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Friday, September 2, 2011

Define Rich, Part III. What the tax tables of yore say.

Posted by Divorced one like Bush | 9/01/2011 02:03:00 PM

By Daniel Becker

Randolph Duke: Money isn't everything, Mortimer.
Mortimer Duke: Oh, grow up.
Randolph Duke: Mother always said you were greedy.
Mortimer Duke: She meant it as a compliment.

A while ago (an understatement) I posted on the question of what is rich. The first dealt with what issues to consider in defining rich. The second was looking at the issue of getting rich if that is even what one wants to do. The “rat race”. I don't believe most people really want to be rich. I believe most people when thinking about being rich are thinking about what it would take to remove the fears of events that would make one's life either very difficult in a world that requires money to remove risk or drastically different from what one's life was. I'm thinking things like losing a job, debilitating injury or illness possibly resulting in physical disability or Louis Winthorpe III.

This all ties into “The American Dream”. The “Dream” is not just an ideology of governance and social philosophy. It is also a life style and thus requires a specific level of income. I have posted on this issue also and noted just how high in income we have driven this “Dream” such that two people with bachelor’s degrees just starting life together may not be able to have it.

Now that we have entered a period where taxes are on everyone's minds such that there is serious consensus to raising taxes, maybe we need to see what we had in the past to know what we need now. I am sure most readers are aware of Mike's work defining what rates appear to effect economic growth the best. If I recall correctly the number for the top 1% was around 65%. I have also suggested that there is a range as to how large a share of the income the top 1% should have. That number for the top 1% is not to be above 15% and not to much below 10%.

I should also mention my postings on taxation’s purpose. Specifically I looked at taxing from the perspective of the legal profession as oppose to the economic profession. The conclusion was that there was one main reason for taxing. It is to fulfill the directive of our constitution: equality of power. It is to assure the concept of one voice one vote. If there was ever a time in our history to raise taxes in order to assure this directive it is now in the age of the Citizens United ruling. President FDR referred to the issue and those with the one voice multiple votes do to their monied power as “economic royalty”. I like that phrase and I wonder why it is not used as are retort to those who use “class warfare” as a guilt trip.

Let's get started.

I have constructed 4 sets of data using the tax rates of 1936/37, 1945/46, 1965/67 and 2010. I chose 1936 because it is a tax rate increase after the economy had turned north based on Mikes posting. I chose 1945/46 because it is another adjustment that happens right after after WWII. I chose 1965/67 because it is the decrease often spoken of fondly. Of course 2010 is because that is where we are at.

This posting would be hugely long if I post on all 4 periods at once, so I have broken it up. Let me first and I think most importantly note that we people today have no idea just how much we were willing to tax ourselves to have the society that we now refer to as “the good old days”. Not only did we have the tax tables of 1936, that table eventually had a 10% surcharge added to pay for the war. Yes, another reason to consider the generation that fought the 1st and 2nd world wars the greatest generation. There was a 7% surcharge for the Vietnam war, though that number became less as time passed. Still, we knew that if we wanted to do exceptional things, we had to tax ourselves exceptionally. Also, the early taxation made no distinction for single or married, never mind filing joint or separate. Everyone paid the same rate. Most interestingly, with the current table, the people who comparatively get screwed are those who are married and file separately. All the rates kick in at a lower income than even those who are single. The other thing we don't seem to understand is that all the tax rhetoric we have been hearing since Reagan we've heard before virtually to the word.

Andrew Mellon, Treasury Secretary 1921 to 1932 :

Generally speaking, Mellon argued that tax burdens were too high. Steep rates, he insisted, served only to stifle incentive and foster tax evasion. “Any man of energy and initiative in this country can get what he wants out of life,” he wrote. “But when initiative is crippled by legislation or by a tax system which denies him the right to receive a reasonable share of his earnings, then he will no longer exert himself and the country will be deprived of the energy on which its continued greatness depends.”

Worse yet, Mellon argued, high rates didn’t even raise money. By encouraging both legal tax avoidance and illegal tax evasion, they eroded the tax base and reduced overall revenue. Lower rates, he said, would actually raise money by spurring economic growth and reducing the incentive for tax avoidance. “It seems difficult for some to understand,” he complained, “that high rates of taxation do not necessarily mean large revenue to the government, and that more revenue may actually be obtained by lower rates.” In particular, Mellon insisted that high rates distorted investment decisions, boosting the popularity of tax-free state and local government bonds. Indeed, Mellon made these tax-free bonds a regular target of his reform attempts, but Congress resisted his plans to eliminate them.

