Taxing Wealthy People More Heavily—Posner

Inequality in income and wealth has grown very substantially in the United States in recent decades, and appears to be at a historical high. That would hardly be noticed, in a society such as ours that is strikingly free of envy, were it not for the last almost three and a half years of economic distress. The distress is not felt by the wealthy; this is noticed, and angers the nonwealthy, who are naturally inclined to think that the distress should be shared, and that increasing the progressivity of the tax system would be a step in that direction, and should be taken. Many people are worried by the nation’s huge public debt, and it is natural to think that raising taxes on the wealthy would reduce that debt by reducing the gap between government revenue and government spending. Furthermore, Federal Reserve and other regulatory officials, who I believe were (with a helping hand from many academic economists) primarily responsible for the economic distress because of unsound interest-rate and regulatory policies, and regulatory laxness, and general cluelessness, have managed to shift the blame, in the mind of the public, for the economic distress to the financial industry. Markets are Darwinian, and the industry’s reliance on short-term capital, both financial and human, compels risk taking to the farthest degree that the government will allow, and the Greenspan-Bernanke Fed and its staff and the entire financial regulatory establishment allowed too much risk taking. But this is not widely understood; the reappointment of Bernanke as Chairman of the Federal Reserve helped to conceal recognition of the point. 

But as long as a substantial segment of the public blames the wealthy, the pressure for making the tax system more progressive presents a political as well as an economic issue. An increase in progressivity that does little economic harm would be a low-cost response to the political pressure, though the President’s recent proposal to tax people who earn more than $1 million at a rate that will make them pay 30 percent of their income in federal income tax carries symbolism too far. If a person who earns $1 million a year and is taxed at an effective rate of 25 percent is subjected to such an imposition, instead of paying $250,000 in taxes he will have to pay $300,000, and he will therefore do whatever it takes to reduce his income from $1 million to $999,999, as that will save him $49,999. 

Marginal income tax rates can be increased slightly, deductions trimmed slightly, the budget of the Internal Revenue Service increased so that the tax laws are enforced more effectively, and income tax forms simplified, and the result of these modest measures would be a small increase in government revenues at a small—I would guess a negligible—cost in economic growth. Anything  more ambitious in the way of tax reform probably is politically infeasible, given our disordered political system, and, more interesting, probably economically infeasible as well. While there are good theoretical arguments for replacing income with consumption taxes, as discussed by Becker, the administrative and transitional costs would be staggering; and so with any effort to overhaul the federal income tax system rather than just tinker at the edges of it. 

Grandstand gestures like the proposed millionaire tax would have only the slighest effect in alleviating resentment at the rich, and should be understood as campaign documents rather than serious proposals. 

As for a tax on wealth as distinct from income, I agree with Becker that it is an uncommonly silly idea. I would again stress issues of implementation, rather than theoretical objections (for example that the wealth tax would necessarily exclude human capital from taxable wealth, despite its importance). It would be an enormous undertaking to compel everyone in the United States (for one cannot identify who is wealthy by income alone, since one can have great wealth but a small income, depending on the form the wealth takes) to value his entire wealth honestly. Would everyone who owns a home have to submit an appraiser’s evaluation? And who would pick the appraiser?

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[Chas]

This whole tax system is esoteric. You need a tax lawyer to devote his life finding loop holes. And, who can hire a tax specialist? Only the wealthy.

When the government makes things so complex and over regulated, only a few benefit. And, that's the wealthy. Why doesn't the government make things simpler so that the masses can take advantage of programs or business opportunities. Widen the tax base so more people contribute, instead of raising taxes on only a few.

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[Sherif]

A receipt is the amuont received, an income is the receipt which is covered under income tax as chargeable. All incomes are receipts but all receipts cannot be treated as incomes. Eg. Gift received on Marriage is a receipt but not an income under the income tax.

