The Unequal Burdens Of The Rich

Image from here.

Shorter Megan McArdle:

Without arguing about whether our tax system is fair or not, the fact is that the federal income tax is the most variable part of the code, and the federal income tax is now very progressive; it collects most of its revenue from people at the top. (Whether it should collect even more is an argument for another day.) Because it collects most of its income from people at the top, and because the incomes of the wealthy are more variable than the incomes of the poor and middle class (Warren Buffett's income can drop by $300,000; mine can't), we're going to get deep troughs in recessions, and high peaks in boom times.

Longer Megan McArdle:

Nothing "confuses" McArdle more than the difference between a number and a percentage. When she wants to deemphesize something she'll use number and ignore percentage. ( Or do the opposite.) She did it with drug company profits, she did it with health care and bankruptcies, and now she's doing it with taxes. If the McArdles' income dropped by $300,000, that would be a decrease of about 90-100%. If Buffet's income dropped by $300,000 the percentage drop would be tiny. (And of course she ignores assets and concentrates only on income.) Her point is irrelevant. She doesn't want taxes raised for people who make over $250,000 because she makes over $250,000 and doesn't like to pay for the government services she receives. If others suffer because she doesn't like to pay higher taxes on her higher income it is their own fault because nobody made them poor, they are poor because they are weak. (More Ayn Rand, of course, via Jane Galt.)

Your basic Randian will declare that she is being accused of being selfish for wanting to keep the results of her hard labor. She is like a teenager who wants to spend all the money she makes at her after school job on clothes and movies and have her parents pay for her home, necessities, and education, while telling herself that they can't tell her what to do anymore because she is all grown up and independent. You don't want to pay our Social Security? We don't want to pay for all the airports that you use much, much more than we. The difference is that nobody listens to the poor and a lot of people listen to McArdle's lies, evasions and half-truths.

Speaking of well-known McArdle practices, watch her get nailed for linking to a source that doesn't say what she tells everyone it says, according to a commenter.

clawback 17 hours ago
We will get particularly high peaks when the booms are delivering huge chunks of income to a handful of people in a very short timeframe. According to the CBO, capital gains receipts alone, which more than doubled in Clinton's second term, accounted for more than 30% of the increase in income tax receipts above the rate of GDP growth.

The CBO report you point to wisely refrains from assuming that wide swings in capital gains tax receipts are due to business cycles. It correctly points out they also seem to correlate to changes in the capital gains tax rate. But, unlike you, they cautiously decline to assume cause and effect. Still, it could be that keeping capital gains taxes at a predictable rate would result in less variability.

abUWS 16 hours ago in reply to clawback
You would have to differentiate rate-change variability from business cycle variability in order to tease out some level of capital gains tax receipts and how they are affected by given rates. In other words there are actually three variables to capital gains taxes. The business cycle, the level of the tax, and expectations that the level of the tax will be changing (higher or lower) at some point in the future.

I have no answers. I only know that anyone who makes it sound or seem simple has to be questioned.

clawback 16 hours ago in reply to abUWS
Which is why I reject Ms. McArdle's attempt to make it sound simple. She expects us to accept, without evidence, her theory that tax receipts from the rich are more variable than average. This needs to be proven, and not by pointing to CBO reports that don't support her claims.

Cruxius 16 hours ago in reply to clawback
How about looking at the states that relied on income taxes on the rich?

This isn't exactly groundbreaking news to point out that income tax receipts are highly variable, and capital gains receipts even more so.

Consumption tax receipts are less variable. Property tax receipts are the least variable of the common taxes. (I guess a head tax would be even less variable than that, but no one uses them.)

clawback 16 hours ago in reply to Cruxius
If it "isn't exactly groundbreaking news" it should be easy for her to provide the evidence, rather than pointing to CBO reports that don't support her theory.

McMegan 16 hours ago in reply to clawback
This isn't even remotely controversial. Income taxes, which are primarily levied on high earners, swing much more widely than regressive taxes like sales taxes or payroll taxes. The drop in income taxes between 2008 and 2010 was about 22%; the drop in payroll taxes was 3%. All the work by places like Brookings shows that income volatility is primarily at the tails, and even Hacker has now revised to show the same thing, which is not surprising. CEOs often get big multi-year packages, financial income swings with the condition of the markets, and people who use corporate pass-throughs get nothing when the company is losing money, while the people on payroll still draw a check. This isn't some piece of right-wing propaganda; no economist you ask, left or right, will tell you anything different.

clawback 16 hours ago in reply to McMegan
I don't doubt that income taxes are more variable than sales or payroll taxes. I'm asking for evidence, rather than handwaving, showing that income taxes on the rich are more variable than income taxes in general.

