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Tax the Deca-Millionaires!

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March 15, 2011 – Comments (20)

Yesterday, NPR's "Tell Me More" had an interesting discussion about Japan and the budget deficit with Wall Street Journal reporter Sudeep Reddy.  Readers suggested various ways to close the budget gap, and one suggested that households earning $10 million or more pay a tax rate of 50% (compared to the current 35%). Reddy looked into this, and had this to say:

"If you look at just income alone, there were 13,000 returns with income above $10 million in 2008, the latest year for which we have data. And if you were to add all that income up, you're looking at about $350 billion in taxable income, which generates about $84 billion in taxes, and that's a 24 percent tax rate for people in that bracket."

Two thoughts: 

1. Why does our progressive tax system stop progressing at approximately $380,000 of taxable income? In other words, why does a household that earns $400,000 pay the same tax rate as one that earns $2 million? Or, for that matter, all the various ways (including the new health-care law) to raise taxes on singles making more than $200,000 and married folks making more than $250,000?

2. These folks paid about 24 cents in income taxes for every dollar they made. Not quite as bad as some people would have you believe. This doesn't just apply to the deca-millionaires. There's a difference between your tax bracket and your effective tax rate (dividing the amount of income taxes you pay by the amount you earned). Given that this is tax time, you can do this calculation yourself. You may be surprised. 

That said, income taxes are just part of the story. There are property taxes, sales taxes, state and local taxes, gas taxes, cell-phone and cable taxes, etc.  Add all that up, and you may be enraged.

I don't know if raising taxes on the deca-millionaires is the answer. (I live in Washington, and know plenty of people who work for either the government or government contractors. And most will tell you that there's fat to be cut.) But I found Reddy's stats interesting.

Robert Brokamp, CFP®, is the senior advisor for the Fool's Rule Your Retirement service.

20 Comments – Post Your Own

#1) On March 15, 2011 at 1:32 PM, cthomas1017 (39.66) wrote:

The U.S. Treasury is depleting its cash at an accelerating pace, drawing down its cash balance by $81.6 billion in the just the first four days of March, leaving only $108.9 billion on hand, according to the Daily Treasury Statement released two weeks ago.

I haven't run the calculation lately, but I seem to recall that the US Government spends roughly $2B per hour.  So your solution of doubling the taxes on all those making over $10M will cover less than a week of government spending. 

Change accounting methods, move corporate entity overseas, and expatriation will be a choice taken by maybe a quarter of the funds of those $10M+ earners.  (They can still afford accountants & tax attourneys.)  So maybe your tax change suggestion will handle 1/100th of the spending deficit (at current interest rates, which are at all time lows for this long of a period.)

It's much easier to print money and devalue the currency.  (Which will make us ALL poorer.)  Spending isn't likely to be reigned in.  I'm not blaming politicians.  They are simply a symptom of the electorate who won't see the problem until it's too late.

So thank you and NPR for time and energy put into class warfare while inflation will be the silent killer of ALL we taxable income earners.  Keep fiddling while Rome burns.

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#2) On March 15, 2011 at 3:08 PM, ChrisGraley (31.45) wrote:

Yep, tax Warren Buffett 90%!

How dare he donate all that money to the Bill and Melinda Gates foundation!

We could be subsidizing corn based ethanol with all that money!

Everyone knows that the government can manage Warren's money better than Warren can anyway!

;-)

 

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#3) On March 15, 2011 at 3:09 PM, catoismymotor (72.81) wrote:

No thanks.

www.fairtax.org

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#4) On March 15, 2011 at 3:15 PM, whereaminow (58.64) wrote:

Only cowards ask government thugs to steal property for them. If you want their property, why not take it yourself?

David in Qatar 

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#5) On March 15, 2011 at 3:18 PM, TMFHousel (95.18) wrote:

I'm certaintly not advocating it, but a lot people forget that taxes for top brackets were over 90% in the '50s and '60s. Reagan was considered a capitalist hero for dropping top marginal rates to 50%. Obama, meanwhile, gets labled a socialist for trying to peg them at 39%. 

Many scoff at the idea of a 50% tax as being completely unreasonable, and it probably is, but much worse has been done -- and during a period when the coutnry prospered like never before.

Again, I'm not advocating we go back to those days. And no, I didn't grow up in Stalingrad.  

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#6) On March 15, 2011 at 3:26 PM, devoish (98.71) wrote:

I am advocating for it. Actually 75% on the top 1% until the budget is balanced, SSI and Medicare are funded, and retirements are secure.

Catherine Black just retired from the board of directors of IBM with a $3.3 million check. That was a part time job.

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#7) On March 15, 2011 at 3:33 PM, catoismymotor (72.81) wrote:

Re: #6

Again, no thanks.

www.fairtax.com

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#8) On March 15, 2011 at 3:52 PM, leohaas (91.57) wrote:

Pointing out that the Government spends too much is NOT an argument for not increasing taxes on some. Progressive taxation is about how the tax burden is spread. How much the Governments spends is a different discussion.

