Should We Bring Back The 90% Top Tax Rate?

by: DaveJ

Tue Jul 21, 2009 at 13:30


How many stories have we heard in recent years of CEO's and other executives looting, stealing, polluting and wreaking general havoc?  The incentive to loot a company's pension funds is money.  The incentive to outsource our jobs is money.  The incentive to deny needed treatments to an insured patient is money.  The incentive to pollute our rivers and air is money.

Generally the incentive to lie, cheat and steal is money.  This is especially true in the corporate world where the reason for ... well, everything ... is money.    This is normal, and can be kept in check.  But the temptation that pushes many over the line is not just money, it is the possibility of the big, humungous jackpot.  And that is what we have today.  

It used to be that you could make, why, millions of dollars if you worked hard, built a company, invented something important, or had amazing talent.  But today mere millions is for chumps.  Today you can loot a fund, rig an energy market, forward-run stocks or threaten to bring down an economy and end up with a quick payoff of billions.

When excessive, massive paydays are possible, it opens the door to overwhelming greed and a resulting compromising of principles.

There is a way to prevent the destructive behavior we have been seeing from the top.  People won't have an incentive to cheat and steal if they can't get the huge jackpot from the proceeds.  Let's limit the possibility of collecting a vast and fast return.  The vast and fast return is the motivator, so take it out of the equation.

DaveJ :: Should We Bring Back The 90% Top Tax Rate?
The way to do this is with a very steep progressive income tax with a very high tax rate on income above a certain level. So suppose we set the top tax rate back to 90% for people making over, say $3 million.  $3 million a year is nothing to sneeze at, so there is still plenty of reason to do what you do to make a lot of money.  And if you pass $3 million you still take home $100K for every million more you make, which is also nothing to sneeze at.  But there is no longer a reason to engage in quick-buck schemes.  Instead there is plenty of reason to build a solid business over time, and hopefully eventually build a fortune of hundreds of millions.  As I said, nothing to sneeze at.

People could still become vastly wealthy, except it would take ten or twenty years to become vastly wealthy.  You would have to actually do a good job, consistently, instead of looking for fast-buck schemes to cash out in a year.  And for those who still need to make a billion or two a year, We, the People are the beneficiaries while they still take home hundreds of millions.  It's a win-win.

Again, if we limit the income that can be realized from such behavior we reduce the incentive to engage in it.  We as a society used to understand this.  We used to tax high incomes at very high rates.  We used to see that this provided all of us with a benefit.

An additional bonus from this idea: by limiting the amount that can be made in a single year we provide an incentive to stay involved and work hard and over a longer period of time build up a respectable fortune.  Just not a vast and fast fortune.

Another benefit from increasing the top tax rates is that we need the money.  Because of the huge tax cuts that were given to the wealthiest we neglected maintaining our infrastructure, we have run massive deficits, we cut services to citizens and now we are reaching a limit of our ability to borrow.  So it is time to ask the beneficiaries of the policies that got us into this jam to pitch in again and help us get back out of it again.

Until the late 1970s the United States had a very, very high top income tax rate.   From the time of FDR until the 1960s the top rate was 90% plus on very high incomes.  From the 60s until the Reagan years it was in the 70%s.  Under Reagan it ramped down to 28%.  (See the numbers here.)

The periods of highest taxation of the highest incomes coincides with periods of the most investment in the country's infrastructure, the period of building the middle class and American leadership in areas of education, science, technology and manufacturing.  Perhaps this is because we, as a country, had the financial resources available to invest for the public good rather than tied up by a few at the top as we see today.  Perhaps this is because in a consumer economy more regular people with more money keeps things going, and moving the taxes up to the prime beneficiaries increases the amount of money that regular people have to spend.

There were multiple historical justifications for these tax rates.  Among these, we understood that the purpose of our economic system was for OUR benefit.  So while we encourage people to produce we also understand that once the production is stimulated we all want to benefit from it.  So after a certain point a tax kicks in and increases and we all share in the returns from the enterprise.  

