The brewing battle over taxes

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Pity the American millionaires. For how many souls should we be shedding tears? Income disparity has not been so wide since 1928, with the top one percent of Americans now reaping 23% of national income.

The Current Population Survey is a joint effort between the Bureau of Labor Statistics and the Census Bureau. It reveals that in 2009, 1,181,000 males earned over $250,000 (£155,625) a year, with a mean income among earners of $454,655. In other words, with a such a number of people bringing home large slabs of bacon, their tax revenues could help meaningfully to counteract national deficits.

That bears remembering, as the fiercest battle in Congress goes into high gear: should the Bush income tax cuts for the “rich”, that is those netting over $250,000, be allowed to go gracefully into the sunset, or should they be temporarily or permanently extended?  Extensions appear most probable, since Republicans scored huge victories in the midterm elections, and most high earners are, well, Republican. (article continues below)

The argument for leaving the high-end Bush tax cuts alone goes back to the supply side theories of the 1980’s.  It boils down to elasticity of effort, that is, whether a tax hike demotivates workers, which in turn reduces revenues. Paul Krugman asks whether a substitution effect of more generous state support (healthcare, retirement benefits, and so on) may “wash out” the income effect of less take home. Unlikely, he concludes, as those state funded goodies represent only a small proportion of income for the well-to-do.  But higher taxes may incent them to seek out aggressive strategies for evasion, avoidance and loopholes.

Supposing pigs flew, and Congress actually raised marginal rates on the rich?  Former Labor Secretary Robert Reich has proposed lifting their marginal rates to 55%, from today’s 35%.  As a tradeoff, he would exempt altogether those earning less than $20,000 from payroll taxes, the levy that supports medical and Social Security retirement pensions. I myself have a proposal. Eliminate the ridiculous cap on those payroll taxes. Those who make over $106,800 now enjoy a negativetax bracket, as their 6.2% rate plummets to a fat zero at that level. 

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Vanessa Drucker is the American Editor of Fund Strategy, based in New York City.  She has worked as a financial journalist for 20 years. In the 1980s, she practiced banking and securities law on Wall Street, and is the author of two business novels. Vanessa can be contacted at vanessa.drucker@centaur.co.uk.

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