Corporate income can be expatriated. Personal income cannot. Unless you give up US citizenship or brake the law, of course.

Thanks for mentioning Buffett. He is in favor of taxing the rich more than we do now!

Contrary to what its name implies, fairtax.com does NOT advocate a fair tax system. It would move a significant part of the tax burden from the rich onto the middle class and poor.

Taxation is not the equavalent of theft. Only Libertarians believe that. That does not make it true. I don't care if that makes me a "coward" in the eye of some expatriate.

 

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#9) On March 15, 2011 at 4:13 PM, catoismymotor (72.81) wrote:

My bad.

www.fairtax.org

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#10) On March 15, 2011 at 4:19 PM, ChrisGraley (31.45) wrote:

Theft: A criminal act in which property belonging to another is taken without that person's consent.

It doesn't make you a coward in my eyes leohaas, just unethical and self serving.

If spending is a subject that should be discussed seperately, then it least it should be at least discussed first. I'd like to get to know you a little bit before you put your hands in my pockets.

devoish, you should send your resume to IBM.

 

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#11) On March 15, 2011 at 4:21 PM, whereaminow (58.64) wrote:

Leo,

I don't care if that makes me a "coward" in the eye of some expatriate. 

I'm just curious as to why you don't take the money yourself?  Between you and devoish, I'm sure you guys can overpower an old man like Buffett and make him hand it over.  What's the problem here?  

David in Qatar 

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#12) On March 15, 2011 at 4:24 PM, catoismymotor (72.81) wrote:

Contrary to what its name implies, fairtax.com does NOT advocate a fair tax system. It would move a significant part of the tax burden from the rich onto the middle class and poor.

leohas,

This statement shouts that you are unfamiliar with the truth about the FairTax. I ask you to visit the following link:     http://www.fairtax.org/site/PageServer?pagename=about_main

Go all the way down to the bottom of the page where the *FairTax Five* questions are. Choose the bottom one. It addresses your misperception.

Respectfully Yours,

Cato

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#13) On March 15, 2011 at 6:21 PM, tobernator1000 (< 20) wrote:

Cato,

The problem with the fairtax plan is the assumption that spending and income increase linearly. A family making a poverty level income will be spending 100% or more (via credit) of their income, and thus will be taxed on all of their income (or more), but a family making 10 or 100 times the poverty rate will probably only be spending 80% or 50% of their income, with the unspent part of that income remaining untaxed.

One of the reasons tax breaks to low-income people increases the GDP more than tax breaks to high-income people is that more of that money gets spent. For what it's worth, tax breaks/refunds to low-income people generally increase the GDP by 1.4 times the amount spent, whereas tax breaks to high-income earners increase the GDP by 0.4 times the amount spent. "Across the board" tax breaks generally increase the GDP by between 0.9 and 1.1 times the amount spent, but all the gains come from low-income earners, and high-income earners actually cause the GDP to decrease because they spend a smaller percentage of their budget than the government does.

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#14) On March 15, 2011 at 8:23 PM, ChrisGraley (31.45) wrote:

tobernator, that's the right idea but the wrong conclusion.

First, you are very correct that a family at poverty level will spend 100% of their income,(or more) but the increase in GDP created by that spending is a rising tide that lifts all boats. Next the rebate given to that same person at poverty level to spend more cash instead of spending on credit. Again a rising tide lifts all boats. Last, no matter what tax system that you come up with, if you want that person at the poverty level to get ahead, you have to convince him to save and invest money.

Taxing him on his income even a trivial amount isn't doing him any favors. He'll tell himself "Why work overtime if they tax me that much more?"

But, if you tax his spending, he'll think twice about spending beyond his means. He might actually save a little. He may work a few more hours too if he knows that every time he takes one step forward he doesn't take 2 steps back.

I'm not exactly a huge fair tax fan myself, but it's a hell of a lot better than what we have now!

I would vote for it over what we have in a heartbeat.

It's simple economics. To be a strong country you have to produce more than you consume.

Taxes discourage.

Instead of taxing productivity and ignoring consumption, we should be taxing consumption and encouraging productivity.

Don't let me sway you though, I'm just a guy that was a poor kid that decided that waiting in line for cheese wasn't gonna get him ahead in life.

If you're for the whole tax the rich and hand cheese to the poor after the politicians skim their cut off the top thing, I'm not gonna change your mind anyway. 

Again, I'm not totally for the fair tax, but I would vote for it in a heartbeat.

It makes a hell of a lot more sense then what we have now. 

 

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#15) On March 15, 2011 at 10:09 PM, catoismymotor (72.81) wrote:

Chris,

It makes a hell of a lot more sense then what we have now.

