By Alan Reynolds. Title says it all.

When President Obama announced a two-year stay of execution for
taxpayers on Dec. 7, he made it clear that he intends to spend those two
years campaigning for higher marginal tax rates on dividends, capital
gains and salaries for couples earning more than $250,000. "I don't see
how the Republicans win that argument," said the president.

Despite the deficit commission's call for tax reform with fewer tax
credits and lower marginal tax rates, the left wing of the Democratic
Party remains passionate about making the U.S. tax system more and more
progressive. They claim this is all about payback‹that raising the
highest tax rates is the fair thing to do because top income groups
supposedly received huge windfalls from the Bush tax cuts. As the
headline of a Robert Creamer column in the Huffington Post put it: "The
Crowd that Had the Party Should Pick up the Tab."

Arguments for these retaliatory tax penalties invariably begin with
estimates by economists Thomas Piketty of the Paris School of Economics
and Emmanuel Saez of U.C. Berkeley that the wealthiest 1% of U.S.
households now take home more than 20% of all household income.

http://si.wsj.net/public/resources/i...G_201012221745
02.jpg [image of data table]

This estimate suffers two obvious and fatal flaws. The first is that the
"more than 20%" figure does not refer to "take home" income at all. It
refers to income before taxes (including capital gains) as a share of
income before transfers. Such figures tell us nothing about whether the
top percentile pays too much or too little in income taxes.

In The Journal of Economic Perspectives (Winter 2007), Messrs. Piketty
and Saez estimated that "the upper 1% of the income distribution earned
19.6% of total income before tax [in 2004], and paid 41% of the
individual federal income tax." No other major country is so dependent
on so few taxpayers.

A 2008 study of 24 leading economies by the Organization of Economic
Cooperation and Development (OECD) concludes that, "Taxation is most
progressively distributed in the United States, probably reflecting the
greater role played there by refundable tax credits, such as the Earned
Income Tax Credit and the Child Tax Credit. . . . Taxes tend to be least
progressive in the Nordic countries (notably, Sweden), France and
Switzerland."

The OECD study‹titled "Growing Unequal?"‹also found that the ratio of
taxes paid to income received by the top 10% was by far the highest in
the U.S., at 1.35, compared to 1.1 for France, 1.07 for Germany, 1.01
for Japan and 1.0 for Sweden (i.e., the top decile's share of Swedish
taxes is the same as their share of income).

A second fatal flaw is that the large share of income reported by the
upper 1% is largely a consequence of lower tax rates. In a 2010 paper on
top incomes co-authored with Anthony Atkinson of Nuffield College,
Messrs. Piketty and Saez note that "higher top marginal tax rates can
reduce top reported earnings." They say "all studies" agree that higher
"top marginal tax rates do seem to negatively affect top income shares."

What appears to be an increase in top incomes reported on individual tax
returns is often just a predictable taxpayer reaction to lower tax
rates. That should be readily apparent from the nearby table, which uses
data from Messrs. Piketty and Saez to break down the real incomes of the
top 1% by source (excluding interest income and rent).

The first column ("salaries") shows average labor income among the top
1% reported on W2 forms‹from salaries, bonuses and exercised stock
options. A Dec. 13 New York Times article, citing Messrs. Piketty and
Saez, claims, "A big reason for the huge gains at the top is the outsize
pay of executives, bankers and traders." On the contrary, the table
shows that average real pay among the top 1% was no higher at the 2007
peak than it had been in 1999.

