An Overlooked Constant

[Wehrwolfen]

An Overlooked Constant​

By Steve McCann
December 13, 2012



The theater of the absurd in Washington revolving around raising tax rates on the wealthy is based on a fiction: massively raising the rates will result in additional revenue for the government.

One of the constants in any analysis of income taxes paid in the United States since their inception in 1916 is the correlation between the top marginal rates and the taxes actually paid by the so-called wealthy. Short of turning America into Stalin's police state and confiscating all the wealth of the "evil" one percent, the predictable behavior of this economic class very much revolves around the tax policies of the government, both state and federal.

The two taxes that most effect the financial decisions of the wealthy are income and capital gains taxes. A cursory examination of these rates and the percentage of overall tax revenue paid by the top one percent of tax filers since 1979 reveals:

1979--Top Marginal Income Tax Rate 70.0%-- Maximum Capital Gains Tax Rate 28.0% Percentage Overall Tax Revenue Paid by Top One Percent 19.0%

1982--Top Marginal Income Tax Rate 50.0% -- Maximum Capital Gains Tax Rate 20.0% Percentage Overall Tax Revenue Paid by Top One Percent 19.2%

1989-- Top Marginal Income Tax Rate 28.0%-- Maximum Capital Gains Tax Rate 28.0% Percentage Overall Tax Revenue Paid by Top One Percent 27.0%

1996-- Top Marginal Income Tax Rate 39.6%-- Maximum Capital Gains Tax Rate 29.0% Percentage Overall Tax Revenue Paid by Top One Percent 31.0%

2010-- Top Marginal Income Tax Rate 35.0%-- Maximum Capital Gains Tax Rate 15.1% Percentage Overall Tax Revenue Paid by Top One Percent 37.4%

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As the top rates dropped not only did the percentage of overall taxes paid by the wealthy increase, but also the amount of revenue received by the government, since investment and income decisions no longer included excessive and at times absurd tax planning.

In 1986, a tax reform bill was passed which eliminated virtually all the tax shelters created to minimize taxes. These were, oftentimes, simply very poor and risky investments driven by the need to reduce tax liabilities. The dramatic increase in the share of overall taxes paid by the top one percent reflects this change and also greatly increased the actual revenues realized by the Treasury. As a further benefit, the nation's gross domestic product grew by an average of over 4% per year after the reform bill was passed.

Since 2003, the key drivers in the increase in the share of taxes paid by the top one percent was the reduction in the capital gains rate, which helped to offset the increased top marginal rate passed in the Clinton years as well as taxing dividends at a flat 15%.

Despite the lesson of the above, the Obama proposal is to raise the top marginal rate to 40.5% (39.6% plus .9 for ObamaCare), increase the capital gains rate to 20.0%, and dramatically raise dividend taxation rates for the top one percent to 44.3% (40.5% plus 3.8% for ObamaCare).

This is being sold as absolutely necessary to raise revenues. It is projected by the Congressional Budget Office that these changes could raise $84 billion per year. That is assuming those in the top one percent do not change their economic behavior, an absurd assumption. There will be a dramatic change in behavior, particularly for those who live in high income tax states such as California and New York, who will be staring at an effective marginal tax rate for every dollar of income over $200,000.00 (single) or $250,000.00 (married) of over 53.0% before Medicare of 2.9% and other local taxes.

Beyond the damage these policies will do to small and medium sized businesses, not to mention job creation, the revenue eventually realized by the government will fall far short of the estimate and will in all likelihood drop below what is being collected today, as many taxpayers will move to assure that their income stays as close to the $250,000.00 threshold as possible, and will look to make investments overseas rather than in the United States.


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