Why can't "the solution" be LOWER taxes, NO deficits, SMALLER government...?

[Thunderdog]

Quote from Cache Landing:

A Treasury study done at the request of the Joint Economic Committee of Congress traced the income reported by 14,351 taxpayers between 1979 and 1988. One result is that 85.8% of those who started in the bottom quintile in 1979 had climbed to a higher quintile by 1988. In fact more of them were in the top quintile in 1988 than were still in the bottom quintile.


After WWI the top income tax bracket was a high 73%. But the Revenue Acts lowered it to 25% in a set of reductions starting in 1921 and completed in 1926. This was done because it was argued that high taxes were restricting economic growth. Tax revenue surged during the 1920's from $719 million in 1921 to $1.16 billion in 1928, an increase of over 61%.

There is no escaping the fact that when the taxation of large incomes is excessive, they tend to disappear. In 1916 there were 206 incomes of $1,000,000 or more. Then the high rate went into effect. The next year there were only 141, and in 1918, but 67. In 1919, the number declined to 65. In 1920 it fell to 33, and in 1921 it was further reduced to 21.

http://www.bigissueground.com/politics/blair-trickledownreagan.shtml

The story of the guys in the bar above proves the point nicely.

Sorry, no soup for you.

In your first paragraph, you refer to the Reagan years. Try not to forget that the apparent prosperity was met with what was at that time unheard of budget deficits adding significantly to the national debt. Looking at only one side of the equation, the shiny part, is hardly a full and objective analysis. Only the Bushes were able to surpass Reagan's deficit spending.

You then go on and refer to the post WWI economic boom and attribute it solely to tax cuts? That's a tad glib, wouldn't you say? And it's interesting that your reference should only lead up to, but not include, the popping of the bubble in 1929.

In your third paragraph, you refer to the prosperity of 1916, followed by a decline shortly thereafter. You are aware, of course, that Wilson called for war on Germany, which the U.S. Congress declared on 6 April 1917. The United States had a small army, but it drafted four million men and by summer 1918 was sending 10,000 fresh soldiers to France every day. You think that might have been a factor at all?

I must concede that you chose your periods under review most carefully.

What else you got?

 

[SWhiting]

Quote from Cache Landing:

The average american actually pays about 15% federal income tax, so you were a huge 13.5% off. But point well taken.

The average pays 15% on Taxable Wages. The Adjusted Gross Wages (AGI) is the number that is calculated before Standard/Itemized Deductions and Exemptions. I take the Standard Deduction since I have no mortgage and, as an atheist, am not subject to the "10% religion tax"..

However, I was off on the percentage by a good bit (I pulled my returns). My AGI was 159K and my Taxable Income (line 43) was 142K. My Total Tax amount was $28,735. This comes to 18% of AGI and 20% of Taxable Income. Still low by industrialized country standards but considerably higher than I had thought. And, I'm not complaining. (I admit I do not pay a state Income Tax (TN) so some of you might have a little bit more to complain about).

Now...if you want to talk about my satisfaction concerning HOW this 28.7K is spent....

 

[Cache Landing]

Quote from Thunderdog:

Sorry, no soup for you.

In your first paragraph, you refer to the Reagan years. Try not to forget that the apparent prosperity was met with what was at that time unheard of budget deficits adding significantly to the national debt. Looking at only one side of the equation, the shiny part, is hardly a full and objective analysis. Only the Bushes were able to surpass Reagan's deficit spending.

You then go on and refer to the post WWI economic boom and attribute it solely to tax cuts? That's a tad glib, wouldn't you say? And it's interesting that your reference should only lead up to, but not include, the culmination of the bubble in 1929.

In your third paragraph, you refer to the prosperity of 1916, followed by a decline shortly thereafter. You are aware, of course, that Wilson called for war on Germany, which the U.S. Congress declared on 6 April 1917. The United States had a small army, but it drafted four million men and by summer 1918 was sending 10,000 fresh soldiers to France every day. You think that might have been a factor at all?

I must concede that you chose your periods under review most carefully.

I agree that the factors you cite are also relevant. My choices were not chosen carefully, but rather by default. There aren't any other supply-side periods that better qualify for review. Even the ones cited don't really qualify well, as we have never really had a true supply-side policy that was left to prove itself.