McMegan 15 hours ago in reply to clawback
But payroll taxes are (basically) income taxes in general; they're income taxes on lower incomes. They are less variable than income taxes on higher incomes. QED.

clawback 15 hours ago in reply to McMegan
Sigh. The point of your post was your theory that raising income taxes on the rich would make tax receipts more vulnerable to business cycles as compared to raising income taxes across the board. This is true only if non-payroll income tax receipts from the rich are more variable than those on average. You haven't shown this.

McMegan 15 hours ago in reply to clawback
No, the point of my post was that under Clinton, a highly progressive system combined with a giant spike in the incomes of the wealthy produced a peak that we cannot easily reproduce; and that Kevin [ was assuming we could not only reproduce these conditions, but also, turn the peak into an average. But seriously, no one disputes that income taxes on the wealthy are extremely volatile, which is why wonks left to right pretty much think we're going to end up with a VAT; a system that relies mostly on taxing the rich is a system that will have very wide swings from peak to trough. I don't know why you're disputing this in the face of very strong empirical evidence both about the incomes of the wealthy (they have always been more volatile, and have gotten more so--see Piketty & Saez, Dynan) and about the different sorts of taxes we currently have. It's okay. You can still be in favor of taxing the rich.

clawback 15 hours ago in reply to McMegan
The sources you cite show only that the incomes of the rich have gone up, not that they're more volatile. This is hardly an argument for keeping their taxes low. But it's okay; you can still be in favor of cutting programs for the poor and middle class.

McMegan 1 hour ago in reply to clawback
I didn't cite the CBO in support of volatility; I cited it as the source for the capital gains numbers. The volatility stuff is all over, but I suggest you start with Karen Dynan's work; income volatility is highest (and growing fastest) at the tails. Or look at the IRS tax tables.

Goalpost moving. This post is like a Faulty Reasoning bingo card.

Wilson263 13 hours ago in reply to McMegan
"No, the point of my post was that under Clinton, a highly progressive system combined with a giant spike in the incomes of the wealthy produced a peak that we cannot easily reproduce"...

No, Megan. You're clearly misinterpreting the meaning of your own post. Clawback is obviously correct on this point.

But, yeah. Closing the deficit only with tax increases is basically just bad math. And that's with the current/baseline projected level of spending. This isn't including all the other super-awesome free lunch programs progressives presumably want to enact over the course of the next 50+ years.

circleglider 5 hours ago in reply to McMegan
clawback is disputing facts and basic arithmetic out of ignorance coupled with irrational resistance to any information contrary to his belief system.

Just like Kevin Drum.

Yes, quite a few commenters complain about the innumeracy of liberals in this post. Sometimes it's like Bizarro World over there. Mistress Megan, meek and mild, said nothing, as if butter wouldn't melt in her mouth.

Cruxius 15 hours ago in reply to clawback
The IRS has a bunch of data that you can use to learn what everyone else already knows:

http://www.irs.gov/taxstats/in...

For example, http://www.irs.gov/pub/irs-soi... [PDF] shows the returns of the 400 Americans with the highest AGI for the Clinton years. Their "salaries and wages" bottomed out at $1.87 billion in 1994 and then went up to $11.6 billion by the year 2000.

The total income tax paid by the top 400 in nominal dollars went from less than $5 billion in 1992 to over $15.5 billion in 2000.

DavidWalser 15 hours ago in reply to clawback
Ms. McArdle's theory as to the variability of capital gains tax revenues is widely accepted by economists from both sides of the aisle. In a relatively short blog post, is the author required to document her belief the sky is blue and the grass is green, or can't commonly accepted explanations be assumed?

