Income Inequality and Tax Policy

Here's an interesting look at the results of several recent studies on tax policy and the resulting inequity of income, from a famous journalist and professor in the tax policy arena. If you want to know the *actual* long-term effects of continuous tax cuts, here you go. Hint - it's not making the economy stronger or benefiting the vast majority of citizens. And as more and more of the economic output goes to the rich, the tax burden on everyone else becomes more onerous every year.

In 2011 the average AGI of the vast majority fell to $30,437 per taxpayer, its lowest level since 1966 when measured in 2011 dollars. The vast majority averaged a mere $59 more in 2011 than in 1966. For the top 10 percent, by the same measures, average income rose by $116,071 to $254,864, an increase of 84 percent over 1966.

Plot those numbers on a chart, with one inch for $59, and the top 10 percent's line would extend more than 163 feet.

Now compare the vast majority's $59 with the top 1 percent, and that line extends for 884 feet. The top 1 percent of the top 1 percent, whose 2011 average income of $23.7 million was $18.4 million more per taxpayer than in 1966, would require a line nearly five miles long.

That disparity in income growth rates comes as the total federal tax burdens on those at the top have been slashed, compared with 1966, especially for the long-term capital gains that account for about a third of total income at the very top.

This $59 increase for the vast majority covers a time longer than most people work. Back in 1966, the first Star Trek episode aired and Barack Obama started kindergarten.

Skyrocketing growth at the top and, in recent years, plummeting income for the vast majority caused a major re-slicing of the national income pie. That re-slicing results in large part from tax, employment, and other rule changes that began with President Reagan and intensified under President George W. Bush. The situation changed slightly this year under President Obama, but the rules allow the rich to make their fortunes grow like a giant snowball rolling down a hill.

Candidate Bush said his tax cuts would make everyone prosper. But the real average pretax income of the bottom 90 percent in 2011 was $5,340 less than in 2000, a decline of more than $100 per week, or 15 percent, in pretax income. The top 1 percent of the top 1 percent saw their incomes plummet even more after the Bush tax cuts were enacted, down $7.5 million or 24 percent in real terms in 2011 compared with 2000.

Robear wrote:

Quote:

Back in 1966, the first Star Trek episode aired and Barack Obama started kindergarten.

Coincidence? I think not.

The liberal plot to make our world part of a "federation" that has abolished money and makes food available to everyone equally at the touch of a button hinges on first eliminating income inequality. That is a goal they will never accomplish, unless they somehow manage to take money almost completely out of the electoral process and severely restrict the lobbying system.

I think trying to draw a correlation from tax cuts to income inequality is specious at best. There are a lot more things that have lead to this.

Make your arguments, because tax cuts are and were sold as benefiting the economy and the middle class. It seems entirely valid to say "No, they have failed at that, as a mechanism of economic stimulus", after all the time we've had.

This is a simple criticism of a major part of fiscal policy in the last 30 years.

Robear wrote:

Make your arguments, because tax cuts are and were sold as benefiting the economy and the middle class. It seems entirely valid to say "No, they have failed at that, as a mechanism of economic stimulus", after all the time we've had.

This is a simple criticism of a major part of fiscal policy in the last 30 years.

Do you want me to reply to benefiting the economy or benefiting the middle class? And what do we define as middle class.

Ulairi wrote:
Robear wrote:

Make your arguments, because tax cuts are and were sold as benefiting the economy and the middle class. It seems entirely valid to say "No, they have failed at that, as a mechanism of economic stimulus", after all the time we've had.

This is a simple criticism of a major part of fiscal policy in the last 30 years.

Do you want me to reply to benefiting the economy or benefiting the middle class? And what do we define as middle class.

Well, given that they were promised to improve BOTH, I suppose you could start with economy then move on to middle class as that is defined?

Demosthenes wrote:
Ulairi wrote:
Robear wrote:

Make your arguments, because tax cuts are and were sold as benefiting the economy and the middle class. It seems entirely valid to say "No, they have failed at that, as a mechanism of economic stimulus", after all the time we've had.

This is a simple criticism of a major part of fiscal policy in the last 30 years.

Do you want me to reply to benefiting the economy or benefiting the middle class? And what do we define as middle class.