I also argue that tax revenue is largely affected by GDP growth. That is why I say that I would consider myself an objective observer. But it stands to reason that the government is essentially trying to do the same thing your employer is trying to do. The employer tries to pay you the least amount possible without hurting performance. The g-ment is trying to tax you the most possible without hurting performance. Both know without a doubt that they can only push so hard before your productivity suffers.

 

[Cache Landing]

Quote from SWhiting:

The average pays 15% on Taxable Wages. The Adjusted Gross Wages (AGI) is the number that is calculated before Standard/Itemized Deductions and Exemptions. I take the Standard Deduction since I have no mortgage and, as an atheist, am not subject to the "10% religion tax"..

However, I was off on the percentage by a good bit (I pulled my returns). My AGI was 159K and my Taxable Income (line 43) was 142K. My Total Tax amount was $28,735. This comes to 18% of AGI and 20% of Taxable Income. Still low by industrialized country standards but considerably higher than I had thought. And, I'm not complaining. (I admit I do not pay a state Income Tax (TN) so some of you might have a little bit more to complain about).

Now...if you want to talk about my satisfaction concerning HOW this 28.7K is spent....

You were off on "your" percentages, but you make considerably more than the average American, who after the standard deduction pays about 15%.

 

[Cache Landing]

Quote from Bernoulli:

This may be true in Latin America or even Italy, but there has never been an epidemic of conducting business off the books here. The same people who were doing it in the '70s are probably still doing it today; it's not how much they have to pay, it is that they have to pay. BTW, I don't recall the government taking most of what I earned in the '70s. So again, you follow a group of people across time they are going to rise through the brackets.

I'm not arguing that people won't rise through brackets, but rather that they will do so at different rates depending on the incentives to rise.

Also, if tax rates get too high on the top 2%, it isn't very difficult for them to forgo claiming income. OTOH, it is quite difficult for the average American to avoid claiming their income for any amount of time. The result is that the less wealthy end up paying a larger than intended portion of the tax bill. Similar to the way rent controls hurt the very people they were intended to help, excessively high tax rates don't accomplish the objective.

 

[SWhiting]

Quote from Cache Landing:

I'm not arguing that people won't rise through brackets, but rather that they will do so at different rates depending on the incentives to rise.

Also, if tax rates get too high on the top 2%, it isn't very difficult for them to forgo claiming income. OTOH, it is quite difficult for the average American to avoid claiming their income for any amount of time. The result is that the less wealthy end up paying a larger than intended portion of the tax bill. Similar to the way rent controls hurt the very people they were intended to help, excessively high tax rates don't accomplish the objective.

If those on the 'Top 2%' (or any other level) will hide their income (cheat/steal) at 50% they'll do it at a rate of 1%.

A moral character does not consider the 'effective tax rate' when deciding whether to cheat or not.

 

[Bernoulli]

Quote from Cache Landing:

After WWI the top income tax bracket was a high 73%. But the Revenue Acts lowered it to 25% in a set of reductions starting in 1921 and completed in 1926. This was done because it was argued that high taxes were restricting economic growth. Tax revenue surged during the 1920's from $719 million in 1921 to $1.16 billion in 1928, an increase of over 61%.

Here is the history of the maximum tax rate courtesy of a report from The John M. Olin Center for Law, Economics, and Business at the Harvard Law School. As you can see the max. rate (77%) during WWI was for incomes greater than $1mm (the equivalent of $13.36 million in 2006 dollars). So while that rate may be confiscatory, considering the small base to which it was applied it wasn't likely to stifle economic growth.

As to that "surge" in tax revenues, that works out to an annual rate of just under 6%, during the go-go Twenties. Probably not that unusual regardless of the tax rate.
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The federal income tax went into effect in 1913 with a top marginal rate for married couples of 7 percent on taxable income in excess of $500,000 (the equivalent in today’s dollars of about $10,187,000). Under the pressure of paying for America’s participation in World War I, the TMR was raised to 77 percent in 1918 on taxable income in excess of $1 million (the equivalent of $13.36 million in 2006 dollars).

During the next 20 years (1919 to 1939), the top marginal rate declined to 25 percent in 1925 (kicking in at $1.15 million in 2006 dollars) and stayed there until it jumped to 63 percent in 1932 when it was applied to taxable income in excess of $1 million ($15.52 million in 2006 dollars). In 1941, on the eve of American participation in World War II, the TMR was 81 percent on taxable income in excess of $5 million (the equivalent of $68.61 million today).