[Andrea]

I could tell right away this post would trigger an alsmot unimaginably toxic brew of mindless plutocratic cheerleading that has been thoroughly discredited by real-world application, but you managed to outdo yourself in Gilded Age excess. Where to begin . Either the estate tax doesn’t work, or it’s hitting people who aren’t part of that fcber-rich classification. If the goal of such a tax is to make incomes more equitable, then why has income inequality gone up despite its presence. It works just fine. And repeated efforts have been made to resist raising the worth threshold for which the estate tax kicks in, thus saving the six or seven farms or hardware stores per year that this tax allegedly bankrupts. Unfortunately, Republicans have resisted raising said threshold at every turn, fighting tooth and nail to deliver a tax-free inheritance for Paris Hilton and Patrick Kennedy once their parents croak .based upon their amazing contribution to society of winning the genetic lottery. As for why income inequality keeps going up .basically your responses to answers 2-16 of this quiz go a long way towards explaining that. I say, you can tax when someone’s alive, but once they’re dead, that should be beyond the reach of the tax-man. It gets taxed as income to those who receive it, and that’s good enough for me. Except that the tax doesn't apply to the person who dies, it applies to person who stands to inherit that money just a litany of other taxes applies to less affluent people who engage in a transfer of ownership in our economy. I know it's complex! It's amazing to believe that for all the demagoguery Republicans are spoon-feeding us over the immorality of taxing Paris Hilton's inheritance, it took Frank Luntz to coin the term death tax several years ago before you had any angle whatsoever from which you could defend a birthright claim to untaxed millions for sitting on your silk sofa eating bon-bons all day. Gotta love that Republican work ethic!!!! Absolutely not. 70% of those in low-wage jobs are teenagers, not the “working poor”. And the with the cost of auto insurance and higher education going down so drastically, it stands to reason that teenagers receive lower wages for their toils year to year. And I'm sure if an airline boasted a 70% success rate in reaching its destination, you'd be buying a ticket. Not only would such a law not have the intended effect, it would make things worse for the working poor by making the supply of jobs that much tighter. Ever since the imposition of the minimum wage, free-market ideologues have been preaching fire and brimstone about the depletion of entry-level jobs and continue the doomsday prophesies with every suggestion to raise the minimum. How then do we explain that the percentage of minimum wage fast food and retail jobs keep rising as a percentage of our overall job market? Just one more example of how the Milton Friedman bible has failed his Mammon-worshipping minions.

[David]

PART III Just think about it: how in hell would a corporation put eognuh money aside to “fully fund” their pension plans when people are living longer (thanks to expensive pharmaceuticals and medical treatments) when the population as a whole was aging. Again, it all comes down to whether we're doing any favors encouraging longer lives for our population. This is a serious conundrum that our society has found itself in, celebrating the virtues of healthy lifestyles and longer lives on one hand and bemoaning the impending financial collapse coming from the demographic shift of an aging society on the other. The same things bankrupting traditional pension plans will ultimately bankrupt 401(k)'s for the relatively small number of people sufficiently funding their own ..they will live so long that they'll deplete their retirement account and require government to bail them out. I’m not OK with the widespread usage of drugs. Alcohol is bad eognuh – adding to our troubles doesn’t make much sense to me. I'm more conflicted on this than I have been recently. The prohibition against narcotics has been the Babe Ruth of wasteful government programs for the last quarter century, destroying millions of lives (disproportionately black and urban) of individuals, their families and their neighborhoods that were used as tools of the narcotics black market. Certainly there is a way we could legalize drugs, wipe out the black market at every level, and still reduce narcotics consumption, but government would be incapable of pulling it off. You mention alcohol, which is an excellent example of how a decriminalized drug is ultimately commercialized and destigmatized, ultimately raising usage levels through the roof. That could easily happen with cocaine, heroin, and meth as well, but an even more certain outcome of legalization is that, like tobacco, greedy state governments (and the federal governments) would gratuitously inflate the tax on legalized narcotics every time they needed to plug a budget hole. The end result would be narcotics priced so far above their market value that the criminal underworld would re-emerge .while government at every level would have a vested interest in keeping the number of drug addicts buoyant so that the regressive excise taxes would keep the money flowing into state coffers. The more I think about how horrible government policy has been towards tobacco and alcohol, the more I question my previous allegiance to the existing prohibition on narcotics, counterproductive as that is.

[Chanchal]

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