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Tax policy and the concept of “a fair share” is a great dividing line between Democrats and Republicans, and the election campaign has brought that to the forefront. From Bernie Sanders’ constant critiques of billionaires to the lower tax rates or flat tax plans produced by Republicans, the benefits of adjusting the tax rate for the 1% at the top of the American income scale have been heavily debated in recent months.
Democrats argue that raising these rates will bring in much needed revenue. Republicans argue that raising these rates will stifle investment and growth. Both parties could be right.
A recent analysis by The New York Times looks at the Democratic side of this argument by attempting to answer the question: if the total tax burden were raised on the rich, how much revenue would it really generate for the U.S. coffers? That answer is not as straightforward as it might seem, because of the multiple sources of income (and taxes) that the rich have and the distinction between capital gains and regular income tax rates.
Using information from the Treasury Department and the Tax Policy Center, the Times compiled information on total federal tax burdens by percentile of revenue. Tax sources include federal income tax, payroll taxes, the share of corporate taxes that investors pay, excise taxes, estate taxes, and gift taxes. The average tax burden calculated this way is 19.8% for all Americans, ranging from 3.6% for the lowest 10% in income to 25.7% for the upper 10% in income.
Looking at the very highest levels, those in the 95%-99% income range have a tax burden of 25.2%. The top 1% of Americans (nearly 1.13 million households) have an average 33.4% tax burden while the top 0.1% average 34.9%. Raising the tax burden on the top 1% to 40% would result in $157 billion in first-year revenue; a 45% rate would raise $276 billion. Limit the increases to just the top 0.1% and $55 billion and $109 billion will be produced respectively.
To put that in perspective: Bernie Sanders’ plan to pay for all college tuition is estimated to cost around $47 billion, the Federal Highway Administration estimates $176 billion is needed annually to improve highways, and the federal deficit this year is expected to be around $426 billion. Greater tax revenues would help, but clearly, work has to be done on the spending side as well.
The mechanics of increasing the tax burden on the rich is another matter entirely. Simply raising the capital gains tax (typically 20% but in some cases as high as 28%) is more likely to directly affect growth and investment — yet the richest Americans are extremely adept at shifting as many income sources as possible into capital gains. The Treasury Department finds that the top 0.1% pays around 25% of their income in taxes even though their individual rate is 39.6%.
It makes sense on a fundamental level to define the proper revenue/total tax burden balance before acting. The knee-jerk reaction that tax rates on the rich must always be lowered (Republicans) or raised (Democrats) should be replaced by a thoughtful analysis of where the line should be drawn. Surely, almost everyone would agree that raising taxes when the rate is 90% or lowering the rate when it is 10% is silly.
It may be better to look at this in terms other than fairness and look for the optimal point of tax rates that maximize revenue without discouraging investment — and that has to be looked at from the global perspective as well. Remember, tax policies are often cited as the reason investments are made abroad. Then the even larger battle can begin — with revenues maximized, what is the best way for America to spend it and not run up huge deficits?