of labor in the equation. I guess they think the worker is expendable, that there will always be more where we came from. That’s one reason they demonize unions and a big reason they love illegal immigrants and outsourcing jobs so much. They can find people who’ll work for substandard wages in substandard conditions, helping them become even richer.

But we’re supposed to revere them as the ones who “create jobs.” Well, the working man is the one who really creates jobs — he does the work and he buys the products and services.

Communism sux

June 29th, 2010
12:08 pm

Left wingers don’t seem to understand that Capitalism pulls people out of poverty.

Let’s take a look at one particular group of Democrat voters shall we.

Afro-Americans(black people): 90% of them have voted for Democrats for decades. 100% of black populated areas are controlled by Democrats. 100% of those areas are poor and have high crime rates. 100% of those areas are also uneducated and have children out of wedlock.

Democrats always promise black people money etc yet for decades blacks have been living in poverty. Jesse and Al have done nothing good for black people except to keep them stupid and under their control.

Now, when black people make a life for their own, go to school and stay out of trouble, they end up becoming independent and live a comfortable life. Democrats and left wingers refer to them as Uncle Tom’s and Aunt Jamimas.

Bottom line: Democrats are idiots.

Citizen of the World

June 29th, 2010
12:09 pm

Saul, shouldn’t you be blogging over on NYTimes.com? Your contributions to this discussion are just way over our heads here.

Communism sux

June 29th, 2010
12:09 pm

“CJ, you’re my hero. ‘

You must have really low expectations of heros.

Communism sux

June 29th, 2010
12:09 pm

“Saul, shouldn’t you be blogging over on NYTimes.com? Your contributions to this discussion are just way over our heads here.”

I’m sure most things in life are over your head.

Communism sux

June 29th, 2010
12:10 pm

Citizen of the World

Obama promised jobs in 2008. Instead, unemployment shot up to 10% and Joe “smart @ss” Biden said two days ago that jobs lost are not coming back.

So………you got nofin!

Communism sux

June 29th, 2010
12:13 pm

Citizen of the World and CJ

If the GOP is to blame for all of America’s woes, explain the continuing downward trend of the American economy under the Democrats?

Blaming Bush and the GOP no longer works.

Consumer Confidence Drops In June On Jobs Worries

Americans, worried about jobs and the sluggish economic recovery, are having a relapse in confidence, causing a widely watched index to tumble in June and raising concerns about consumer spending in the critical months ahead.

http://www.cnbc.com/id/37994762

Reason

June 29th, 2010
12:16 pm

Kyle

The reason progressives don’t know a damn thing about the economy is because they don’t work in the private sector. Obama has never worked one day in the private sector. Same with John Kerry, Barney Frank, Chris Dodd, Nancy Pelosi, Barbara Boxer etc……

Kyle Wingfield

June 29th, 2010
12:17 pm

Citizen: It’s not about “downplaying” anything. There are more people capable of working than there are people with money available to invest. Initiative begins with the latter. One side of the economic debate recognizes these facts and shapes policy accordingly.

Entrepreneurship — which both sides say they value — is in large part about being motivated to move from the first group to the second one. But once the entrepreneur succeeds, one side vilifies him, or at least makes policy as if it considered him a villain. Why is that?

Reason

June 29th, 2010
12:18 pm

scrappy

June 29th, 2010
12:24 pm

Reason – wow – I didn’t know all government employees were progressives. you’re so smart! way to overgeneralize and assume.

Reason

June 29th, 2010
12:25 pm

“I didn’t know all government employees were progressives. you’re so smart! way to overgeneralize and assume.”

Funny, you gals on the left are always calling conservatives, racists, nazis and tea baggers.

Pot meet kettle.

Reason

June 29th, 2010
12:26 pm

Keith Olberman=sad sack of horse dung. And left wingers wonder why no one listens to them.

Keith Olbermann Mocks Sarah Palin’s ‘Imbecility,’ ‘Stupidity’ (VIDEO)

http://www.huffingtonpost.com/2010/06/29/keith-olbermann-mocks-sar_n_629066.html

scrappy

June 29th, 2010
12:27 pm

Comm sux – I can do that too… 100% of rural areas is white people. 100% of these areas are controlled by Republicans. 100% of these areas are poor and covered with meth trailer parks. Bottom line: Repulicans are meth pushers..

makes about as much sense as your attempt at an argument

Left wing management

June 29th, 2010
12:28 pm

Utterly unconvincing.

First of all, the term “rich” is meaningless any more. The relevant category now is “hyper-rich”. And to break down the population into quintiles is also highly problematic and very misleading.

We can look at different numbers, based on different breakdowns, and come up with strikingly different results. Take the top 400 earning families according to the Center on Budget and Policy Priorities:

“The top 400 households paid 16.6 percent of their income in federal individual income taxes in 2007, down from 30 percent in 1995. This decline works out to a tax cut of $46 million per filer in 2007, or a total of $18 billion in tax cuts for these households per year.”

So what this shows is what you have completely ignored in your analysis, which is any trace of a historical perspective whatsoever. And that’s not surprising. Conservatism often seems based on a complete rejection and repression of history itself.

Communism sux

June 29th, 2010
12:29 pm

“100% of these areas are poor and covered with meth trailer parks. Bottom line: Repulicans are meth pushers.. ”

You of all people should know about trailer parks.

saywhat?

June 29th, 2010
12:29 pm

Kyle wrote “Entrepreneurship — which both sides say they value — is in large part about being motivated to move from the first group to the second one. But once the entrepreneur succeeds, one side vilifies him, or at least makes policy as if it considered him a villain. Why is that?”

