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March 08, 2009

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Everyone pays less tax in the US as compared to the EU average. The significant difference is that a large number of folks in the US pay no taxes, and the US relies on the rich for more tax revenue than the EU average. I don't think that it's sustainable.

Ok, as too many others have pointed out and you continue to ignore, nobody in the US pays no taxes, but let's move on...

You look at that data and see a society that increasingly relies on the wealthy minority as its tax base. Do you give any thought to why that is?

I look at that data and see a society that is in the process of destroying its middle class tax base.

I agree with you that it is unsustainable.

Only a few have pointed out that this is why the wealthy are increasingly the only ones paying federal taxes: fewer of us have taxable income!

You want to make the tax base more equal across the board, raise incomes for the bottom 80% proportional to the raise in income for the top 20%. That'll flatten your tax base in a hurry.

It's the inequality that's the problem here, not the progressivity of the tax system relative to the EU or to US history.

243 -- Do you mean I should have noticed it (I did), or I should have mentioned it here?

Either way, what difference does it make? I'm not being snarky, I just mean: do you think average household size differs between the quintiles?

As far as (what I consider to be) the inequities go, it's all the worse if the incomes showing up at the low end are what multiple people have to live on, instead of just one person. On the other end of the spectrum, I suspect that a household as large as you could find could just about get by on $24 million.

JanieM, I thought you should have mentioned it, and yes I think it likely that household size with the definition given "(A household consists of the people who share a housing unit, regardless of their relationships.)" might well vary as to income. It seems likely that lower income people would have room-mates or adult children living at home thus increasing the size of their household. That said I'm not criticizing your broader points, and I truly appreciate the link to the spreadsheet.

Thanks 243.

Nate Silver has interesting graphs of where the top tax bracket has started over time.

The real face of actual poor people. Oh, it's a great life living off the wealthy! Who wouldn't want to live such a lazy and free existence?

KCinDC -- thanks for the Nate Silver link. That is great stuff.

Nate Silver has interesting graphs of where the top tax bracket has started over time

That'd be even more interesting if it were adjusted for inflation. That $75 million starting point for the upper bracket in 1941 or so is equivalent to about $1B, now.

It's also useful to note the number of brackets. In 1940, there were 30 income brackets. This was eventually pared down to 19 by the time Reagan was in office, and in 1987 it was reduced to five. In Bush the elder's time it was brought down to three, the Clinton administration saw it brought back up to five, and then Bush the younger's administration had it go up to six.

Janie M: If you feel like it....check the #'s again.

:)

I think you've got it. The problem is, as I put out there before, that the way to make the SS/Medicare treatment of self-employed income equivalent to employment income is to divide that income by 1.0765 (rather than multiplying it by .9235)and pay 15.3% of that in SS/Medicare. This would make self-employment income exactly equivalent to employee income in terms of SS/Medicare taxes considering the 7.65% employer contribution to SS/Medicare.

That $75 million starting point for the upper bracket in 1941 or so is equivalent to about $1B, now.

Oops. That should have been $5M in 1940, which is about $73M in current dollars. The next bracket down from the upper bracket (which sees a rate of 79%) starts at $2M (~$30M in current dollars) and is taxed at 78%. Not much real difference between the upper bracket and the next one down, then. You have to go about 18 brackets down from the top one, in the 1940 scheme, to see the tax rate our upper bracket is currently paying.

That'd be even more interesting if it were adjusted for inflation.

Perhaps you missed the note under each graph that says, 'inflation adjusted dollars.'

I proposed this on another thread, but I would like to see tax brackets eliminated in favor of a formula based on the inverse tangent. It would look like:

%income tax = K1*invtan[K2*(taxable income + K3)] + K4

If K1 and K2 were each equal to 1 and K3 and K4 were each equal to 0, the graph would be asymptotic at %income tax = -1 and 1 with a value of 0 at taxable income equal 0.

K1 streches the graph vertically at values greater than 1. The value of this constant can be used to adjust the spread of tax rates from the bottom to the top.

K2 stretches the graph horizontally for values less than 1 and compresses it horizontally for values greater than 1. The value of this constant can be used to adjust how quickly the graph rises over income levels.

K3 slides the graph back and forth horizontally. For a given K2, this number will determine where your inlection point resides with respect to taxable income and, given all the other constants, where, say, your zero tax rate, if there is one, would lie relative to taxable income.

K4 slides the graph up and down. This number will determine where your inflection point resides relative to tax rate.

This formula allows for negative income tax, if desired, and will only apply for values of taxable income greater than zero. I'm not HTML proficient enough to provide a graph of the inverse tangent, but a google search will yield one readily. When you see the shape of the curve, you will, I hope, understand why I felt this function was appealing for determining income tax rates.

hairshirthedonist -- That's interesting. I missed it in a previous thread. (Some weeks, especially when traveling, I go for whole hours at a time without looking at ObWi.... ;)

There was a discussion in November about posting pictures in comments.

