Taxing the 1%: Why the top tax rate could be over 80% Post author By Philip Lane Post date December 8, 2011 Read the VOX article by Piketty, Saez and Stantcheva here. Categories In Uncategorized 36 Comments on Taxing the 136: Why the top tax rate could be over 8036 ← December 14 ESRI Conference on Economic Renewal: Public Services → Sargent’s Nobel Lecture: US then, Europe Now 36 replies on “Taxing the 1%: Why the top tax rate could be over 80%” Cue Pat Kenny: “But the rich will leave!” That’s what passes for a knock-down argument on RTE. The article points out what the tax rate could be, rather than what it should be. As is those who earn more, pay much more tax, it’s a matter of fundamental morality/normative reasoning as to whether they should be forced into paying more. This goes to the realm of political philosphy, rather than economics. Also to add more facts to the mix, here’s Ronan Lyons little tax quiz….so…how much tax do you think the medial earner pays ? http://www.ronanlyons.com/2009/07/28/a-little-quiz-on-irelands-income-tax/ @Ernie In fairness to Pat Kenny the authors themselves state; Second, higher top tax rates can increase tax avoidance. In that scenario, increasing top rates in a tax system riddled with loopholes and tax avoidance opportunities is not productive either. However, a better policy would be to first close loopholes so as to eliminate most tax avoidance opportunities and only then increase top tax rates. With sufficient political will and international cooperation to enforce taxes, it is possible to eliminate most tax avoidance opportunities, which are well known and documented. With a broad tax base offering no significant avoidance opportunities, only real supply-side responses would limit how high top tax rate can be set before becoming counter-productive.” @Desmond Brennan link “here is a quick quiz, three questions, about Ireland’s income tax system. I would have only got one of these right beforehand…” There are 4 questions. I hear there is an opening in DOF for someone with qualities such as this. The last one has just left for Brussels. You may get that fixed PDQ before the students get back from the pub Ronan 😉 @Des Brennan I note that Ronan Lyons post concentrates a lot on the median income tax payer in his interesting questions. So too do many commentators that do not favour higher taxes. But the question is what is the median. I had to look it it up myself. It convinced me that it was a completely bogus statistic in terms of any analysis of tax payers. There are hundreds of thousands of OAPs with a few euros of deposit interest included to get the median. The median skews the argument to the point of nonsense. I assume the people using it know this. Apologies P. Great analysis in the article and I agree 100%. Rent seeking by our senior civil servants and politicians? Surely not! This thread is pointless. The only thing the Government are actually adamant on is that they will not increase income tax, no matter how many disabled children have to go hungry. So instead of losing their inflated, credit fuelled salaries in the cause of rowing in with Irish society, the wealthy in Ireland will simply lose it in the coming deflation of the new Irish currency once the Euro collapses. how can that be? the median earner? my single brother pays almost 60% in, granted, marginal tax rates, but the high rate kicks in at very low levels. Is that questionnaire biased? surely not? The question of inequality vs “wealth” in a system that is leveraging up should be embarrassing to any neo classical economist. The answer is obvious. Interest payments go to a tiny minority, the userers. If enough usary is allowed, then ALL the proceeds of production will eventually go the the userers, and if these userers get to buy the politicians on the way up, then they even get to protect their gains when the worm turns. They pass the losses that rightly belong to them onto those that didn’t use their “services”. It’s a criminal heist, but hey, our economic “scientists” insist that interest costs and financial intermediation fees are irrelevant. thay afe not a drag on real economic activity so it must all be OK, right? and taxing the wealthy is an age old struggle. read “a free nation deep in Debt” to undertsand thw upper class attitudes to taxes. the key is NOT absolute rates of taxation, it is relative rates across borders. If most countries tax wealth at 10%, then the one country that tries to tax at 20%, with free movement of capital, won’t succeed. If all of the major countries tax at 50%, then the weathly have nowhere to go. If tax is based on land, the. only the wealthy will suffer it especially if that tax is applied only to those with a large holding (say 100 acres or more). The poimt I am trying to make is that governments can tax the wealthy if the want. Politicians that argue against all taxation for the rich are playing games. They don’t want to tax themselves There is never a simple