“I’m one of the few people among my friends who regularly talks to Trump voters,” she said. “There’s enough money for everyone, I keep telling them—there is. It’s just not in your pocket, it’s in the one per cent’s pocket. If only we had the right progressive tax system, this wouldn’t be such a problem. As a roboticist, I feel a responsibility to communicate this to people.”
- Stefanie Tellex, Brown University, speaking about the affordability of a Universal Basic Income, quoted in The New Yorker (10/23/17)
Right now the top marginal federal income tax rate is 39.5%. If you factor in state income taxes, the top combined state-federal income tax rate is 45%.* Of course marginal tax rates tell only part of the story. What matters is the effective rate - what's actually paid - and the share of tax revenue collected. For instance, in 2013 the effective income tax rate for the top 1% was 27.1%, compared to 3.3% for the bottom 50%. The income earned by the top 1% was 19.0% of total income earned that year and their share of federal income tax revenue was 37.8%.
Ok, the above makes it sound like the 1% are paying their fair share and then some. But this country has serious problems that require money to fix. Surely the 1% can pay more.
The point of raising tax rates is to raise tax revenue. However, raise the rate too high and tax payers will change their behavior to lower their tax bill. So is there a sweet spot for taxing the top earners in this country, where we can get the most revenue for the top rate? Here's what the IMF has to say:
“The IMF reckons that the optimal tax rate on higher incomes, assuming the aim is revenue maximisation, is 44%.”
– Buttonwood, The Economist (10/19/17)
Uh-oh, we're already there. But the US doesn't have enough tax revenue to fund (or continue funding) some really important federal programs. I do notice, however, that some developed countries have higher top marginal tax rates than we do. But just about all of them have had anemic GDP growth for years. Take Canada, which has a top marginal tax rate of 53.5%, but GDP growth has been under .5% the last two years.
What to do? Well, I'm going to raise our top marginal tax rate a bit, to 50% - hopefully close enough to the sweet spot that tax revenues would increase without undermining US economic vitality and GDP growth.
Next: Who are the 1%
*This is an average; a few states don't have an income tax; others, like California, have quite high income taxes
References:
Buttonwood: “Higher taxes can lower inequality without denting economic growth” The Economist October 19, 2017 Issue https://www.economist.com/news/finance-and-economics/21730423-new-study-imf-finds-no-strong-correlation-between-lower-taxes-and-higher (accessed on 10/26/17).
Sheelah Kolhatkar “Welcoming Our New Robot Overlords. Once, robots assisted human workers. Now it’s the other way around” Annals of Technology, The New Yorker; October 23, 2017 Issue https://www.newyorker.com/magazine/2017/10/23/welcoming-our-new-robot-overlords (accessed on 10/26/17).