Another justification was that we needed the money to pay for WWII, and to invest in the things that pulled us out of the depression.  Yes, we got out of the depression by raising taxes at the top.

But beginning in the 70s the malefactors of great wealth started a well-funded drumbeat of marketing messages to convince people that government and regulation are bad, the richest should not be taxed, the rich "create jobs," cutting taxes increases government revenue, etc.

This huge propaganda campaign succeeded and turned the public against taxes and government.  They convinced the people that the people should have no power.  (Marketing can convince people to smoke -- it can convince people of anything.)

Look at the changes in the nature of our economy since tax rates were lowered.  We have financialized the economy. We have been shipping manufacturing and jobs out of the country.  We have been eliminating pensions. Wages have stagnated.  We have massively increased debt.  And a very few at the top have been able to use financial power to consolidate to themselves much of the income and benefits of the economy that We, the People built.

Reasonable returns that build up over time are boring.  They require work.  So when you can make out like a bandit you act like a bandit.  Since the tax rates were lowered the nature of our economy has changed from building solid companies that treated their customers well and provided well-built products, to quick-buck schemes designed for fast cash out.

Corporate conservatives will argue that we just want to "punish success" by asking the wealthiest to pitch in.  Actually we want people to make lots of money.  In fact, we want more people to make more money.  That's the point of our economy - so that we all are prosperous.  And with ever higher tax rates, when those at the top make more money we all make more money.  So in fact with high top tax rates there is an additional societal incentive for the rest of us to encourage those at the top to make even more.

What we don't want is people gaming the system so they can reap vast personal returns for themselves at the expense of the rest of us. We want the system functioning smoothly.  A very high top tax rate helps fight this problem.  In the recent financial collapse it was vast and fast returns that provided the incentive for the gaming, for taking huge risks and not worrying enough about the downside.  

Some other points, off the top of my head:  (This is a blog post not a Ph.D. thesis.)

- High tax rates at the top encourage work.

- High top tax rates limit the concentration of wealth.

- High top tax rates distribute the benefits of our economy to all of us, paying a dividend for participating in a democracy.

We can also use high top tax rates to increase investment incentives.  A top rate of 90% provides a lot of room to set a favorable capital gains rate.  If you only tax, say, 60% of the income from capital gains this would provide a huge incentive for the very rich to invest.  This way a person in the 90% tax rate would only pay $54 in taxes and a person in a 20% tax rate would only pay $12 on capital gains.

We used to believe as a society in democracy and sharing the wealth.  We used to believe in not letting a few get wealthy enough that they can use the resulting power to skew the country's policies in their favor.  We used to believe that windfalls should be shared.  This idea helps return us to a functioning democracy with the resources to act for our mutual benefit.

This idea retains the profit incentive while reducing the greed/bad-behavior incentive by capping the potential gains.  These potential gains can be great enough that anyone can strive for them, without being high enough to drive massive greed.

So, what do you think?  Should we set the top tax rate back to 90% or higher?


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Yes. (4.00 / 4)
And while we're at it, tax ALL income at the same steeply progressive rates -- corporate income, capital gains, inheritance, etc.

Of course, these are all just moderate, incrementalist proposals, on the way to REAL tax reform: tax wealth, NOT work.

Jeez, I'm such a compromise-kinda guy...kinda like supporting single-payer, when my preference is socialized medicine.


Funny how people forget (4.00 / 3)
Even funnier is that a lot of people look back at the 50's as the high times for the US - and that just happens to be when our top marginal income tax rate was among it's highest and all the revenue was building INFRASTRUCTURE that made us as a nation much stronger.

Infrastructure is for peons (4.00 / 1)
What do I care of the roads are crumbling, bridges are falling, and commuter trains run into each other because there are no funds to fix them, if I can board a helicopter, or a private jet, to move between enclaves of wealth that are walled off and gated to keep the decay from spreading into my world?



