"Tax rich people at 80%! That's totally, TOTALLY unfair! How can you penalize someone for being successful and creating jobs? When YOUR tax rate is only 18%! UNFAIR! They'll leave the country!"
blah, blah, blah... more of the same, my heart bleeds, yadayadyada
Shut. The. Fuck. Up.
Because, seriously, you don't know what you're talking about. You just don't.
Using numbers like "80%!" to scare people into thinking that someone with a $10 million annual income will pay the government $8 million and have to eke out a pitiful deprived existence on the remaining $2 million (probably further reduced by state and local taxes, too! Waaaaahhhh!!) is just one more smoke-blowing tactic to keep the debate in Unreality Land.
Let's bring it back to reality, shall we?
Federal Tax rates in the United States of America are currently somewhat progressive. Here's what that means: "Progressive" describes a distribution effect on income or expenditure, referring to the way the rate progresses from low to high, where the average tax rate is less than the marginal tax rate.<6><7> It can be applied to individual taxes or to a tax system as a whole; a year, multi-year, or lifetime. Progressive taxes attempt to reduce the tax incidence of people with a lower ability-to-pay, as they shift the incidence increasingly to those with a higher ability-to-pay. (Wikipedia: Progressive taxation)
Suppose we picked 80% as our top marginal tax rate. How would that affect our $10 million income?
It depends on how progressive we make our tax code: That is, how many deductions we apply (we apply LOTS, by the way...) and how many "steps" we establish in between the base tax rate and the top marginal rate.
Just to simplify things, lets say that we allow ONLY the following deductions, and they are all 100%, on gross income, pre-tax:
Mortgage income on a primary residence; capped at $50,000 Filer's self-deductions at $8,000 or $15,000 for 2 adults filing jointly Dependents at $10,000 per head Higher education tuition credits at 20% up to $15/year (round to $3,000 per kid) Retirement contributions up to $5,000 per adult in the household
We actually have thousands more, but let's keep it simple.
Now let's say we establish the following tax rates for households with 2 adults filing jointly (maximum amounts rounded up):
0% on income up to $20,000 15% on income between $20,001 and $34,999 (maximum $2400) 18% on income between $35,000 and $49,999 (maximum $2700) 20% on income between $50,000 and $69,999 (maximum $4000) 25% on income between $70,000 and $99,999 (maximum $7500) 30% on income between $100,000 and $124,999 (maximum $7500) 35% on income between $125,000 and $199,999 (maximum $26250) 40% on income between $200,000 and $499,999 (maximum $120,000) 45% on income between $500,000 and $999,999 (maximum $225,000) 50% on income between $1,000,000 and $1,999,999 (maximum $500,000) 55% on income between $2,000,000 and $2,999,999 (maximum $550,000) 60% on income between $3,000,000 and $3,999,999 (maximum $600,000) 65% on income between $4,000,000 and $5,999,999 (maximum $1,300,000) 70% on income between $6,000,000 and $7,999,999 (maximum $1,400,000) 75% on income between $8,000,000 and $9,999,999 (maximum $1,500,000) 80% on income over $10,000,000
Let's compare the annual tax bill of two otherwise-identical households, Household A in the "25% bracket", and Household B in the "80% bracket".
Household A: Gross income from two adults with two and a half jobs between them: $75,000 Deductions: Joint filing plus dependent: $25,000; Mortgage interest of $5,000, one kid in community college for $1,000, and both adults contributing to retirement funds at $10,000. Total (pre-tax) deductions: $41,000
Taxable income: $34,000 (After deductions, surprise! They're no longer in the 25% marginal bracket-- all their income is taxed at 15%.)
Actual taxes due: $2,400
Household B: Gross income from two adults with two jobs between them: $10,000,000 Deductions: Joint filing plus dependent: $25,000; Mortgage interest of $50,000 (of course!); one kid at Ivy League school $3,000, both adults contributing to retirement funds at $10,000. Total (pre-tax) deductions: $88,000.
Taxable income: $9,012,000 (After deductions, surprise! They're no longer in the top marginal bracket-- this happens a lot more under our current thousands-of-deductions-and-low-top-marginal-rate system.)
Actual taxes due: $4,954,350 The poor bastards will have to try and struggle along on a mere five mil, give or take a few pennies.
My heart bleeds, really, it does.
Now, this illustration is vastly oversimplified, particularly in the area of deductions, as well as the actual calculations for which income falls in which brackets. Nonetheless, the basic truth is that in a progressive taxation system, top marginal rates do not actually represent the real tax rates that wealthy individuals pay. They are not meant to. They are (apparently) only meant to scare the willies out of unthinking fools who fantasize that someday they'll be rich, and don't want the ebil gummit "confiscating" their hard-earned lottery winnings.
There are plenty of other things we can do to ease the terrible, terrible burden of taxation for these poor, oppressed wealthy people. Some deductions can be pegged to certain tax rate brackets on the assumption that some kinds of luxury expenditures actually DO create jobs (and some do,) thereby encouraging those who can afford to spend money on luxuries to do so, here at home domestically, where the expenditure will enable others to earn money from it. That was the original rationale for extending the mortgage interest deduction to second residences, for example. Certain categories of business and charitable expenses can be assigned deductions that will disproportionately soothe the pain of taxation for the downtrodden plutocrats, as well.
Top marginal rate of 80%? Doesn't scare me. And if I ever manage to make it into a top marginal bracket, I'll take all my legitimate, ethical, legal deductions and pay my final tax bill proudly, knowing that I'm making it possible to educate kids, care for the needy, drive on good roads, maintain a communications infrastructure, and stand tall in the community of nations.
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