That's the Cliff's Notes version of my thinking as well. 

tobernator,

Chris put it very well in his first three paragraphs. Thank you for expressing your thoughts. It was good to read a well thought
opinion that runs contrary to my own.

Cato

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#16) On March 15, 2011 at 10:56 PM, devoish (98.71) wrote:

Taxes discourage

Mozillo and Hank Paulson needed some discouraging.  Alot of discouraging.

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#17) On March 16, 2011 at 1:05 PM, whereaminow (58.64) wrote:

Here devo, let me help you complete your sentence:

Taxes discourage savings, investement, and entrepreneurial activity. Taxes encourage the growth of the parasite class: the state and those who feed off the state.

Since Hank Paulson is a member of the parasite class, he is one who feeds off the state.

Therefore, raising taxes empowers Hank Paulson, your sworn enemy.

This is why liberals never get anywhere. You don't understand the nature of the state. You think it is there for you. It is not. IT IS THERE FOR SNAKES LIKE HANK PAULSON.  A FREAKING BLIND LEPER COULD SEE THAT.

Everytime you reward the state with more funds, you simply make more Hank Paulsons. I guess you must be a masochist.

I just don't get why you wear your flaming stupidity like a badge of honor, while the rest of America has to pay for it.

David in Qatar

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#18) On March 16, 2011 at 2:59 PM, cthomas1017 (39.66) wrote:

What Warren Buffett says and what he does are, too often, very different things.  If Warren Buffett believes that he should pay more taxes, there is a line near the bottom of his 1040 where he can contribute whatever he wishes into the US Treasury.  But Warren Buffett has not done that, EVER.  Nor has he made one statement encouraging others to do the same.

Warren Buffett's morals are subjective and self-serving. 

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#19) On March 16, 2011 at 8:47 PM, devoish (98.71) wrote:

David in Qatar,

Thank you for speaking for me and all liberals. Thank you for declaring all climate scientists liars.

Best wishes,

Steven

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#20) On March 21, 2011 at 4:17 PM, tobernator1000 (< 20) wrote:

Chris and Cato,

"... if you want that person at the poverty level to get ahead, you have to convince him to save and invest money." 

I think that this is true, but only after you've made it possible for that person to save money. Any person or family without health insurance can be completely wiped out by a completely random event like cancer or a car crash (even wealthy people probably can't pay $500,000-1,000,000 for chemotherapy or months surgeries and in-patient services). Even barring that, there are people in this country who don't have enough money to feed themselves, much less start saving. In fact, when people have to choose between eating and anything else, saving, investing, going to school, etc, they will choose eating. That's why poor people don't go to school, or have health insurance, or save, because they're busy feeding themselves and trying to scrape $350 in rent for the room they share with two other people. There are definitely some people who are lazy, and game the system, but the majority of people I've met on welfare of any kind feel ashamed of it, and are actively trying to find a way to earn money.

"He'll tell himself "Why work overtime if they tax me that much more?""

I've heard this argument many times, but I've never really understood it. The obvious answer to "Why work overtime?" is "Because you'll have more money." Are there really people out there in the world who say "Well, I could make $500,000 a year, but then I'd only take home $250,000, which is 50%, so instead I'll only make $10,000 a year, get $2,000 from the government, and take home $12,000, which is 120%!"? I think if there are people who do this they desperately need to be educated.

"...if you tax his spending, he'll think twice about spending beyond his means." 

This implies that people in poverty have a choice regarding their spending. If you ask people without health insurance why they don't have it, I suspect the most common answer you'll get is "I can't afford it," and not "I'm intentionally gambling that I won't get sick, and like paying $200 every time I visit a doctor". Most people at the poverty level are spending all (or more) of their money on eating, paying rent, and sending themselves or their kids to school. This is why money given to poor people gets spent. It's not because they have no self control or inclination to save, but because they have no choice but to spend everything they make.

"If you're for the whole tax the rich and hand cheese to the poor..."

I am for taxing the rich, but only as much as we need to to create a floor that keeps people from having to choose between life and a good life. I believe in incentives, but I also think it only works when people have a choice. If I can't eat, I won't be going to school. If I can't pay rent, I won't have health insurance. If I'm not going to school and don't have health insurance I'm not going to save for a rainy day, because every day is already rainy. The government shouldn't be subsidizing caviar, or giving away McMansions, but it should make sure no child is forced to run drugs to feed his family. It should make sure that a child doesn't die of the flu because his family can't afford a doctor. It should make sure that if someone is smart and dedicated and hard-working that they have to opportunity to go to a school that lets them realize their potential.

The government is not a business, and it has different goals than a business does. The government fulfills moral goals, rather than profitable ones. We may disagree on exactly what morality is, but unless you're a fan of the Thunderdome I think we can both agree that businesses are NOT moral institutions. We, as a people, have a moral obligation to our fellow man, and the government is the institution that is supposed to work for that obligation. If it has failed, it is because we, through apathy and ignorance, have let it do so.

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