During the war years, the top marginal rate ranged from 88 percent to 94 percent on taxable income in excess of $200,000 (the equivalent of $2,241,000 in 2006). The TMR declined to a range of 87 percent to 84 percent in the years after World War II, but returned to the 91 percent level for the Korean War and remained at that level through 1963.

The American people recognized that World War I, World War II and the Korean War were critical to our future as a nation, and that everyone needed to make some financial sacrifices to sustain our war efforts, especially those who had received the largest financial rewards from living in the U.S.
From 1951 through 1963, the top marginal rate was 91 percent on taxable income in excess of $400,000 (the equivalent of about $2.64 million in 2006 dollars). Today, many folks would look on a 91 percent TMR as extremely high, but top executives in 1962 were considered to be very well-paid, although they received relatively modest sums compared to majority of their 2006 counterparts.
In 1971, the top marginal rate was reduced from 71 percent to 60 percent on taxable income in excess of $996,000 in today’s dollars, and it dropped to 50 percent and remained there until 1987. The TMR was lowered again in 1988, this time to approximately 30 percent.

 

[Cache Landing]

Quote from SWhiting:

If those on the 'Top 2%' (or any other level) will hide their income (cheat/steal) at 50% they'll do it at a rate of 1%.

A moral character does not consider the 'effective tax rate' when deciding whether to cheat or not.

I'm not saying that they will illegally hide it, but rather that incentive exists for them to simply not take a large income, which many of them have complete control over. Middle/lower-income people don't have this control, nor do they have the luxury of simply living off past income.

In any case, I looked into it a bit further and the group from that tax study was faulty. Other studies from different period show the same income mobility during almost every decade studied. So the question then becomes:

"If tax policy doesn't change income mobility, and tax revenue is most highly correlated with GDP growth, does tax policy even matter?"

I would argue that GDP growth is largely dependent on tax policy, but as it is also greatly effected by spending policy I'm not sure that I'm knowledgeable enough to form an opinion yet.

 

[Cache Landing]

Quote from Bernoulli:

Here is the history of the maximum tax rate courtesy of a report from The John M. Olin Center for Law, Economics, and Business at the Harvard Law School. As you can see the max. rate (77%) during WWI was for incomes greater than $1mm (the equivalent of $13.36 million in 2006 dollars). So while that rate may be confiscatory, considering the small base to which it was applied it wasn't likely to stifle economic growth.

As to that "surge" in tax revenues, that works out to an annual rate of just under 6%, during the go-go Twenties. Probably not that unusual regardless of the tax rate.
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I agree with the premise, but all other tax brackets were dramatically increased in 1918 to the tune of 300% of previous levels.

Same thing in the 40's as not only the highest marginal rate increased but also every other bracket to the tune of over 200% increases. In addition, personal exemptions were dramatically reduced during these times, resulting in a much higher taxable income.

Problem is that we don't know whether the economy would have been stifled because war has been shown to help the economy.

The only other time period that I'm aware of that included a significantly high tax rate across the board were the 50's and early 60's, but I've not seen a study on this time period. Also, the standard deduction during this time was raised to the point where 2/3 of the population had no taxable income, so we can't really use that as a reference for high taxation.

 

[FerdinandAlx]

Quote from Cutten:

No it's because people are ignorant and mainly follow their own self-interest. Most people have no problem robbing Peter to pay Paul as long as they are Paul. Politicians must answer to most people, thus they are forced to collude in robbing Peter so long as there are more Pauls - if they don't they don't get elected.

Politicians are no better or worse than you and I, on average. They all start idealistic. Their incentives are such that they become worse, otherwise they are out of a job.

The system is fucked, but so far no one has found a better one. Disenfranchising the poor has been tried and results in stagnant elitism/tyrrany/mercantilism followed by revolution.

If history is any guide the natural progression of democracies seem to be towards tyranny. Checks and balances that made democracies more tolerable than other political systems are subject to erosion from the day they were implemented. Nor have I ever heard a good argument as to why the majority should have the right to impose its will on the minority.

The conclusion I came to is that no politcal system is desirable. The only alternative to politics is to become a sovereign individual and to minimize the state's influence on your life.

This means that in order to avoid becoming a 'Peter' a person would have to shift their assets to a jurisdiction that doesn't rob them in the name of 'Paul'.