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Taxing the heck out of the top 400 taxpayers won't help the bottom 20 million

February 19, 2010

The IRS has issued one of its occasional summaries of the tax lives of the 400 taxpayers with the highest adjusted gross income. As usual it shows that they have lower tax rates, which is no surprise - most people only show up on the top 400 list once, when they have a big capital gain, which is taxed at the lower rate. And as usual, the list triggers lamentations of the unfairness of it all.

If the government took away 100% of the income from these 400 folks, it wouldn't improve the lives of the poor a lick. In fact, it would make the lives of the poor harder by destroying the productive ability of those 400 and their capital to hire people and do things.

The real problem isn't the tax structure at the top. It's the hidden tax structure at the bottom:

Chart courtesy Ludwig von Mises Institute

The chart shows that the phase-out of welfare benefits as income rises can lead to implicit tax rates in excess of 100%. Taxing capital gains isn't going to fix this. Arnold Kling has a better ideas:

There are two potential solutions. One solution is to base eligibility for means-tested benefits on total income, including other government benefits programs. Another approach would be to abolish a lot of specific programs and replace them with generic cash assistance.

Either idea will work better than going after the top 400.

Oh, and thanks to Ryan Clutter and Andrew Leonard for our first Salon link. I hope to have more to say on the subject next week.

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"Taxing the heck out of the top 400 taxpayers won't help the bottom 20 million."

Perhaps not but do it anyway. At least they will be paying their fair share as they did during the Eisenhower presidency.

Fair share is such an ambiguous term. What may be fair for one person may not be fair for another.

As well as location is fungible. There are many places around the world that the ‘evil rich’ (per Kerry M. Kerstetter’s definition) could move and enjoy much lower tax rates than what they were under previous administrations. This becomes increasingly more likely as the world keeps on getting flatter with advances in communication technology and spread of wireless and wired networks.

But, if you are reading this blog, you probably have read the multiple articles Joe has posted on exactly this topic. In addition, these people that you are suggesting raising taxes on, are the same ones that create jobs by being business owners. Generally speaking anyways, since there are more ways to accumulate wealth than business ownership, but it and real estate are the two most likely ways to do so.

Reminds me of this story circulating the web,

Suppose that every day, ten men go out for beer and the bill for all ten comes to $100. If they paid their bill the way we pay our taxes, it would go something like this:

The first four men (the poorest) would pay nothing.
The fifth would pay $1.
The sixth would pay $3.
The seventh would pay $7.
The eighth would pay $12.
The ninth would pay $18.
The tenth man (the richest) would pay $59.

So, that’s what they decided to do.

The ten men drank in the bar every day and seemed quite happy with the arrangement, until one day the owner threw them a curve. “Since you are all such good customers,” he said, “I’m going to reduce the cost of your daily beer by $20.” Drinks for the ten now cost just $80.

The group still wanted to pay their bill the way we pay our taxes so the first four men were unaffected. They would still drink for free. But what about the other six men — the paying customers? How could they divide the $20 windfall so that everyone would get his “fair share”? They realized that $20 divided by six is $3.33. But if they subtracted that from everybody’s share, then the fifth man and the sixth man would each end up being paid to drink his beer. So, the bar owner suggested that it would be fair to reduce each man’s bill by roughly the same amount, and he proceeded to work out the amounts each should pay. And so:

The fifth man, like the first four, now paid nothing (100% savings).
The sixth now paid $2 instead of $3 (33%savings).
The seventh now pay $5 instead of $7 (28%savings).
The eighth now paid $9 instead of $12 (25% savings).
The ninth now paid $14 instead of $18 (22% savings).
The tenth now paid $49 instead of $59 (16% savings).

Each of the six was better off than before. And the first four continued to drink for free. But once outside the bar, the men began to compare their savings.

“I only got a dollar out of the $20,” declared the sixth man. He pointed to the tenth man, “but he got $10!”

“Yeah, that’s right,” exclaimed the fifth man. “I only saved a dollar, too. It’s unfair that he got ten times more than I!”

“That’s true!” shouted the seventh man. “Why should he get $10 back when I got only two? The wealthy get all the breaks!”

“Wait a minute,” yelled the first four men in unison. “We didn’t get anything at all. The system exploits the poor!”

The nine men surrounded the tenth and beat him up.

The next night the tenth man didn’t show up for drinks, so the nine sat down and had beers without him. But when it came time to pay the bill, they discovered something important. They didn’t have enough money between all of them for even half of the bill!

And that, boys and girls, journalists and college professors, is how our tax system works. The people who pay the highest taxes get the most benefit from a tax reduction. Tax them too much, attack them for being wealthy, and they just may not show up anymore. In fact, they might start drinking overseas where the atmosphere is somewhat friendlier.

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