Atlas Shrugged wasn't even written then!  What we don't hear much of are the original concerns and reasoning for progressive taxation. Teddy Roosevelt:

1906...We should discriminate in the sharpest way between fortunes well-won and fortunes ill-won; between those gained as an incident to performing great services to the community as a whole, and those gained in evil fashion by keeping just within the limits of mere law-honesty.

1907 regarding an income tax:...while in addition it is a difficult tax to administer in its practical working, and great care would have to be exercised to see that it was not evaded by the very men whom it was most desirable to have taxed, for if so evaded it would, of course, be worse than no tax at all; as the least desirable of all taxes is the tax which bears heavily upon the honest as compared with the dishonest man.

No advantage comes either to the country as a whole or to the individuals inheriting the money by permitting the transmission in their entirety of the enormous fortunes which would be affected by such a tax; and as an incident to its function of revenue raising, such a tax would help to preserve a measurable equality of opportunity for the people of the generations growing to manhood. We have not the slightest sympathy with that socialistic idea which would try to put laziness, thriftlessness and inefficiency on a par with industry, thrift and efficiency; which would strive to break up not merely private property, but what is far more important, the home, the chief prop upon which our whole civilization stands. Such a theory, if ever adopted, would mean the ruin of the entire country--a ruin  which would bear heaviest upon the weakest, upon those least able to shift for themselves.

At this moment, I want to mention corporate taxes. There are lessons to be learned from it's history. I think it is a factor in understand more completely the issue Mike is focusing on: taxation and GDP growth. Wrap your minds around the fact that from 1936 to 1943 there were 6 years that corporate tax collections were greater than personal income tax collections. 1943 was the best year for this as personal income tax collections were 68.1% of the corporate tax collections. Just one year later it flips to corporate tax collections being 75.3% of personal income tax collections. In 1944 $34,543 million in total for the two taxes was collected vs 1943 $16,062 million in total.  In fact, personal income taxes remain in the mid to high 40 percent of total revenue collections from 1944 to present. The corporate share of total revenue peaks in 1943 at 39.8% and declines to hover around the 10% level with a few ventures into the single digits. Most notably 1983 the corporate share was 6.2% and 2009 it was 6.6%.
First up is our current tax table. I used the “married filling jointly” as that would be consistent with the other tables. One big rule of this series of postings: DO NOT concern yourself or me about the deductions that exist. They do not matter for this presentation and for all intent and purposes we can consider the income to have already gone through the deduction calculator and is now ready to have the tax table applied. This is because, these tables only apply to adjusted gross income.

You will notice that the table is calculated out to $,1,000,000 of income. I did this in order to keep all the tables going to the same income level. The 1936 table actually has rates for incomes up to $8 million. That is $8 million in 1936. (Using my favorite money converter that would be $301,000,000 in unskilled labor or $573,000,000 in GDP/capita.) Going to $1,000,000 in income also allows one to see what happens at the top when the rate no longer rises.

A very important concept to understand is that not every dollar is taxed at the single percentage rate as you go up the income ladder. Thus, there are two columns in my charts. The “Marginal Tax” is the additional money paid at the top of the bracket for the corresponding rate. The “Total tax” is the actual money paid up to that level. It is the “effective rate”. In simple terms, if you are at the 35% level, you 
are not paying 35% on all that you earn. Instead you are paying the amount based on your income being divided up into the number of brackets that exist. For 2010, there are 6 brackets, thus you have six different incomes so to speak.

This is what it looks like as a graph.

When the rate maxed out, I divided the range to $1 million into even parts so that the tax paid for each additional income level is the same. For the 1945/46 and 1965/67 data sets I converted the net income to 2010 dollars. I used the “unskilled labor” and GDP/cap as those are the 2 factors suggested as being the best for knowing what income equivalents are over time. The 1936 data set is converted to 1967 dollar because the numbers just get crazy. For example, a net income of $3840 is $145,000 in unskilled labor and $275,000 in GDP/cap. Though it is only $60,400 via the CPI. Which doesn't say much for today's median family income. It also gives us a clue as to just how much money is considered “rich”.

Next posting, I will start presenting the historical data sets. I'm still thinking about the best way to do it as what is important is the comparison among the data sets.  Maybe post just the data charts and later the graphs or maybe one data set and it's graphs at a time. 

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