explanation for good or bad times but there is no evidence that low personal taxes stand out as a key catalyst for economic growth. US households with incomes over $1 million in 1961 paid an average 43.1% of their incomes in federal income taxes. Today, households with $1m income or more pay 23.1%, almost half as much, adjusting for inflation. The 91% top US statutory tax rate in 1961 applied only to “ordinary” income over $400,000, the equivalent of about $3m today. The US had a more sustainable and balanced economy in 1961 than it does now. Startups and young firms are responsible for all net job creation in an advanced and Denmark (social security is included in income tax) which has high rates, has low rates to to encourage startups. Ireland in common with the Med countries has a history of evasion and insiders scrounging public funds. The fact that UCD could tell public officials to take a hike in respect of claimed ultra vires payments, shows that different rules apply to different classes. What would be missing in a high tax situation in Ireland is confidence that public funds would be spent prudently. Should read: Startups and young firms are responsible for all net job creation in an advanced economy.. @ Michael Hennigan I agree with your points Michael and still feel that the ‘wealthy’ can afford to pay a lot more than they currently do. The marginal loss of disposable income of a higher tax rate on 150kpa is of no consequence relative to a person on 25kpa – what is 250 euro a month loss to someone on 150kpa? A night out? A coat? It is physicological, like trophy houses, and 7 series BMWs – ‘Look at me and look at you – I’m worth it’. 80% sounds a bit excessive to me, like the bad old days of postwar UK. But US Prof DeLong recently argued that there’s nothing wrong w/ 70%. Hmm. Guess it depends on how the progression would look like. Anyways, it would be a huge success if our nations would manage to make the top 1% at least pay a top tax rate of 50% on their income. The fat cats will fight tooth and nail to prevent that. @ Michael Hennigan Correlation does not equal causation. Your post implies that the US could have a more ‘sustainable and balanced economy’ today if the top rate of tax was higher than today. Do you have any evidence to support this? You say in your post that “… there is no evidence that low personal taxes stand out as a key catalyst for economic growth”. Perhaps in the spirit of objectivity, you should also state that “… there is no evidence that high personal tax rates help solve an unsustainable and unbalanced economy” (unless of course you can support this point of view). One only needs to travel (and meet people) around US and then around Europe for few weeks to see the difference. The energy, determination to get ahead in life and ambition of people (I met) in US is very exciting, not having a cradle to grave welfare state is a great incentive to innovate, produce and take care of ones own future. Considering that the US despite its doldrums (mainly due to the latching on of China) has lower unemployment and higher growth (especially among southern states) than European states, who are now in deep poop thanks to politicians trying to hijack a crisis and turn into an opportunity to push true unrelated agenda that is only fuelling the crisis and not helping solve it. As for evading taxes, I created a second business outside of Ireland and now in the process of moving most of the operations abroad (internet services). Already helping create/maintain jobs in other countries and tapping into emerging markets, Ireland on the global stage is an insignificant market with few people. I am sick to death of paying dozens of thousands every few months in VAT,PRSI/PAYE and Corpo tax only for my hard earned money to be wasted on a public service who are insulated from reality and banks who took on gambles and got rewarded for it. I have reduced my outgoings into this cesspit we call Ireland, and will continue to do more. I know it may sound “aholish” but I seen businesses in east europe pay less in taxes and “protection” to mafiaa/local racketeering groups than businesses and people with startups here in Ireland pay to the state. And for what? what do I get in return?? Sorry about rant above 🙁 just needed to get it off chest, it hurts me after putting so much energy into starting a business and being profitable during this great recession to be used as a cash cow for an incompetent, corrupt state which calls itself “first world” but in many respects much more insidious and wasteful than others. This country will have no hope of recovery while taxes are being raised and people who might create jobs (i did) get kicked in the balls at every opportunity in the name of socialism or whatever they want to call it nowadays. Income Tax is but one form of taxation – there are many others such as VAT, VRT, DIRT, stamp duties , various duties etc – maybe if they were taken into account the