Well, given that they were promised to improve BOTH, I suppose you could start with economy then move on to middle class as that is defined? :)

The problem with that reports like this is that there are too many pieces to the economy and taking two data points and trying to paint a picture while ignoring all the other data points is just wrong. I'm not here to carry water for the Bush administration. But, we can say that we did have GDP growth after the tax cuts. Does that mean the cuts helped improve the economy? I supported the 2001 cuts which did lead to an increase in federal revenue. When it comes to the middle class and tax cuts is that income taxes have very little benefit for the middle class because the middle class do not pay income taxes. The primary load of a middle class person tax burden isn't in the income tax rates. Their largest burden comes from the payroll taxes. If you're a family of 4 earning $60,000 a income tax cut isn't going to do you a lot of good. A family of 4 in the exact middle of the income range will pay 5.6% (2011) of its income in income taxes. There isn't a whole lot of room for movement there. The Bush taxes cuts took millions off of paying any income tax. They aren't the bogey man they were made to be.

The biggest factor in the income stall are larger macro-economic changes and not tax cuts. We cannot cut taxes to fix the problem. We're already at historic lows for taxes but not at a rate that a lot of people like to make you believe. A lot of people like to roll out the old Ike rates and say "SEE!! TAXES WERE HIGHER AND ECONOMY BOOM!!!" well that's bullsh*t because 1: no one payed those rates and 2: very few people made the incomes that we're now making now. This is why I hate economist. It's a political science and not a real science.

We're still getting out of the hole from the recession and that is the contributor to income far more than the bush tax cuts.

So the fact that the upper 10% were hit much less hard, and at the same time they got more tax relief, enabling them to keep more of the overall economic output, that's just coincidence?

If tax cuts have little effect on income, the Republicans have been presenting us with a red herring for decades...

Robear wrote:

So the fact that the upper 10% were hit much less hard, and at the same time they got more tax relief, enabling them to keep more of the overall economic output, that's just coincidence?

If tax cuts have little effect on income, the Republicans have been presenting us with a red herring for decades...

When you say they got more tax relief you're are using it in terms of dollars received which I believe is the wrong way to look at it. The cuts were a larger % of income for the lower brackets but in absolute dollars returned were larger for higher incomes. Well, that obviously makes sense because the people in the upper brackets pay so much more in income taxes. Tax cuts do have an effect on income and capital accumulation. Capital formation is very important. the problem that we run into with these debates is that because economics is social studies and really more about supporting political ideologies, we cannot even agree on the basic numbers. it all depends on what data points you choose to look and and try to correlate to whatever political point you're making. this is my whole problem with the field of study. i actually after going through graduate level economics at one of the best schools in the country and working in finance have very little faith or belief in any of it at all.

now, i actually think we could have real fundamental tax reform that is a net increase in revenues that will have a much larger impact in the economy or fundamental tax reform that is revenue neutral that will have a much larger impact in the economy than any tax cut will. right now the tax code is broken and used by both political parties as away to pay back political allies, the well connected, uber wealthy, and all the crony capitalism is built into it. the power of the elite is in the ability to get special treatment through the tax code and regulation.

in ulairi's perfect world we wouldn't tax income we'd tax wealth. but if anyone tried to propose that plan people like warren buffett and so many others would throw a big hissy fit.

Ulairi wrote:
Robear wrote:

So the fact that the upper 10% were hit much less hard, and at the same time they got more tax relief, enabling them to keep more of the overall economic output, that's just coincidence?

If tax cuts have little effect on income, the Republicans have been presenting us with a red herring for decades...

When you say they got more tax relief you're are using it in terms of dollars received which I believe is the wrong way to look at it. The cuts were a larger % of income for the lower brackets but in absolute dollars returned were larger for higher incomes. Well, that obviously makes sense because the people in the upper brackets pay so much more in income taxes. Tax cuts do have an effect on income and capital accumulation. Capital formation is very important. the problem that we run into with these debates is that because economics is social studies and really more about supporting political ideologies, we cannot even agree on the basic numbers. it all depends on what data points you choose to look and and try to correlate to whatever political point you're making. this is my whole problem with the field of study. i actually after going through graduate level economics at one of the best schools in the country and working in finance have very little faith or belief in any of it at all.

now, i actually think we could have real fundamental tax reform that is a net increase in revenues that will have a much larger impact in the economy or fundamental tax reform that is revenue neutral that will have a much larger impact in the economy than any tax cut will. right now the tax code is broken and used by both political parties as away to pay back political allies, the well connected, uber wealthy, and all the crony capitalism is built into it. the power of the elite is in the ability to get special treatment through the tax code and regulation.

in ulairi's perfect world we wouldn't tax income we'd tax wealth. but if anyone tried to propose that plan people like warren buffett and so many others would throw a big hissy fit.