Here's some html for doing it:

< img src="angry.gif" alt="Angry face" />

If you use it, get rid of the space between the first bracket and "img".

"Angry face" is a caption (I think).

In place of "angry.gif", put the location on the web of the image you want to show in a comment. It took me a while to figure out that this isn't the URL of the website where the picture is. You can find the right address to put there by right-clicking on an image, selecting Properties, and copying the address from the properties page into your html.

To post a picture of your own, you have to put it someplace where it can be picked up. I posted one that I had stored in a Picasa album.

Meanwhile, http://mathworld.wolfram.com/InverseTangent.html>here's a picture. I don't want to pull in the image because I'm not sure what the copyright rules are....

Perhaps you missed the note under each graph that says, 'inflation adjusted dollars.'

Perhaps I did. Now I know where that $75M came from.

O, the embarrassment. I die.

It's also useful to note the number of brackets. In 1940, there were 30 income brackets. This was eventually pared down to 19 by the time Reagan was in office, and in 1987 it was reduced to five.

Quite right.

Essentially, what Reagan did in the 80's was just lop the top brackets off of the tax schedule. Then, raise the cutoffs for the remaining rates, lather rinse and repeat.

If you were making $50K for the period 1980-1987, you saw your top marginal rate drop from 49% to 28%. Pretty nice.

If you were making $1M you saw them drop from 70% to 39.6%. Even nicer.

Top cutoff in 1980 was $215,400. Top in 1987 was $90,000.

The upper brackets just went away. Poor folks got squat, middle to upper middle class folks got a nice break, rich folks got an even nicer one.

1988 and 1989 were kind of perverse because the top rate was, somewhat astoundingly, actually LOWER than the next-to-top. Go figure.

Historical US federal tax rates.

Meanwhile, here's a picture. I don't want to pull in the image because I'm not sure what the copyright rules are....

Thanks, Janie. I goofed on the range of y asymptote values for a straight inverse tangent graph: -pie/2 and +pie/2, not -1 and 1. No biggie, though. It just changes how you use the K's a bit. Same concept.

1988 and 1989 were kind of perverse because the top rate was, somewhat astoundingly, actually LOWER than the next-to-top. Go figure.

And 1990, too. I never noticed that before. Certainly I wasn't in a position to enjoy it.

The upper brackets just went away. Poor folks got squat, middle to upper middle class folks got a nice break, rich folks got an even nicer one.

I wouldn't advocate adding another dozen and a half (or more) tax brackets, though.

-pie/2

If I owe you a pie, and give you half a pie, this is my outstanding balance?

I wouldn't advocate adding another dozen and a half (or more) tax brackets, though.

Nor I. I'd actually like to see the tax code become quite a bit simpler than it is now, not more complex.

My only point here, albeit made to the point of tedium, is that folks making more than a quarter million bucks a year don't have all that much to complain about, all things considered.

With or without Obama's tax changes, our federal tax regime is gonna be, at worst, mildly regressive.

[Did I post this one already? I don't remember.]

pie chart

-pie/2

If I owe you a pie, and give you half a pie, this is my outstanding balance?

Yes, but I would accept $1.57.

[eek. Forgot the closing tag. My mind is going. I can feel it.]

Nor I. I'd actually like to see the tax code become quite a bit simpler than it is now, not more complex.

I don't get this at all. The complexity of the tax code comes from calculating your adjust gross income which involves mashing deductions and credits and tracking down all those stupid pieces of paper. Once you have an AGI though, plugging it into a computer (or even looking it up in a table) doesn't get any harder no matter how many tax brackets there are. Right?

Once you have an AGI though, plugging it into a computer (or even looking it up in a table) doesn't get any harder no matter how many tax brackets there are. Right?

Yep

pie chart

I like this one better.

Slarti: I wouldn't advocate adding another dozen and a half (or more) tax brackets, though.

Russell: Nor I. I'd actually like to see the tax code become quite a bit simpler than it is now, not more complex.

Beating my own dead horse, I say tax complexity has nothing to with tax rates.

Hairshirt's formula yields an infinite number of brackets, or a single bracket, depending on your point of view. But it is not complicated -- once you calculate the input variable called "income". The hair-pulling and brow-furrowing comes in when you try to do the additions and subtractions to figure your AGI. Plugging that number into an inverse trig function is a trivial last step.

Reducing (or raising!) tax rates on incomes that are 10, 100, even 1000 times the median income is completely orthogonal to the simplification question.

--TP

The complexity of the tax code comes from calculating your adjust gross income

Beating my own dead horse, I say tax complexity has nothing to with tax rates.

Yeah, you guys are both right. My bad.

I guess I wish the tax code were simpler, *and* I don't necessarily see lots of value in adding lots of additional rates to the table.

Beating my own dead horse, I say tax complexity has nothing to with tax rates

I'm not saying otherwise. I'm just noting that the upper bracket rate, although not completely devoid of information, doesn't really tell the entire story.