results would really be somewhat different. Remember a lot of these taxes are paid in “after income tax” Euro’s – still think Ireland is a low tax……yeah right if you are a corporate! Noel, BIG corporates (think microsofts and googles of this island) can afford an army of accountants and tax experts in order to launder money thru this state (and create few jobs while at it, and we need jobs!) small to medium companies and their directors/managers employees are not exempt from all of those you listed, if anything if you start own company and become a propriety director you get shafted more: *any interest in personal savings is counted as income, despite paying DIRT like everyone else *PAYE/PRSI tax credit is gone (about 1300 is it?), despite paying PAYE/PRSI *stamp duty on transfer of shares, yes directors in new companies often have to transfer shares as its discovered that some of the directors might be incompetent! And then there is VAT (soon to be 23%) on sales to Ireland and EU27! This is the largest “cost” in business and I can not pass it onto customers since we have to compete with companies outside EU with other much lower costs or those who simply dont pay it Dont get me started on electricity and network infrastructure either, already moved server equipment to France where electricity is 2x cheaper (nuclear) and US where bulk and quality bandwidth is 10x cheaper! let me see what else Oh yes have to pay VHI (no free healthcare) which soon is to increase again Yes have to pay for car and fuel like everyone else buy food, pay bills like everyone else, non business expenses can not be put as a business expense! If anyone here thinks that starting a new business is a good idea, think again you will be shafted! The energy, determination to get ahead in life and ambition of people (I met) in US is very exciting, not having a cradle to grave welfare state is a great incentive to innovate, produce and take care of ones own future. I got the book “the ruins of Detroit” and have been looking at videos of the city on youtube and it is really shocking what has happened to the city. No energy, determination or ambition to change anything in Detroit. The white people all left for the suburbs. http://en.wikipedia.org/wiki/Detroit The gasoline crises of 1973 and 1979 impacted the U.S. auto industry as small cars from foreign makers made inroads. Heroin and crack cocaine use afflicted the city with the influence of Butch Jones, Maserati Rick, and the Chambers Brothers. Renaissance has been a perennial buzzword among city leaders, reinforced by the construction of the Renaissance Center in the late 1970s. This complex of skyscrapers, designed as a city within a city, slowed but was unable to reverse the trend of businesses leaving Downtown Detroit until the 1990s. In 1980, Detroit hosted the Republican National Convention which nominated Ronald Reagan to a successful bid for President of the United States. By then, nearly three decades of crime, drug addiction, and inadequate policies had caused areas like the Elmhurst block to decay. During the 1980s, vacant structures were demolished to reduce havens for drug dealers with sizable tracts of land reverted to a form of urban prairie. Young Boys Incorporated, also known as Y.B.I. was among the first African-American drug cartels that operated on street corners. They controlled all of the heroin traffic[clarification needed] in Detroit, Michigan from the summer of 1978 through the late 1980s. The group was formed by a small group of neighborhood friends in 1977. In the beginning, all of the boys were in their late teens. Dwayne Davis (a.k.a. Wonderful Wayne or WW), and Raymond Peoples were two of the founders who became bosses. A few years later Butch Jones (a.k.a. Big Boy) was paroled from prison and joined the organization. It was about this time that Y.B.I. split into three separate crews (WW, Big Boy and Raymond). From the start, Y.B.I.’s main place of operation was the Dexter/Webb neighborhood on Detroit’s west side. About two years after its formation, Y.B.I. completely took over the heroin trade in and around Detroit with sales estimated at about $750,000 per day. After the split, WW sent one of his top lieutenants to Boston to expand his operation. About a year after being in Boston, the crew he took to Boston with him, along with new members from Boston, took over most of that city’s heroin trade. Sales peaked at about $50,000 per day. The organization in Detroit was seriously crippled in 1982, when in September of that year, it was alleged that Butch Jones ordered the execution of WW because of a turf dispute. WW was gunned down on the corner of Columbus and Lawton on Detroit’s west side. A few months later, on December 7, Raymond Peoples, Butch Jones and 41 of Y.B.I.’s top Lieutenants were indicted, convicted, and later sentenced to long prison terms. Most people believed that because of WW’s death none of his crew were indicted. After Raymond Peoples was