I agree with allot with some of this but why would Buffett be the one throwing the hissy fit? If anything hes the one thats shedding some light on how whacked the system is.

As for tax cuts wouldn't the best ones related to income be right to the lowest tax bracket? I don't think it would be hard to get economists no matter the agenda to agree that the people with the least money have the highest propensity to consume. Thats one of the more simpler ones that cant be spun.

jowner wrote:

As for tax cuts wouldn't the best ones related to income be right to the lowest tax bracket? I don't think it would be hard to get economists no matter the agenda to agree that the people with the least money have the highest propensity to consume. Thats one of the more simpler ones that cant be spun.

They spin it by talking about Welfare Queens, everyone needing to have skin in the game, and how much those people deserve to be poor.

jowner wrote:
Ulairi wrote:
Robear wrote:

So the fact that the upper 10% were hit much less hard, and at the same time they got more tax relief, enabling them to keep more of the overall economic output, that's just coincidence?

If tax cuts have little effect on income, the Republicans have been presenting us with a red herring for decades...

When you say they got more tax relief you're are using it in terms of dollars received which I believe is the wrong way to look at it. The cuts were a larger % of income for the lower brackets but in absolute dollars returned were larger for higher incomes. Well, that obviously makes sense because the people in the upper brackets pay so much more in income taxes. Tax cuts do have an effect on income and capital accumulation. Capital formation is very important. the problem that we run into with these debates is that because economics is social studies and really more about supporting political ideologies, we cannot even agree on the basic numbers. it all depends on what data points you choose to look and and try to correlate to whatever political point you're making. this is my whole problem with the field of study. i actually after going through graduate level economics at one of the best schools in the country and working in finance have very little faith or belief in any of it at all.

now, i actually think we could have real fundamental tax reform that is a net increase in revenues that will have a much larger impact in the economy or fundamental tax reform that is revenue neutral that will have a much larger impact in the economy than any tax cut will. right now the tax code is broken and used by both political parties as away to pay back political allies, the well connected, uber wealthy, and all the crony capitalism is built into it. the power of the elite is in the ability to get special treatment through the tax code and regulation.

in ulairi's perfect world we wouldn't tax income we'd tax wealth. but if anyone tried to propose that plan people like warren buffett and so many others would throw a big hissy fit.

I agree with allot with some of this but why would Buffett be the one throwing the hissy fit? If anything hes the one thats shedding some light on how whacked the system is.

As for tax cuts wouldn't the best ones related to income be right to the lowest tax bracket? I don't think it would be hard to get economists no matter the agenda to agree that the people with the least money have the highest propensity to consume. Thats one of the more simpler ones that cant be spun.

Buffett talks out of both sides of his mouth. He talks about how he's under taxed while he and his companies are in trouble for not paying taxes. He talks about raising taxes knowing that it won't affect him. The solution is to tax wealth and not work. He would HATE that. The Kerry's, Bush's, Kennedy's and all of the wealth don't pay income taxes. They got theirs and they don't care about the professional and entrepreneurial classes that get killed.

Ulairi's idea of taxing wealth rather than work income is brilliant.

That said, current income gaps really do cross the TSAR threshhold, the point at which the 'average reasonable person' can look at the situation and say, "That sh*t ain't right."

NathanialG wrote:
jowner wrote:

As for tax cuts wouldn't the best ones related to income be right to the lowest tax bracket? I don't think it would be hard to get economists no matter the agenda to agree that the people with the least money have the highest propensity to consume. Thats one of the more simpler ones that cant be spun.

They spin it by talking about Welfare Queens, everyone needing to have skin in the game, and how much those people deserve to be poor.

Well thats my problem that Ulairi also has once Economics meets Politics.

