Back to the Bad Old Days of High Marginal Tax Rates
As Mike Tanner has written, the health care bill means a big tax hike — indeed, a lot of tax hikes. It also means a reversal of one of President Ronald Reagan’s great achievements, bringing down the top marginal income tax rate.
Small-business owners are warning that the economy would suffer under a health care bill proposed by House Democrats, which would drive tax rates for high-income taxpayers to levels not seen since before President Reagan’s tax reform of 1986.
The top federal income tax rate, which Mr. Reagan and a bipartisan Congress lowered from 50 percent to 28 percent, would reach 45 percent in 2011 if Congress and President Obama enact the surtaxes that are part of the health care reform plan that House Democrats announced Tuesday.
Small-business owners, who would take a direct hit from the surtaxes, expressed dismay over the proposal, saying it would force them to curtail hiring and reduce wages amid the worst recession in a generation.
“If they institute a 5 percent surtax on income, it will have a severe impact on small businesses that are already hurting,” said Michael Fredrich, whose Wisconsin company, MCM Composites, molds plastic parts.
“We run maybe three days a week, sometimes four days a week, sometimes zero days,” he said. “I can tell you that at some point, people … running a small business are just going to say, ‘To hell with it.’ “
Individuals tend to focus on their tax burden. After all, our overall tax bill reflects the amount of money we lose as legislators speed about the country allegedly “serving” us while promoting their own political ends.
Marginal tax rates more directly affect decisions on saving, investment, business formation, work effort, job creation, and more. Even politicians not enamored of the “rich,” whatever that term means, should recognize that we all benefit from an economic system which encourages entrepreneurship.
Proponents of big tax hikes might want to recall Aesop’s Fable, The Goose that Laid the Golden Eggs. Wreck the economy, and the health care system will crash too.
Filed under: Health, Welfare & Entitlements; Tax and Budget Policy
Federal Tax Rates
Conveniently timed as Tax Day approaches, the Congressional Budget Office has released new data on the taxes paid by each income group. The CBO data includes federal income taxes, payroll taxes, and excise taxes, which amounts to almost the entire federal tax grab.
The CBO calculates tax rates by quintile from the lowest-earning to the highest earning households. These tax rates are simply total federal taxes paid by the group divided by total income earned by the group.
The chart makes clear that we have a very graduated or redistributive tax system, which some people call “progressive.” President Obama doesn’t think that the 25.8% rate paid by the top quintile is progressive enough, so he plans to penalize that group with an income tax rate hike.
Piketty Tax Battle: Round Two
The Economist has posted rebuttals to first-round arguments in my tax debate with French economist Thomas Piketty. Piketty seems to think that everyone with a high income has a “grabbing hand” that comes at someone else’s expense.
The debate over tax rates on the rich is important, but Piketty is important in himself because he is widely cited in the media and elsewhere as if he were a neutral authority. For example, President Obama’s budget featured a chart showing that the top 1 percent of earners have greatly increased their share of national income over the decades, using Piketty’s numbers.
But Alan Reynolds has found serious flaws in Piketty’s calculations. Piketty bases his calculations on tax return data, but reported income under the federal income tax has changed greatly over time.
The bottom line is to be suspicious when you see a chart on income trends that is sourced to this advocate of 80 percent tax rates.
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