released from prison he was shot to death as he sat in a car on the city’s west side. The lieutenant that WW sent to Boston came back to Detroit after WW’s death and took over what was left of Y.B.I. He operated for about another six years, taking the group to another level until crack cocaine became the drug of choice over heroin. One of his soldiers who came back from Boston with him was Steven Sealy. Sealy is best known for being gunned down and killed as he sat in Whitney Houston’s Rolls Royce in front of a Boston club. In the car with him was his future brother in law, Bobby Brown. Butch Jones was released after serving 12 years in federal prison, but was eventually indicted again on drug and murder charges. Under US Federal Law, anyone who is convicted of a drug related murder is eligible for the death penalty. Facing such punishment, Jones cooperated with federal authorities for a lesser sentence. YBI’s reputation and system of organization impacted and influenced drug gangs nationally during the 1980s and 1990s. Y.B.I. had such an incredibly organized and structured drug ring that after their downfall other African-American Detroit drug cartels copied their strategy. Many gangs rose to prominence such “Best Friends”, “Pony Down”, “Black Mafia Family” and “The Chambers Brothers”, who were featured in a Black Entertainment Television documentary series entitled “American Gangster”. The film New Jack City is based loosely on the rise and fall of the group. _____Consolidation during the 1950s, especially in the automobile sector, increased competition for jobs. An extensive freeway system constructed in the 1950s and 1960s had facilitated commuting. The Twelfth Street riot in 1967, as well as court-ordered busing accelerated white flight from the city. Commensurate with the shift of population and jobs to its suburbs, the city’s tax base eroded. In the years following, Detroit’s population fell from a peak of roughly 1.8 million in 1950 to about half that number today. @ Edward v2.0 You are correct in saying that there is no evidence that high taxes promotes growth. However, the rich are not only paying much lower taxes than in the past, they are also monopolising a big amount of income gains. US taxes are at a 60-year low and hedge fund mangers paying a 15% rate while in 2009 the median full-time male worker aged 25-64 brought home $48,000 – – roughly the same as in 1969 after adjusting for inflation, is not good for a balanced society. US corporate after-tax profits as a ratio of GDP are at the highest level since 1929, the year of the Great Crash on Wall Street that was a factor in triggering the Great Depression. The US wage and salary income GDP ratio is at the lowest since 1929. Profit margins were at their highest level in 2010 since the mid-1960s and the decline in wages and benefits is responsible for about 75% of the increase in major US corporations’ profit margins. With low taxes and a big slice of income gains, a plutonomy is responsible for a disproportionate chunk of consumer spending – – almost 40%. Not a pretty picture long-term. @ EIS I’m a big fan of the US but despite your positive image, they rely a lot on immigrants for dynamism — 50% of Silicon Valley companies have been founded by immigrants or have an immigrant as a founding partner; immigrants are responsible for 25 to 30% of all startups. The US health service at over 17% of GDP costs the economy a hell of a lot more than any welfare state in Europe and 45m without insurance coverage depend on charity. President Obama says the educational system lags behind many other countries. @ seafóid Wouldn’t the link do rather than breaching copyright? @seafóid Yes there are exceptions, i seen slums in Miami (yes slums is the right word) and seen hardship that would seen alien to us Europeans, areas predominantly Hispanic, but remember that we Irish were once in the spot that the Hispanics find themselves in in the US structure… but I also seen an economy that functions and a Federal CB (highly recommend visiting one in Atlanta!) THAT WORKS! But overall the people I met are very hard working, the work ethic for those that do have jobs (unemployment is lower) is crazy! I can not buy admire the determination and drive that I met. Once again yes there are exceptions (of course), just like there are exceptions on this side of the pond. But overall my travels and adventures have left me with an impression than in the medium to long term US will continue to perform much better than Europe due to its people and their ambitions. Anyways aint pointing at an a edge case such as Detroit a form of straw-manning? One can also point at large parts of ex industrial Europe (or Dublin for that matter) with similar social and economic problems. I’m a big fan of the US but despite your positive image, they rely a lot on immigrants for dynamism @seafóid So do we here in Ireland, the likes of Google already have hard time finding people in areas of