If anything related to the other thread about disability claims and people potentially gaming the system you want to eliminate taxes on the poor.

At its base allot of economic principles are pretty straight forward and sound. If working minimum wage < collecting Welfare or Disability.…. Guess what people are going to start to gaming the system. This really isn't far out or controversial

Want to really jump start the Economy? Eliminate potential Welfare and Disability fraud? Start moving the minimum level you start paying payroll tax higher and higher.

If we're going to continue to leave the U.S. tax system largely in place, we should at least push toward reforms that restore more balance and fairness. For instance, adding more tax brackets. Right now the last tax bracket for income after $400,000. Why not another at $1 million and another at $5 million?

What should this tax money be used for? Public services that we benefit from.

ChrisLTD wrote:

If we're going to continue to leave the U.S. tax system largely in place, we should at least push toward reforms that restore more balance and fairness. For instance, adding more tax brackets. Right now the last tax bracket for income after $400,000. Why not another at $1 million and another at $5 million?

What should this tax money be used for? Public services that we benefit from.

I doubt there's much reason for brackets at 1 and 5 million - there just aren't that many jobs that actually pay that much money. Unless the person is an athlete or the CEO of a large company, anyone bringing that much in is likely doing so via capital gains and thus not subject to the income tax brackets. Of course, I don't have the actual numbers here, so I'm more than happy to be proven wrong.

billt721 wrote:
ChrisLTD wrote:

If we're going to continue to leave the U.S. tax system largely in place, we should at least push toward reforms that restore more balance and fairness. For instance, adding more tax brackets. Right now the last tax bracket for income after $400,000. Why not another at $1 million and another at $5 million?

What should this tax money be used for? Public services that we benefit from.

I doubt there's much reason for brackets at 1 and 5 million - there just aren't that many jobs that actually pay that much money. Unless the person is an athlete or the CEO of a large company, anyone bringing that much in is likely doing so via capital gains and thus not subject to the income tax brackets. Of course, I don't have the actual numbers here, so I'm more than happy to be proven wrong.

its time Hollywood pays its fair share

Ulairi wrote:
billt721 wrote:
ChrisLTD wrote:

If we're going to continue to leave the U.S. tax system largely in place, we should at least push toward reforms that restore more balance and fairness. For instance, adding more tax brackets. Right now the last tax bracket for income after $400,000. Why not another at $1 million and another at $5 million?

What should this tax money be used for? Public services that we benefit from.

I doubt there's much reason for brackets at 1 and 5 million - there just aren't that many jobs that actually pay that much money. Unless the person is an athlete or the CEO of a large company, anyone bringing that much in is likely doing so via capital gains and thus not subject to the income tax brackets. Of course, I don't have the actual numbers here, so I'm more than happy to be proven wrong.

its time Hollywood pays its fair share

Good call - so we've got athletes, actors/actresses, and CEOs. Personally, I'd rather see the capital gains rate go up (or disappear all together) along with a drop in the general income tax rates.

billt721 wrote:

I doubt there's much reason for brackets at 1 and 5 million - there just aren't that many jobs that actually pay that much money. Unless the person is an athlete or the CEO of a large company, anyone bringing that much in is likely doing so via capital gains and thus not subject to the income tax brackets. Of course, I don't have the actual numbers here, so I'm more than happy to be proven wrong.

It doesn't matter if there are a lot of jobs that pay that much, it matters whether or not there is a lot of money in such a bracket.

Yes, we also need to tweak the capital gains tax system.

I still think the 90+ percent Estate Tax past first million takes care of a lot of these issues. Problem is even if something would affect less than 1 percent of retired people, if it affects retired people at all the measure is dead on arrival.

That is not to mention how insane it is that much of pension income is not taxed as income in the US.

My wife and I got a nice surprise today. Apparently when we bought our house in 2008 (which we turned into a rental in 2012 so we could move into the city) we got a tax credit. Turns out that tax credit was actually a loan. i.e. A way to juice the housing markets and save the banks. Not really anything for us plebes. We did our taxes and got billed the entire amount of that credit this year. $7,000. Surprise! Out of nowhere.

