Punishing the Rich

Via Sullivan, the CBO published data related to federal taxation, broken down by income brackets, spanning 1979 to 2005.

The primary thing that irks me about the whole "taxing the rich is punishing success" meme is that the Loons, never, ever, reference actual data to substantiate their argument.

But we do here... Lets have a look shall we?

We'll start at 2005, the latest data available. Table 1 of the report is broken down by income brackets. It doesn't display the actual income level, but rather by rankings. Income from the lowest to 80% is split in 4 brackets, and from 80 to the top .01% of income is more granular. Table 3 breaks those brackets down into actual income, so I will cross reference Table 3 into the tax rates in Table 1 so you can see actual income dollars versus the tax rate. This is based on gross income. I'm adding a column with the net tax bill based on the rate, as well as the net income (money left over after paying the bill). That net number is the important one, obviously.

* Important note, this is not just income tax, but ALL Federal taxation. There are more tables if you want to see the breakdown of what comprises the total taxation. These are averages, which include deductions such as mortgage interest. I compared my tax liability from last year to this table and it is very very close to the number. I buy the Fed a car every year. John buys them a tank.

Income	Tax Rate	Payment	Net $
$15,900	4.3	$684	$15,216
$37,400	9.9	$3,702	#33,697
$58,500	14.2	8,307	$50,193
$85,200	17.4	14,825	$70,375
$120,600	20.3	$24,482	$96,118
$161,800	22.4	$36,243	$125,557
$269,800	25.7	$69,339	$200,461
$588,100	29.7	$174,666	$413,434
$1,207,200	31.2	$376,646	$830,554
$4,699,400	32.1	$1,508,507	$3,190,893
35,473,200	31.5	$11,174,058	$24,299,142

Wealthy people pay a lot, eh? They certainly do. However, look at the amounts of money they have left over after their tax bill, and compare it to the middle class. Compare it to the vast amount of wealth of the country that they hold, and which the rest of the population does not.

The median income in the United States in 2005 was $47,084. That's the very center of the "middle class" in America. Without getting overly detailed, let's assume that based on the table data, that the effective tax rate for that middle class is exactly half way between the two closest brackets in the table (9.9, 14.2) and call it 12.1%.

Income	Tax Rate	Payment	Net $
$47,084	12.1	$5,697	$41,387

Obama has proposed returning the tax rate for wealthy Americans to the Clinton era levels. In reality, it's doubtful that's going to happen right away, but more likely Obama will allow the Bush tax cuts for the wealthy to simply expire in 2010. Of course, that depends on economic conditions at the time.

Now that we know the rates, let's go ahead and punish the rich!!!

Let's give a 3% tax increase for Americans earning over $250k a year. This is less than the peak levels during the Clinton era, and a modest gain. I've not heard details of exactly how the "middle class" tax reduction is going to work, but let's go ahead and do a 5% reduction to all the brackets under $250k. No doubt it won't be an even distribution in reality (i.e. $100k income doesn't get as much reduction as $30k), but let's do this as an approximation.

Income	Tax Rate	Payment	Net $	Net Change
$15,900	0	$0	$15,900	+ $684
$37,400	4.9	$1,833	$35,567	+ $1,870
$58,500	9.2	5,382	$53,118	+ $2,925
$85,200	12.4	$10,565	74,635	+ $4,260
$120,600	15.3	$18.452	$102,148	+ $6,030
$161,800	17.4	28,153	$133,647	+ $8,090
$269,800	28.7	$77,433	$192,367	- $8,094
$588,100	32.7	$192,309	$395,791	- $17,643
$1,207,200	34.2	$412,862	$794,338	- $36,216
$4,699,400	35.1	$1,649,489	$3,002,917	- $140,982
$35,473,200	34.5	$12,238,254	$22,234,946	- $1,064,196

Boy.. really punished, eh? But, aren't the wealthy still wealthy? Will there be a difference in their life styles? That's a subjective question left up to each person. If John and I are "punished", I can tell from looking at the numbers that we're still going to have Friday Night Fine Dinning, and we're still going to go on fabulous vacations. We're still going to have Chaquita clean the house and do the shopping. For those that are really hauling in the dough.. I can't imagine how they'll notice it. We won't.

Obviously there's a big swing between 161k and 269k in my table, and that would be smoothed out a bit. Less cut for 161 and less increase for 269, net effect about the same.

People living at the median are often living paycheck to paycheck. What will that extra money buy them? Will they be able to buy essentials.. save for college? Will they be able to survive? Is the middle class tax cut enough? No problem, give them another 1% because 1% of not a whole lot is not a whole lot.

Guess what happens in my little tax plan? Total tax revenue goes UP, and the deficit can be reduced. How is it possible? Well, there's lots of really rich people in the United States. Look at table 3 and see how many households fall into each income category. Then, look at table 2 and see the share of the total federal tax burden that the wealthy pay. They pay the majority of it, by far.

The top 4% in income pay 44% of the Federal tax burden. That's because there is a lot of people, making a whole lot of money.

So, what's the long term effects of the tax changes? The middle class has more breathing room, and can actually purchase more goods. The wealthy pay marginally more, which obviously won't effect them, and guess what? Those wealthy people overwhelmingly own the vast majority of wealth (stocks, etc.) in this country, and the stimulation to the economy from the spending increases their profits.

And the deficit is reducted. It's the best plan.

You know what happens under a non-progressive, or "flat" tax plan? Everyone pays the same thing, but the same amount of revenue needs to be collected. The only way that happens is if you massively increase taxes for the middle class.