LeBron James, Welcome to the Tax Debate
One of today's core economics issues is the rates of tax on personal income. One side thinks moving tax rates on upper-income earners is a sensible way to start closing the U.S. government budget deficit, while the other says even today's rates, reduced twice by the Bush Administration, are intimidating the upper classes and holding back economic activity, in particular small businesses.
The levels of tax rates that are appropriate depend a lot on the incomes that people receive, right? That's what James Surowiecki discusses in "The Financial Page," his weekly column in The New Yorker, the edition of August 16 & 23.
He reminds us that the current federal rate structure, which sets a maximum marginal rate of 35 percent on incomes above $375,000, is all out of proportion:
...[S]omeone making two hundred thousand dollars a year and someone making two hundred million dollars a year pay at similar tax rates. LeBron James and LeBron James' dentist: same difference.On a related issue, a few weeks back the folks on CNBC made a convincing argument that LeBron, the self-styled king of sports, might well have chosen his new team based on tax considerations. New York City has onerous personal income taxes, which over the life of LBJ's current contract would have cost him something like $9 million on the margin.
Back to James Surowiecki. Citing the work of professors Thomas Piketty and Emmanuel Saez, he observes that income and wealth in the U.S. have become very concentrated at the top. (For those who like details on spreadsheets, dig this.)
Here's Piketty and Saez's summary of 2008 incomes, based on IRS estimates published in 2010:
Click on the table for a larger image
And Surowiecki's concise analysis (emphasis added):
Between 2002 and 2007, for instance, the bottom ninety-nine per cent of incomes grew 1.3 per cent a year in real terms-while the incomes of the top one per cent grew ten per cent a year. That one per cent accounted for two-thirds of all income growth in those years...
... But in that period the top one per cent has seen its share of national income double; in 2007, it captured twenty-three per cent of the nation's total income. Even within the top one per cent, income is getting more concentrated: the top 0.1 per cent of earners have seen their share of national income triple over the same period. All by themselves, they [the top 0.1 percent of the number of people] now earn as much as the bottom hundred and twenty million people...
The current debate over taxes takes none of this into account. At the moment, we have a system of tax brackets well suited to nineteenth-century New Zealand...We need to close our federal, state and local government deficits. It's a battle that will have to be fought on several fronts, including reducing government spending on all sorts of things. It will also call for tax increases, starting with the top earners.
I'm not suggesting that high incomes be confiscated at tax rates of 50 percent or more. That sort of system prevailed here for a long time, and in the U.K. as well, and was counterproductive as people took their money and ran to backwater tax havens. I'm talking about a few percentage points.
But taking into account the increasing share at the top, it's hard to explain why the plutocrat hedge fund managers and chief executives who earn many times more than anyone else should be let off with the same tax rates as successful doctors, lawyers and other small business people.