Saturday, January 26, 2008

Share of Taxes Paid By the Rich After 4 Tax Cuts

The graph above shows the share of personal income taxes paid by the top one-half percent of earners from 1960 to 2001. During this period, there were 4 major reductions in marginal tax rates.

1. The Kennedy-Johnson tax cut reduced the top rate from 91% in 1963 to 70% in 1965, and the share of personal income tax paid by the top one-half percent of earners rose from 16% to 18%.

2. The Reagan tax rates in the 1980s lowered the top rate from 70% to 50% and then to 30%, and the share of taxes paid by these earners rose from 14% to 22% of the total.

3. In 1997, the tax rate on income from capital gains was cut from 28% to 20%, and this rate reduction was accompanied by a substantial increase in revenues collected from capital gains taxes and personal income taxes collected from high-income taxpayers. In fact, capital gain taxes roughly doubled from $66 billion in 1996 (the last year before the tax cut) to $129 billion in 2000, when these earners paid 31% of all taxes collected.

Source: "Economics: Private and Public Choice, by Gwartney, Stroup, Sobel and Macpherson, 11th Edition"


At 1/26/2008 6:35 PM, Anonymous Anonymous said...

All the arguments about taxes being too high on the rich are great. Being a libertarian, I agree that government in general is too big. But please leave the supply side arguments at the door. In regards to number 3, don't you remember anything that might have happened in the late 90's that might have increased capital gains tax revenues? Oh that's right, it was a huge run in the stock market!

You see in economics, there is a condition called "ceteris paribus." Having a Ph.D and teaching economics and quantitative methods classes, I bet you already knew this. To show that tax cuts increase revenue, we must correct for everything else that might increase revenue other than the tax cuts. You see, if there is a huge run in the stock market, this will increase capital gains tax revenue. So tell us, is this argument in number 3 adjusted for the run in the stock market?

This is the same thing that was wrong with your other arguments. The increase in real income will increase tax revenues. You must correct for changes in income to show that decreases in marginal rates actually increase tax revenues. Simply showing correlation is not enough.

At 1/26/2008 7:07 PM, Anonymous Anonymous said...

I don't want anyone to get me wrong, cut taxes, please cut taxes. But do it to reduce government revenue, not increase it. Tax cuts do spur the economy, but they don't increase tax revenues. For instance, take the Bush tax cuts, even the CEA chair acknowledged that they didn't increase tax revenues:

House or Senate shake-up likely to end tax cuts By Patrice Hill THE WASHINGTON TIMES October 5, 2006:

Rob Portman, director of the Office of Management and Budget… Council of Economic Advisers Chairman Ed Lazear made a pitch for extending the personal and investment tax cuts, which they believe spurred growth in the economy and stock market.

But they conceded that the tax cuts have not prompted more people to get work and contribute to the economy, while they cut deeply into government revenue and contributed to record budget deficits that have not shown much improvement until recently .

“We do not say the tax cuts pay for themselves,” said Mr. Lazear. “The point is that they created a positive environment for income growth” while helping make the 2001 recession shallower than it otherwise would have been….

At 1/26/2008 8:38 PM, Anonymous Anonymous said...

I'm not sure, how much is New York Times reliable as a source, but:

According to this graph (only by visual check) it seems, that graph of the share of TOP 1% taxes paid PRETTY MUCH corresponds with the graph of their income share.

I don't say it's good or bad (i actually belive inequality is good for many reasons).

But I think, this very important fact wasn't mentioned EXPLICITLY.

You argue with Laffer curve in previous posts. But the higher tax revenues share may be caused just by rising of inequality of income.

Lower marginal rate of rich -> Higher income inequality -> Higher tax share of rich

No Laffer curve needed to explain this effect.

At 1/26/2008 9:49 PM, Anonymous Anonymous said...

By the way, I don't mean to sound condescending to Dr. Perry in these posts, I just know there are some people who will read this and think "ceteris paribus" is some sort of weird latin chant.

If it came out that way, I apologize.

At 1/27/2008 12:16 AM, Blogger Mark J. Perry said...

Just because stock prices increase, it doesn't necessarily follow that people sell stocks and pay capital gains taxes. In fact. stock prices rise due to BUYING pressure, not SELLING pressure.

A better explanation is that people hold stocks longer than otherwise when capital gains taxes are high to avoid paying capital gains taxes, and when capital gains taxes are lowered, there is an initial sell-off in the next few years of stocks that might have been longer than otherwise.

If you tax something, you get less of it. If you lower taxes, you'll get more of it.

At 1/27/2008 11:12 AM, Anonymous Anonymous said...

In fact. stock prices rise due to BUYING pressure, not SELLING pressure.

True enough; but supporting bull on the issue, if you know the turnover (churn) rate, then you know the taxable gains (losses) in a rising (falling) equity market.

JoeSixPack turns over ~100% a year, and the top 1% through their 2&20 hedge fund managers turn over substantially more than that per year.

At 1/27/2008 10:59 PM, Anonymous Anonymous said...

If what you are saying is true, Dr. Perry, then even after correcting for the increases in the stock market, you should still get an ceteris paribus increase in tax revenues solely due to the reduced capital gains tax rates. You must do this to show that the tax avoidance part of the theory is the important part. Otherwise we can't separate the increased income part from the tax avoidance part of the theory. I don't dispute that Pigovian taxation is effective. I do dispute that cuts in marginal tax rates at their current levels will follow the "over the peak" portion of the Laffer curve and increase tax revenues solely due to tax avoidance.

Whether or not it is a "better" explanation is surely an empirical issue, no? By the way, if people are buying, isn't somebody else selling?

At 1/27/2008 11:59 PM, Anonymous Anonymous said...

I am young so one thing strikes me as crazy. The tax rate was once 91%!! Am I the only one who thinks thats insane? How much did you have to make to have the government take 91% of your income?

At 1/28/2008 11:45 AM, Anonymous Anonymous said...

anonymous 11:59pm:

That is insane. Actually, it is BS. The day the government gets more of my income than I do is the day I stop working. There's no way in hell I'm working just to turn over most of what I make to the government in taxes.

At 8/24/2010 7:38 AM, Blogger Mark Krone said...

Don't worry too much about those who were taxed at the 91% rate, they got around it with exemptions and creative accounting. It did not take much to hide wealth.

The 1980s "boom" caused the wealthy to pay a higher share of the total tax "burden." Middle and lower income earners have not seen real growth since the late 1960s.
If lowering taxes on the wealthy improves the economy, why don't we lower them to zero? Let everyone else pay the teachers, fire fighters, etc. and we will all live in boom times. Isn't this what you want us to believe?

At 4/18/2011 12:11 PM, Blogger Jacob said...

To answer the person who left a comment about what income level you'd have to be at in order to get that old 91% rate, I think it was around 400k a year... Taken from here:


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