Would it be fair to ask the following: Hard work- which both sides say they value- is in large part about being motivated to move from the first group to the second one. But UNTIL the entrepreneur starts, one side vilifies him, or at least makes policy as if it considered him a villain. Why is that?”

Communism sux

June 29th, 2010
12:30 pm

“makes about as much sense as your attempt at an argument”

Yet you can’t prove me wrong. But please, continue to cry and whine. It’s funny to watch you gals implode.

scrappy

June 29th, 2010
12:31 pm

again with your over-generalizations. did I call anyone names in my post? no. I merely called you out on gross assumptions

Communism sux

June 29th, 2010
12:31 pm

“Conservatism often seems based on a complete rejection and repression of history itself.”

Oh boy, next she’ll be calling us all Nazis and Racists.

Communism sux

June 29th, 2010
12:32 pm

“did I call anyone names in my post?”

No not yet. That’ll come in a few minutes.

scrappy

June 29th, 2010
12:32 pm

I can’t prove you wrong because you used no actual fact. made up stats will still be made up no matter how much you agrue

Communism sux

June 29th, 2010
12:34 pm

“I can’t prove you wrong because you used no actual fact.”

Fact: poor black areas are democrat controlled.
Fact: 90% of black people vote democrat.
Fact: 100% of black areas in cities have high crime and drug problems.

Please, by all means, prove me wrong.

Jefferson

June 29th, 2010
12:36 pm

Taxes are at a 50yr low, raise the rate on the well heeled !!!

Left wing management

June 29th, 2010
12:37 pm

Communism sux

Yeah, and the irony of it is that conservatism (at least as represented by Burke, Buckley, and others) was presumed to lecture the rest of us on history itself, tradition, long-standing ways, etc.

Communism sux

June 29th, 2010
12:39 pm

Left wing management

Conservatism works every time. Obama is making damn sure the country is going back to conservatism.

See ya in November.

Enormous H

June 29th, 2010
1:07 pm

Fact: rich Jewish areas are democrat controlled.
Fact: 90% of Jews vote democrat.
Fact: 100% of Jewish areas in cities have low crime and drug problems.

Please, by all means, prove me wrong.

MPercy

June 29th, 2010
1:13 pm

CJ,

You’ve certainly over-simplified the capital gains picture to paint it as a subsidy. First of all, not all losses can be deducted, only $3000 of losses (although losses in excess can be carried over). Losses can be used to offset gains, too, but then you’re simply computing net capital gains–a loss is negative income, just like a gain is positive income. Taxing gains without making some allowance for losses is just one-sided.

And short-term gains (sale of assets held less than one year, like those more likely to be had be day-traders) are taxed as normal income. Only long-term gains are given preferential treatment, when the idea is that the gain was really due to an honest investment rather than merely speculation.

And also, not even all long-term gains are treated the same. Gains on collectibles (e.g. art) and small business stock are treated to 28% tax (although short-term holdings are still treated as ordinary income).

The biggest capital gain that most people will face is pretty well 100% tax-free. That’s on a sale of a home (primary residence). Up to $500K of gain is excluded from taxes. Eliminate this exclusion and people will be clamoring for a reduction in capital gains rates.

World B. Free

June 29th, 2010
1:21 pm

“It is easier for a camel to go through the eye of a needle, then for a rich man to enter the kingdom of God” Matthew 19:24

God and liberals have no sympathy for the greedy when dealing with economics…I guess “hell” will resemble a WASPY country club…..

Communism sux

June 29th, 2010
1:28 pm

World B. Free

So rich people can’t go to Heaven?

Communism sux

June 29th, 2010
1:31 pm

World B. Free

Obama is rich. Is he not going to Heaven? John Kerry is rich. Is he not going to Heaven?

No More Progressives!

June 29th, 2010
1:41 pm

Jefferson

June 29th, 2010
12:36 pm
Taxes are at a 50yr low, raise the rate on the well heeled !!!

50 year low? Only on days that end in Y, right?

Marv Albert 3:16

June 29th, 2010
1:48 pm

” Looketh down upon the biggest moron on Earth, communism sux, for he is a tool without equal, so sayeth the Lord, and it was good”

Citizen of the World

June 29th, 2010
1:48 pm

There’s a gap in the comments from 12:39 through 1:07 during which time my response to Kyle’s question vanished.

Basically, I said that requiring the rich to shoulder more of the tax burden is not villification, that they can do so with no harm to their lifestyle, and that it seems they would willingly give more back to the country that afforded them the opportunities to achieve and attain so much.

But instead, they begrudge the poor a living wage and characterize them as parasites that pay no taxes, when in fact they pay plenty of taxes, they just don’t make enough to pay federal income taxes.

Something like that.

Citizen of the World

June 29th, 2010
1:51 pm

Everybody talkin’ bout heaven ain’t goin’ there.

Ronald H. Christ

June 29th, 2010
1:51 pm

My fellow trickle downers, times are very difficult for the wealthy. Yacht sales are down. And the Swiss aren’t letting us evade paying taxes as easily as they used to. And some of the demonized CEOs even want their lives back! I’ve done my part to alleviate their suffering, the rest is up to you fiscal conservatives.

World B. Free

June 29th, 2010
1:57 pm

Citizen of the World, My sources tell me you were in “The Matrix” from 12:39 to 1:07….

jconservative

June 29th, 2010
1:58 pm

Historical top tax rates. 1960 91% over $400,000. 1990 28% over $162,770. No point being made, just found it curious.

This is not the problem. Our problem is that we decided, as a country, that we could increase spending and reduce government revenue at the same time. This formula causes large deficits.

See the administrations of Reagan, Bush 41, Clinton, Bush 43 and Obama.
All of these presidents signed into law budgets that decreased revenue and increased spending.

The question on the table is when will the light in the voters mind turn on?