"It sounds wrong...
     ...but its right."


[ Parent ]
50% (4.00 / 2)
Remember when the top rate was 90% almost no one payed that.  Loopholes were all over the place; some famously paid no tax at all.

Also, investments are taxed differently.  Many of those guys on Wall Street don't even make a taxable salary, the rules are so screwed up so they are taxed at the capital gains rate.

Personally, I'd like to see the top rate at 50%, starting at roughly 1 million with the alternate minimum rate set to 50% at roughly 10 million.  The capital gains tax should mimic this.  (Or at least money taken out and spent should; I'm far from an export on tax laws, so the details could be a bit off.)  50% just fundamentally seems fair.

Also, we should remove the cut-off from payroll taxes, making that a flat rate for all instead of the regressive scheme it is today.

But I don't like the 90% idea.  That brush is too wide and the goal too obviously punishment (deserved or not).  Just put in a reasonable rate that is actually enforced without loopholes.


your aboslutely right (0.00 / 0)
during the 90% times, rich folks found very creative ways to hide the money.  in fact, when the tax was dropped to 28%, more tax revenue was brought in per capita than during the 90% tax rate.  people can be very creative with their money.  do you actually believe that Matt Damon, Danny Glover, A. Rod, Oprah, etc...are going to give up 90% of their income...best of luck on that one.

[ Parent ]
90% tax was quite real. (0.00 / 0)
EG: Anyone remember Joe Louis' chronic IRS problems?

[ Parent ]
i support high income high tax brackets but part of your argument doesn't quite work (0.00 / 0)
People may not end up looking for a large quick payoff and instead look for a steady stream of smaller income over longer time, but the argument you would face from republicans is that they would instead do neither.

 


So what? (0.00 / 0)
So what is the problem if they do neither?  I don't get your point.

--

Seeing The Forest -- Who is our economy FOR, anyway? Twitter: dcjohnson


[ Parent ]
among the results might be (0.00 / 0)
evasion of taxes (= lost revenue)
disincentive to invest (= misallocation of capital)
mobilisation against taxation by people with resources (= undermining of other aims)
and probably others i can't think of off the top of my head.

i personally don't buy the second and the first is not news, and the third is inevitable.  so, like i said, i support high income taxes and preferably a wealth tax to boot (that would be better actually imo) - but my point was just to pose a counterargument that will likely be raised in response to the original post so we can all hone our arguments for what will inevitably be a series of intense political fights.  they're still relying on tax cuts / credits, which means arguments for any tax hikes can be difficult - but then it can also get blue dogs on your side by invoking fiscal health arguments (the other side of point 1).


[ Parent ]
Response (4.00 / 1)
Evasion is against the law.  Just enforce the law.

Disincentive to invest, I addressed in the post.  Tax only 60% of cap gains income.  That is a huge incentive to invest.

Mobilization against taxes is what we have now.  It is destroying the country.

Wealth tax -- great and worth another post.  We can get some of the looted money back that way.



--

Seeing The Forest -- Who is our economy FOR, anyway? Twitter: dcjohnson


[ Parent ]
Wealth Tax - Yes! (0.00 / 0)
A wealth tax is the best way to recover some of the money the rich have acquired during the past 30 years of low taxes and also the money acquired through land grabs, slavery, robber baron monopolies, and other unsavory means over the last few centuries.

But I also like your arguments for high income tax rates -- especially that they would force people to earn long-term, consistent income instead of gaming the system for a quick payoff (including Ponzi schemes). Can we have both, please?


[ Parent ]
A real 40% from every rich citizen and company would be better. (4.00 / 1)
After all, the problem isn't really that the top tax rate isn't high enough, but that almost nobody pays it. Too many loopholes! Remember Warren Buffet's statement that he pays a lower percentage of his income for taxes than his house servants? Nothing has changed with this so far. And 90% wouldn't change that, either, as long as there are so many ways to escape that. And your additional tax incentives for investment would only add additional escape routes. This is totally useless, the rich will invest anyway. Remember, nobody stays rich by keeping all his money under the matress!