IT, engineering and european languages (I have all 3 but decided to go alone instead of continuing to work for a large corporate, thats my background) How would these companies attract people with an 80% tax rate? There has been a massive shift in the mindset of the upper echelons of American UK and Irish society. Brought on by Reagan and Thatcher in the 70’s reverting back to the ideals of the 1900-1920’s which lead to the great depression. The top people in the both the public sector and the private sector signed up to FDR’s new deal. In simple terms it was an agreement that even though they may be responsible for creating or wining massive proportions of the profit earned they were standing on the shoulders of those lower down the organisation and therefore it was right that they only get a small proportion of this profit and the rest should be disbursed among those lower down. That is no longer the case. People now at the top of organisations not only believe they are personally responsible for the vast majority of profit they also believe that they entitled to the vast majority of it personally. Personally I think these people are, not just a little, deluded. But why wouldn’t they be if they continue to get away with it and Anglo/American corporate culture encourages and reinforces it. The question is, this time will it cause the collapse of capitalism or like at the time of FDR will moderate democrats step in and save them from themselves. As was noted above “But the rich will leave!!” and we need these dynamic people. yet they we have the other meme which is why is it that we must export people who go onto become successful entrepreneurs abroad. Cant have it both ways. Also interesting to see Krugman writing not about the 1% but the 0.1% whose income in 2007 was a truly incredible 1 trillion USD @ EIS Given the opportunities for profitshifting to Ireland, the likes of Google wouldn’t have a problem with high personal taxes. It would have plen ways of compensating employees. Places like Denmark and Sweden are hardly economic backwaters. MNCs are offerred both low social security costs and an opportunity to channel foreign revenues through Ireland. It would remain a fantastic proposition — as long as it lasts. It would be nice if we had a definition of “rich”, I presume anyone with an income and assets above the national median/average “rich” would fall into several groups * leveraged rich, those who managed to tap cheap credit, this group has either been wiped out (Quinn) or on the run from creditors (Drumm) * rich by inheritance, i dont think there is that many in this group and the state does take a chunk via taxes * lottery winners, very small group * large farm holders, asset rich > cashflow poor * ex public/civil/university staff, rich due to their parasitic acquisition of wealth via the use of state apparatus, think the David Beggs and the Berties of this world * entrepreneurs, the very few who managed to create and run a successful business (where most fail), this is a group that creates jobs * highly skilled people, these are the creme de la creme with alot of knowledge in their areas of expertise, doctors/engineers/top-programmers/scientists-with-patents (there could be overlap with entrepreneurial group) the last 2 group are NEEDED, no REQUIRED! for this state to get out of the mess, any wealth or high taxes would drive them away, their knowledge/products/services could be sold elsewhere discuss… @Michael (love your factual posts btw) Lets say an 80% income tax is introduced but corporation tax (well actually the loopholes available for sending money onto Bermuda) remain then we would endup with alot more of “Dell” type scenarios where the work that can be done cheaply elsewhere (or attract talent) will move, while a very small group of people would remain to launder money. @ Eamonn Moran In the short-term these imbalances will continue but as the emerging economies continue growing, the free-trade globalization model will come under increasing threat. Already in America, the belief that each generation can do better than the one before it no longer applies — in effect the end of the American Dream. The real challenge will become evident from a decade hence when EM MNCs begin to seriously challenge the leaders today on their home turf. Chinese companies are prepared to get experience in markets in the South before taking the battle into the OECD area. @ Michael Hennigan I agree completely that the financialization of the economy has led to raging inequality and the relative impoverishment of the average working stiff. I just don’t believe that the blunt application of higher taxes on the rich is the right way to solve that issue – better regulation of the finance industry and, more importantly, less interference by the FED and other central banks in setting a below-market price for money would be a better way of channeling the more industrious in society towards industries that make actual