Tuesday, April 19, 2011

Should we raise taxes on the richest people in America?

The IRS has released data on the 400 tax returns showing the highest incomes in America from 1992 to 2007. The average income for the 400 in 2007 was just under $345 million! Those 400 returns represented 1.59% of the total income in the 143 million returns filed. Most of their income came from capital gains. Their average tax rate was 16.62% in 2007, down from 26.38% in 1992. They payed less than $23 billion in taxes out of total income of nearly $147 billion (leaving these 400 families with only $124  billion dollars to live on that year).

Is this good for the economy? Essentially these folk are withdrawing money from investments, and we can assume that they are increasing consumption. If the marginal tax rate was higher, and especially the rate on capital gains, then presumably they would leave money in the companies in which they had invested to allow the capital to grow, rather than selling their investments and increasing consumption. Isn't investment better for growth of the economy and jobs than conspicuous consumption?

Republicans keep saying that tax breaks for the rich support economic growth because the rich lead the productive sectors of our economy. They emphasize the rich owners/managers of small and medium enterprises. First, nearly one quarter of the 400 returns showed no salary income at all. Moreover, I want the owners operating small and medium enterprises to keep their investment in their companies, rather than withdrawing them. I want the managers of these companies to have skin in the game rather than selling their shares. A tax code that encourages rich people to sell their shares and pay only low taxes on the income doesn't seem to me to be likely to encourage investment.

If the top 400 only averaged $50 million per year in income instead of $300 million, and the ranking were the same, do you think it would decrease their incentives?

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