DSGamer wrote:

My wife and I got a nice surprise today. Apparently when we bought our house in 2008 (which we turned into a rental in 2012 so we could move into the city) we got a tax credit. Turns out that tax credit was actually a loan. i.e. A way to juice the housing markets and save the banks. Not really anything for us plebes. We did our taxes and got billed the entire amount of that credit this year. $7,000. Surprise! Out of nowhere.

Wow. That sucks man.

NathanialG wrote:
DSGamer wrote:

My wife and I got a nice surprise today. Apparently when we bought our house in 2008 (which we turned into a rental in 2012 so we could move into the city) we got a tax credit. Turns out that tax credit was actually a loan. i.e. A way to juice the housing markets and save the banks. Not really anything for us plebes. We did our taxes and got billed the entire amount of that credit this year. $7,000. Surprise! Out of nowhere.

Wow. That sucks man.

It's tempting to walk away, honestly. We've been paying $700 a month (the difference between the rent and the mortgage) for an underwater home. Didn't know this was going to happen.

DSGamer wrote:

My wife and I got a nice surprise today. Apparently when we bought our house in 2008 (which we turned into a rental in 2012 so we could move into the city) we got a tax credit. Turns out that tax credit was actually a loan. i.e. A way to juice the housing markets and save the banks. Not really anything for us plebes. We did our taxes and got billed the entire amount of that credit this year. $7,000. Surprise! Out of nowhere.

Hey, DS, who is doing your taxes? The credit (up to $7,500) for a home purchased in 2008 is repaid over 15 years. It should be costing you only $467 a year. Make sure you do not pay $7000 this year because you do NOT need to.

DSGamer wrote:
NathanialG wrote:
DSGamer wrote:

My wife and I got a nice surprise today. Apparently when we bought our house in 2008 (which we turned into a rental in 2012 so we could move into the city) we got a tax credit. Turns out that tax credit was actually a loan. i.e. A way to juice the housing markets and save the banks. Not really anything for us plebes. We did our taxes and got billed the entire amount of that credit this year. $7,000. Surprise! Out of nowhere.

Wow. That sucks man.

It's tempting to walk away, honestly. We've been paying $700 a month (the difference between the rent and the mortgage) for an underwater home. Didn't know this was going to happen.

Now I'm stuck between wanting to build a Kickstarter for people to hire lobbyists as a group, or providing arson-for-hire services with plausible deniability. That blows, DSGamer.

Ulairi wrote:
DSGamer wrote:

My wife and I got a nice surprise today. Apparently when we bought our house in 2008 (which we turned into a rental in 2012 so we could move into the city) we got a tax credit. Turns out that tax credit was actually a loan. i.e. A way to juice the housing markets and save the banks. Not really anything for us plebes. We did our taxes and got billed the entire amount of that credit this year. $7,000. Surprise! Out of nowhere.

Hey, DS, who is doing your taxes? The credit (up to $7,500) for a home purchased in 2008 is repaid over 15 years. It should be costing you only $467 a year. Make sure you do not pay $7000 this year because you do NOT need to.

We turned it into a rental, though. Everything has to be paid back at that point. That's my understanding.

http://www.irs.gov/uac/Tax-Credit-to-Aid-First-Time-Homebuyers;-Must-Be-Repaid-Over-15-Years

If you stop using the home as your main home, all remaining annual installments become due on the return for the year that happens. This includes situations where the main home becomes a vacation home or is converted to business or rental property. There are special rules for involuntary conversions. Taxpayers are urged to consult a professional to determine the tax consequences of an involuntary conversion.

I've seen proposals to tax capital gains at the full income tax rate for taxation purposes. The idea is out there.

Robear wrote:

I've seen proposals to tax capital gains at the full income tax rate for taxation purposes. The idea is out there.

In addition to taxing income at its current rate? That is a horrible idea. Tax the risk on the investment and we'll tax you at the higher rate just because. Now, if we lower (or remove) the takes on wage income I'm okay with that.

I bought my house in that special window where the tax credit was a loan and not a gift (six months later, that changed).

He's right. If its not the primary residence, you gotta pay everything back immediately.

I became even more Libertarian today. And those plans to buy a new home? F that.

DSGamer wrote:

I became even more Libertarian today. And those plans to buy a new home? F that.

Oh man, as if the tax thing weren't bad enough, you had to become more libertarian as well. Ouch. This just isn't your week.