stuff. I read an snippet on PragCap recently that noted that the highest paid financier of the 1980s was Michael Milken, who was paid $550m in 1987 for single-handedly inventing the high yield bond market, which changed the face of modern corporate finance (he may have gone to prison for fixing that market, but the high yield market has led to the creation of many of the world’s largest employers). The highest paid financier of 2010 was John Paulson, who was paid $5bn for making a zero-sum bet on subprime mortgages. This to me is a damning indictment of a degenerating system, but would anything have changed if Paulson had his income taxed at 80% (leaving aside the fact that his $5bn was a capital gain and that he would have had it paid offshore if there was an 80% income tax)? The proportion of the top 1% of US earners that work in the finance industry increased from 7.7% in 1979 to 13.9% in 2005 (if you include lawyers and real estate professionals the frothy proportion of the top 1% goes to 25.5% – http://economix.blogs.nytimes.com/2011/10/17/the-top-1-executives-doctors-and-bankers/ ). I both hope and believe that this proportion will fall again over time as part of a natural cycle of decline in the finance industry (the Dying of Money has a colorful description of Berlin in 1914-1923 where everyone appeared to be bankers or brokers that could just as easily have been describing NYC, London or Dublin prior to 2007 http://esocap.com/uploads/files/Dying%20of%20Money.pdf ) – this isn’t the first time that the financial industry has become too large for the good of society and it won’t be the last. But again, the size and power of the finance industry isn’t going to be affected by a blanket increase in income tax rates – they are only connected in so far as the political will to increase/decrease taxes often lags/precedes financial crises. @ EIS We are already in a situation where employment from foreign ventures is low. My guess is that Twitter was paid to open an office in Dublin for the PR effect. It’s possibe that 70% of Google’s staff in Dublin are non-Irish. Leasing companies in Ireland own more than 3,000 commercial aircraft and these companies employ less than 1,000. The conventional wisdom is that increasing services exports is a good thing as if it’s work done by so-called knowledge workers. A lot of it is administration and call centres. Manufacturing is important in terms of earnings and employment. However, there is little that can be done when costs elsewhere attract a project. There are no easy choices; Noonan this week offered incentives for selling in BRIC countries, but an Irish company will not get business from China without a local base — but if it’s high tech, the technology is likely to be stolen. @Michael do you have link for more info on this BRIC offer? I heard about it on budget day but found no info then. I agree with you we are stuck between a rock and a hard place, but increasing taxes on the “rich” (lets say the 1% @200K+ a year who have made 10% of total income and paid 22% of total tax) while ignoring the the 36% of income earners (who earned 9.2% of total income and only paid 0.28% of total tax Is sheer madness and would endup hurting the country, not helping it. here is the Revenue table from 2009 (is any newer data available?) http://i40.tinypic.com/r0csa8.png @ Eamonn Moran, Absolutely. Equity and equilibrium have a common root. People need to consider that. @ Michael Hennigan “Already in America, the belief that each generation can do better than the one before it no longer applies — in effect the end of the American Dream.” I remember Brian Cowan saying just after the IMF came in that it was not unimaginable that 2007 could be the peak of Irish wealth and that future generations may be less well off than us. It wasn’t picked up by the media. I can imagine having a conversation with my daugher in 15 years time telling her that I was able to afford to travel around the world for six months using a credit card after completing a 4 year degree at the states expense. I think she might look at me in disbelief. You seem to be saying that you dont think the prevailing orthodoxy among the upper echelons is likely to change until it is threatened by other up and coming upper echelons. Would you comletely discount the possibility of a change from within. In otherwords movements like “Occupy” having an impact in mainstream politics? Financial intermediation is big nowadays because we have a more equal society. When a small number of very rich people control the wealth, they can specialise in the business of investing their own money. When workers have liquid financial assets, on the other hand, and especially when pension funds control lots of money on behalf of workers, they need specialists to manage money and credit. We could abolish the evil leeching banking sector, if we were happy to go back to the time when normal people didn’t own liquid assets. Comments are closed.