In a January 2008 New York Times article, Austan Goolsbee (now chairman
of the President's Council of Economic Advisers) claimed that "average
real salaries (subtracting inflation) for the top 1% of earners . . .
have been growing rapidly regardless of what happened to tax rates." On
the contrary, the top 1% did report higher salaries after the mid-2003
reduction in top tax rates, but not by enough to offset losses of the
previous three years. By examining the sources of income Mr. Goolsbee
chose to ignore‹dividends, capital gains and business income‹a powerful
taxpayer response to changing tax rates becomes quite clear.
[reynolds]

The second column, for example, shows real capital gains reported in
taxable accounts. President Obama proposes raising the capital gains tax
to 20% on top incomes after the two-year reprieve is over. Yet the chart
shows that the top 1% reported fewer capital gains in the tech-stock
euphoria of 1999-2000 (when the tax rate was 20%) than during the
middling market of 2006-2007. It is doubtful so many gains would have
been reported in 2006-2007 if the tax rate had been 20%. Lower tax rates
on capital gains increase the frequency of asset sales and thus result
in more taxable capital gains on tax returns.

The third column shows a near tripling of average dividend income from
2002 to 2007. That can only be explained as a behavioral response to the
sharp reduction in top tax rates on dividends, to 15% from 38.6%.
Raising the dividend tax to 20% could easily yield no additional revenue
if it resulted in high-income investors holding fewer dividend- paying
stocks and more corporations using stock buybacks rather than dividends
to reward stockholders.

The last column of the table shows average business income reported on
the top 1% of individual tax returns by subchapter S corporations,
partnerships, proprietorships and many limited liability companies.
After the individual tax rate was brought down to the level of the
corporate tax rate in 2003, business income reported on individual tax
returns became quite large. For the Obama team to argue that higher
taxes on individual incomes would have little impact on business denies
these facts.

If individual tax rates were once again pushed above corporate rates,
some firms, farms and professionals would switch to reporting income on
corporate tax forms to shelter retained earnings. As with dividends and
capital gains, this is another reason that estimated revenues from
higher tax rates are unbelievable.

The Piketty and Saez estimates are irrelevant to questions about income
distribution because they exclude taxes and transfers. What those
figures do show, however, is that if tax rates on high incomes, capital
gains and dividends were increased in 2013, the top 1%'s reported share
of before-tax income would indeed go way down. That would be partly
because of reduced effort, investment and entrepreneurship. Yet simpler
ways of reducing reported income can leave the after-tax income about
the same (switching from dividend-paying stocks to tax-exempt bonds, or
holding stocks for years).

Once higher tax rates cause the top 1% to report less income, then top
taxpayers would likely pay a much smaller share of taxes, just as they
do in, say, France or Sweden. That would be an ironic consequence of
listening to economists and journalists who form strong opinions about
tax policy on the basis of an essentially irrelevant statistic about
what the top 1%'s share might be if there were not taxes or transfers.


Mr. Reynolds is a senior fellow at the Cato Institute and the author of
"Income and Wealth" (Greenwood Press 2006).


The Wall Street Journal, 23 December 2010, page A17.


Joe Gwinn


Ref:
http://online.wsj.com/article/SB1000...03386152295923
4.html?mod=WSJ_Opinion_LEADTop

On 12/23/2010 12:30 PM, John R. Carroll wrote:
Hawke wrote:
It's also a matter of course that anything that comes out of the Cato
Institute is to be taken with a large dose of salt, as they exist to
push a conservative libertarian agenda. So any opportunity that comes
up where they can show we pay too much in taxes is one they take
whenever they can. In other words, they're trying to sell you
something.

Here is a little income distribution info.

In 1979 the middle quintile made $42,900.00
That same group had risen to $52,100.00 by 2006
52100/42900 = 1.2145

Starting from 1979 and fast forwarding to 2006 with the CPI-U as the
calculation basis, this quintile should have had household income of
$128,609.41 just to stay even.
128,000-52,100 = (75,900.00) or an erosion of about 40%.

The top 1% during the same period looks like this

$1,200,300.00/$337,100 = 3.5607
They needed $1,010,588.18 in 2006 to have maintained their income and so
were 20% ahead of the game more or less.

Finally, CEO's of America's publicly traded corporations were making 37
times ther average workers salary in 1975.
Today, the multiple is nearly 400 and the average CEO is taking home $14.6
million per year.


No wonder that capitalists love capitalism so much. It's so good for the
few lucky ones at the top.

Hawke