Besides, why the tax revenues are so variable is less important to her argument than the fact that they are variable. She pointed out, correctly, that Drum was wrong to assert that the Treasury would reap close to 20% of GDP if we just restored Clinton's tax rates. Drum was wrong because the ONLY year in which the Treasury received close to 20% of GDP was in a year that had historically large capital gains. So, unless you assume each and every year our economy will have historically large capital gains, you'd have to assume that at best a reversion to Clinton's tax rates would generate a tax haul of between 18% and 19% of GDP.

clawback 15 hours ago in reply to DavidWalser
Despite the supposed wide acceptance of her theory she felt obligated to provide a link to a CBO report supporting it. Except that it didn't, as I pointed out.

Rex 13 hours ago in reply to clawback
I think that she felt obligated as the hostess of this site to clear up your misunderstanding expressed through repeated rude attempts to make her justify what is basically accepted by everyone else, irrespective of political leaning.

You are not a gracious person.

clawback 11 hours ago in reply to Rex
Rather than guessing, you might have gone back and noticed that she provided the link in her original post, not in reply to anything I wrote.

Trimalchio 11 hours ago in reply to clawback
http://www.irs.gov/taxstats/in...

Look at table 3.5 over time. The truth is out there, man.

Rex 9 hours ago in reply to clawback
Then why did you keep pressing her for a cite?

McMegan 1 hour ago in reply to clawback
The link was for a specific figure on capital gains, not the overall proposition that the income of the wealthy is volatile. I didn't cite that because no one, except you, is disputing it.

clawback 38 minutes ago in reply to McMegan
Oh, please.

We will get particularly high peaks when the booms are delivering huge chunks of income to a handful of people in a very short timeframe. According to the CBO, capital gains receipts alone, which more than doubled in Clinton's second term, accounted for more than 30% of the increase in income tax receipts above the rate of GDP growth.

In context, it is clear you intended to imply the increase in capital gains during the period in question was due to the boom, without mentioning the CBO's cautiously worded theory it might have been more closely related to swings in the capital gains tax rate. This was my original point.

Lying by implication. Bingo! And we're not done yet. Watch McArdle get nailed for ignoring the increase in income inequality, which has always been fine-n-dandy with her.

mmh53b 17 hours ago
"and the federal income tax is now very progressive; it collects most of its revenue from people at the top. (Whether it should collect even more is an argument for another day.)"

When I was a lad growing up in the land of music on AM radio and black and white television, progressivity was not based on the percentage of tax revenue collected from the top, but rather the marginal tax rate. Hereis a though experiment: suppose 1000 people earn $10 with a marginal tax rate of 40 percent for the first $10 earned. So you collect $4000 from these 1000 people. Then there is one person earning, oh say, 1 trillion with a marginal tax rate of 1% for anything earned above $10.

According to Megan this would be highly progressive as the he total collected would be 9.99996 billion from that one trillionaire and $4000 from everyone else even though the masses have 40 times higher marginal tax bracket than Warren Gates in our example.

Looks like somebodys' been sampling a bit too much of the the Kentucky Bourbon nut cake....

McMegan 16 hours ago in reply to mmh53b
Again, the question is not whether the system does enough to equalize wealth. In this context, the question is: how dependent are tax revenues on high incomes? Because the more dependent they are on high incomes, the more they swing from peak to trough. This has, contra your belief, always been a definition that characterizes a system as "progressive" rather than "regressive". I explicitly left out the issue of social justice, because the distance from peak to trough has nothing to do with the percentage of their income you are taking from the wealthy, and everything to do with the percentage of your income that you get from the wealthy. Think of the government as being in the business of selling yachts and vacation homes in the Hamptons.

mmh53b 15 hours ago in reply to McMegan
Thanks for the response. And yes I get the volatility part of tax revenue.

However, what sticks in my Eisenhower-era interstate-highway-building craw is the use of the word "progressive". Due to the era of "Bankers Gone Wild" national income inequality relative to halcyon days of the Bush I administration, by your reckoning tax revenue is more "progressive" because a higher percentage of the revenue is derived from the plutocrats regardless of the flattening of the marginal tax rates. This progressivity, as you describe it, is due exclusively to the increase in inequality and not to a change in marginal tax rates. The more unequal the income distribution, the more "progressive" the federal income tax? Somethin's not right....

BTW, congrats on your upcoming first anniversary. I think paper is supposed to be the gift. Hopefully not a T-bill, though.

What did McArdle win? Hundreds of thousands of dollars, a new house, and a brand-new-(used)-car!!