Spreading the Wealth via Heathcare Reform

I have long said that one of the prime motives for healthcare reform had nothing to do with health per se but rather was a desire by those on the left for greater redistribution of income.  The Tax Foundation has now put some numbers to that proposition for the recently passed bill.  Roughly speaking, the top 1 percent of the population pays an additional $50,000 in taxes because of this legislation, and each of the bottom 50 percent gets about $1000 in benefits.  Click here for the more complete description.

A Guest Post from John Galt

David Leonhardt writes:

There is no question that the wealthy pay a higher overall tax rate than any other group. That is an American tradition. But there is also no question that their tax rates have fallen more than any other group’s over the last three decades. The only reason they are paying more taxes than in the past is that their pretax incomes have risen so rapidly — which hardly seems a great rationale for a further tax cut.

Really? What if the increase in their pretax income is in part attributable to the tax cuts? David seems to be treating pretax income as exogenous to tax policy, whereas there is good reason, both theoretical and empirical, to think that it responds to policy.

So I started wondering: How much of the increase of the the reported incomes of the superrich might be attributable to cuts in their marginal tax rates?  Let's do some very rough calculations to illustrate the possible magnitude of this phenomenon.  I will start my analysis before the first in the series of major tax reductions, which was the famous Kennedy tax cuts.

Over the past half century, the top marginal tax rate has fallen from 91 percent in the 1950s and early 1960s to 35 percent today.  Thus, the amount a person gets to keep at the margin has risen from 9 percent to 65 percent, that is, by a factor of 7.2.  If the elasticity of taxable income with respect to 1-t is one, as some studies find for high-income taxpayers, then the incomes of the rich would have risen by a factor of 7.2 as well.  If the elasticity is one-half, then their incomes would have risen by a factor of 2.7.  In either case, the change in pretax income attributable to the tax cuts is substantial.

By comparison, the incomes of the superrich (top 0.01 percent), as a share of total income, increased by a factor of about 5 over this period.  So, it seems that for plausible elasticities, a significant portion of that increase can potentially be explained by the cuts in the top marginal tax rate.

To be clear, I am not suggesting that we are now on the wrong side of the Laffer curve and that cutting taxes will increase revenue.  And I will be the first to admit that we don't really know the relevant elasticity for the upper tail of the income distribution.  But I am suggesting that it is a mistake to presume that changes in marginal tax rates have little effect on reported pretax incomes.

Why are most professors leftists?

Here is one answer.  Thanks to Craig Newmark for the pointer.

The Valued Added Tax

An overview from Bob Carroll and Alan Viard.

Hear Me Squawk

I am scheduled to be on CNBC's morning show Squawkbox on Monday morning, a bit after 8 am.

Update: If you missed it, here it is:

How to Lie Without Statistics

Today's Parade Magazine (with a circulation of 32 million) includes its "Annual Salary Survey." What this means is that the magazine presents about a hundred photos of various people with their names, occupations, and annual earnings.

At first, you might think this is a good way to give readers a sense of the distribution of income in society. And it would be, if the sample were at all representative. But it isn't. Parade decides to oversample celebrities. That is understandable--after all, readers are more interested in hearing about famous actors and sport stars than about a plumber in Dubuque. But one result of this choice is that the sample is far from representative, making the whole affair misleading as a piece of journalism.

By my count, about 14 percent of the people in Parade's sample earn more than $1 million a year. In the real world, the actual percentage is about 0.2 percent. So, in a truly representative sample of a hundred people, you would most likely have zero, or perhaps one, person with a million dollar income. Finding two would be highly unlikely. 14 would be nearly impossible.

Does this matter? I think it might. There is a common perception in some circles that we can solve all our fiscal problems if only we were willing to tax the rich some more. Yet, in reality, there are not enough rich for this to work. By presenting such a skewed cross-section of incomes, Parade inadvertently feeds an all-too-common misperception.

The Enormity of the Fiscal Gap

Here is a striking way to describe our looming fiscal problem:

A study we conducted at the Tax Policy Center found that Washington would have to raise [income] taxes by almost 40 percent to reduce -- not eliminate, just reduce -- the deficit to 3 percent of our GDP, the 2015 goal the Obama administration set in its 2011 budget. That tax boost would mean the lowest income tax rate would jump from 10 to nearly 14 percent, and the top rate from 35 to 48 percent.

What if we raised taxes only on families with couples making more than $250,000 a year and on individuals making more than $200,000? The top two income tax rates would have to more than double, with the top rate hitting almost 77 percent, to get the deficit down to 3 percent of GDP.