Good call (4.00 / 2)
I bet if we were to close some of the loopholes we could keep rates as is but still bring in substantially more revenue.

As for that Warren Buffet piece, I was googling for it before and had no luck finding it but really want to. So if you or anyone else finds it please post it.

If I recall, he said something in that piece about how his effective tax rate was like 15% or something.


[ Parent ]
I think his tax rate... (0.00 / 0)
...is less a matter of loopholes (although I'm sure that is part of it) than the ridiculous degree of preference we give to investment and other forms of unearned income.  

Compare the long term capital gains and dividend rates with the rates on incomes (even WITHOUT factoring in the regressive social security tax)...


[ Parent ]
I hope you stay on after Chris returns. (4.00 / 1)
Good stuff all around.

I call it ~Unstealing~ the money (4.00 / 1)
that would have gone to the workers and Ameirca's infrasturcture and retirement plans had we lived under a just and good regime.

The current rich are making the mistake of considering themselves "Indispensible Men" when, in reality, we can run the show even better without them.

My advice to them: never believe your own propaganda.


Back to the taxes of the 50's! (4.00 / 1)
There are some good slogan possibilities for this idea.

Before we raise the top income tax rate above the 39.6% Clinton era level... (0.00 / 0)
Before we raise the top income tax rate above the 39.6% Clinton era level, I want to see two things happen:
1) We get rid of the Social Security tax cap, such that the wealthy pay their fare share THERE and myths of insolvency are eliminated.  That's a nice 12% increase right there.  

2) We permanently fix the AMT, with an annual indexing to inflation, such that it doesn't increasingly hit the middle class.

Once you've done there, I'm all for looking at ways to tax the wealthy.  90% pureis probably going too far - with social security and state taxes, that's over 100% - but if we can find a way to make the total marginal rate 90% above some fairly high level that's fine by me.


Brackets (4.00 / 1)
"90% is probably going too far - with social security and state taxes, that's over 100%"

You might be misunderstanding brackets.  And you deduct state and SS...

However, if it is taxpayer bailout bonuses at AIG or one of those, how about 150%?

--

Seeing The Forest -- Who is our economy FOR, anyway? Twitter: dcjohnson


[ Parent ]
In fact (0.00 / 0)
In fact, if the income is from taxpayer-funded bonuses they also have to let me use their car whenever I want. You get to stay in their house.  Are we in agreement on this?

--

Seeing The Forest -- Who is our economy FOR, anyway? Twitter: dcjohnson


[ Parent ]
Uh, I understand brackets... (4.00 / 1)
...and I do mean marginal, rather than total rates.  

The regular part of Social Security/Medicare Taxes are not deductible but are just on top of regular income taxes. So we're at 97% right there...

For high enough incomes, 97% might not be unfair, but I think you're into the billions-per-year, not the low millions.

The employer-paid part are paid "off the pay stub" entirely so are on top of your "gross" to begin with, and I am not sure how the self-employment tax is treated for deductibility.

Further, while state taxes are deductible, if we're going to have a meaningful high rate on very high incomes, we are going to have to be very careful with what qualifies for deductions ... if anything ... and we'd do better with say, a 55% or 70% tax and no deductions/loopholes than a 90% one with a lot of them.

That was of course the intent of the AMT, although it's since then turned into something else.


[ Parent ]
Yes (0.00 / 0)
This is what I have been thinking the last two days after reading the recent Vanity Fair article about the head of the AIG unit that created most of the problems, one in the same issue about the Harvard Management Company and recent news about the resurgence in Wall Street bonuses.

The fact is that if you have $10 million+ in the bank without risk, you don't give a s**t what happens to the company you work for.


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