The New York Times recently published an article by Patricia Cohen, titled “What Could Raising Taxes on the 1% Do? Surprising Amounts.” The basic claim of the article is that the federal government could raise a significant amount of revenue by increasing taxes on the richest Americans.
The article presents several statistics about how much money the federal government could raise if it increased the “effective taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. rate” of high-income households: the total share of their income they pay to the federal government. For instance, the article claims that raising the effective tax rate of the top 1% of Americans from 33.4 percent to 45 percent could bring in “a whopping $276 billion.”
Leaving aside, for the moment, the question of whether $276 billion is actually a “whopping” revenue increase, how exactly would Congress go about raising the effective tax rate of the 1% from 33.4 percent to 45 percent? The article is not specific about this point. In fact, the article acknowledges that it is “sidestepping… the messy question of just which taxes would be increased.”
This is irresponsible policy analysis on the part of the New York Times. When it comes to federal tax policy the devil is always in the details, but here, the New York Times ignores the details altogether. When one examines exactly which taxes would have to be increased to raise the effective tax rate of the 1% from 33.4 percent to 45 percent, the endeavor begins to appear much more difficult than the New York Times portrays.
Let’s say, for instance, that Congress decided to raise the effective tax rate of the 1% by increasing the top rate on ordinary income. Currently, the top tax bracket on ordinary income is 39.6%. How high would Congress have to raise this rate, in order to raise the effective tax rate of the 1% to 45 percent?
According to our estimates, Congress would have to raise the top rate on ordinary income to 74 percent, in order to raise the effective rate of the 1% from 33.4 percent to 45 percent. This would be a rate hike of over 34 percentage points, or an 87 percent increase in the top rate.
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Tax brackets on ordinary income required to raise the effective tax rate of the top 1% of households to 45 percent |
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|
Rate |
Single Filers |
Married Joint Filers |
Head of Household |
|
10% |
$0 to $9,225 |
$0 to $18,450 |
$0 to $13,150 |
|
15% |
$9,225 to $37,450 |
$18,450 to $74,900 |
$13,150 to $50,200 |
|
25% |
$37,450 to $90,750 |
$74,900 to $151,200 |
$50,200 to $129,600 |
|
28% |
$90,750 to $189,300 |
$151,200 to $230,450 |
$129,600 to $209,850 |
|
33% |
$189,300 to $411,500 |
$230,450 to $411,500 |
$209,850 to $411,500 |
|
35% |
$411,500 to $413,200 |
$411,500 to $464,850 |
$411,500 to $439,000 |
|
74% |
$413,200+ |
$464,850+ |
$439,000+ |
What if Congress decided to increase, not only the top rate on ordinary income, but also the top rate on capital gains and dividends? Currently, long-term capital gains and qualified dividends are taxed at a top rate of 23.8 percent. What if Congress were to raise the top rate on all income?
According to our estimates, Congress would have to raise the top rate on ordinary income, capital gains, and dividends to 56 percent, in order to increase the effective rate of the 1% to 45 percent. This would be a rate hike of 16 points on ordinary income and over 32 points on capital gains and dividends (a 135 percent increase in the top rate).
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Tax brackets on ordinary income and capital gains required to raise the effective tax rate of the top 1% of households to 45 percent |
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|
Rate on Ordinary Income |
Rate on Capital Gains and Dividends |
Single Filers |
Married Joint Filers |
Head of Household |
|
10% |
0% |
$0 to $9,225 |
$0 to $18,450 |
$0 to $13,150 |
|
15% |
0% |
$9,225 to $37,450 |
$18,450 to $74,900 |
$13,150 to $50,200 |
|
25% |
15% |
$37,450 to $90,750 |
$74,900 to $151,200 |
$50,200 to $129,600 |
|
28% |
15% |
$90,750 to $189,300 |
$151,200 to $230,450 |
$129,600 to $209,850 |
|
33% |
15% |
$189,300 to $411,500 |
$230,450 to $411,500 |
$209,850 to $411,500 |
|
35% |
15% |
$411,500 to $413,200 |
$411,500 to $464,850 |
$411,500 to $439,000 |
|
56% |
56% |
$413,200+ |
$464,850+ |
$439,000+ |
So, it turns out that increasing the effective tax rate of the 1% by less than 12 points would likely require Congress to hike tax rates by over 30 points. Why is this the case? In part, it’s because the first $413,200 earned by a high-income individual are subject to lower rates, as part of the U.S. graduated income tax system. To raise these rates would mean raising the tax burden on low-income and middle-class American families. In addition, not all income earned by households is subject to federal taxes, due to provisions such as the exclusion of employer-sponsored health insurance and several itemized deductions.
At any rate, raising the effective tax rate on the 1% is a much more difficult policy proposition than the New York Times makes it out to be. It would require marginal tax rates higher than 50 percent, and potentially as high as 74 percent.
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Options to raise the effective tax rate of the top 1% of households to 45 percent |
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|
Option |
New effective tax rate on the top 1% of households |
10-year static revenue |
Economic consequences |
10-year dynamic revenue |
|
Raise the top rate on ordinary income to 74% |
45% |
$3.49 trillion |
3.5% decrease in long-run GDP |
$2.37 trillion |
|
Raise the top rate on ordinary income, capital gains, and dividends to 56% |
45% |
$3.49 trillion |
4.9% decrease in long-run GDP |
$1.96 trillion |
The high rates that would need to be in place to tax the 1% at a 45 percent effective rate would almost certainly have negative economic consequences. According to our Taxes and Growth model, raising the top rate on ordinary income to 74 percent would shrink the size of the U.S. economy by 3.5 percent in the long run, by discouraging labor and pass-through business. While this tax increase would raise $3.49 trillion over 10 years under conventional scoring, after taking its economic effects into account, it would only raise $2.37 trillion. This is a significantly smaller figure than that cited by the New York Times.
Furthermore, raising the top rate on ordinary income, capital gains, and dividends to 56 percent would lead to an even larger decline in GDP, of 4.9 percent. This is because taxes on investment income are especially harmful to long-term economic growth. After taking economic effects into account, this proposal would only raise $1.96 trillion over 10 years.
In addition, none of these figures take into account the effects of increased tax evasion and profit shiftingProfit shifting is when multinational companies reduce their tax burden by moving the location of their profits from high-tax countries to low-tax jurisdictions and tax havens. by wealthy Americans that would surely occur in response to such high rates. After all, when taxes rise, taxpayers have more incentives to avoid them. And it is well-documented that, when rates on capital gains rise, shareholders simply defer their realizations, making it difficult to raise much revenue from tax increases on capital gains income.
All in all, the New York Times claims that the federal government could raise large amounts of revenue by taxing the rich just a little bit more. In fact, taxes on the rich would have to go up enormously in order to bring in the sorts of revenue figures cited by the article. The negative economic effects of these tax increases would then reduce these revenues considerably.
It is entirely possible to increase federal revenue significantly through tax increases on a broader portion of the population. However, it is simply very difficult to considerably increase federal revenues just by raising taxes on the top 1% of earners. This is a lesson that even politicians have internalized, and the New York Times should too.
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