Which, admittedly, is dead obvious.

Another pi chart for the easily amused.

I guess I wish the tax code were simpler, *and* I don't necessarily see lots of value in adding lots of additional rates to the table.

For me, having a small number of brackets seems unfair. It causes big step changes in the tax rate of a marginal dollar. Something like hairshirthedonist's arctan curve makes a lot more sense: there are no discontinuities and looking at the curve it is easier for me to visualize the effect this has on effective taxation as a function of gross income just by looking at the area under the curve. Now, a table filled with brackets can be thought of as an approximation of a smooth curve, but if we're only going to have a handful of brackets, then it is going to be a really crappy approximation.

If nothing else, a smooth curve taxation scheme might have prevented all the galts' whinging about how they were going to cut their income to keep below $250K. Then again, smooth curves can't cure stupid, so probably not.

Granted, this is all very subjective and it is not a particularly big deal. It just seems fairer to say that each dollar gets taxed at almost exactly the same rate as the dollar that come before it.

Something like hairshirthedonist's arctan curve makes a lot more sense: there are no discontinuities and looking at the curve it is easier for me to visualize the effect this has on effective taxation as a function of gross income just by looking at the area under the curve

Actually a single formula that covers all income levels seems ideal to me, mostly because of this:

It just seems fairer to say that each dollar gets taxed at almost exactly the same rate as the dollar that come before it.

This thread's probably dead, after a long, long life. But I have to say that my pi/pie error is very bothersome on further reflection, not that I mind the ribbing in the form of funny pie charts, all of which amused me. It's that being and engineer, perhaps more so being an electrical engineer, I ate far more pi in school than I did pie. Not just that, but I was in an effing fraternity, you know - a Greek Letter Organization. WTF?? How do these brain farts happen? PIE!!! PIE!!! I mean, really ... fnck.

hairshirthedonist -- since the thread is almost done anyhow, I'll follow your lead OT for a moment and observe that I make enormously more typing errors in emails and blog comments than I ever made at a typewriter, and weirdly enough, more than I make if I'm typing inside a Word document. Or at least, when I'm typing in Word, I'm almost always aware of the errors even as I'm making them, and I correct them on the fly.

I don't have an explanation that seems complete. One element seems to be multi-tasking; there are always several things open on my screen, and that's only a fraction of what's floating around in a brain that gets more cluttered with every passing year (and the years are mounting). Another may be the speed of the keyboard. My fingers still can't go as fast as my brain but these keyboards have closed the gap a lot compared to the old days.

I find myself making exactly that kind of pi/pie error a lot. It's as if my brain still knows how to spell but sometimes my fingers don't....

Also, reading and commenting on ObWi is kind of a guilty pleasure. I almost never do it without feeling like I should be working (or something) instead, so I'm always hurrying. (I mostly work at home and have immense flexibility about my hours -- a mixed blessing.)

Meanwhile, back on topic, the inverse tangent function for taxes is a fascinating idea. I too like that evens out the differences from one marginal dollar to the next.

I have been tempted to extend this thread with some further indulgence in abstract thoughts about fairness and what "mine" means in the context of individual and community, but I'll save it for another time.

It's that being and engineer, perhaps more so being an electrical engineer, I ate far more pi in school than I did pie.

As an engineer, you should learn to sweat the important stuff first. It's taken me a number of years to even begin getting that right, as it wasn't anywhere near the top of my list of things to do.

Dweebs are allowed to make mistakes, from time to time. EE '83.

8p

Hilzoy is Dead Wrong

Reagan did not soak the rich. That is an absurd misreading of basic facts. Fundamentally tax rates were significantly higher prior to Reagan's term under asinine laws pushed by the Democratic Congress. Marginal tax rates were lowered dramatically during Reagan's term and we had a corresponding boom in prosperity as the albatross of high marginal taxation encouraged entrepreneurs like me to invest and create new businesses.

Our new Socialist in chief along with his dimwitted co-conspirators Pelosi and Reid are very much encouraging class warfare, redistribution away from those who create value like me to those who want to sit on their butts and demand handouts. No thank you I refuse to kill myself working so a thankless group of fools can claim the right to all kinds of welfare the Democrats are eager to hand out as "rights."

Well instead of fighting this battle with dimwitted Democrats and misguided Republicans I'm just going to opt out - by abandoning US citizenship and buying my way into a more reasonable tax and moral code in a country like Singapore. In our modern world with the mobility of capital and labor you'll find fewer and fewer Americans tolerant of this kind of Socialist redistribution. Instead, the most productive will seek true bastions of free market capitalism, which are sadly further and further away from the country I once used to love (under Reagan's vision for America). Enjoy your Socialist paradise full of self-loathing parasites suckling off a bloated yet decrepit government tit... I will not be around to pay off your absurd deficits, nor will I allow my own children to fall victim to the wealth destruction your misguided policies will impose on generations to come...

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