Who Pays Taxes

I am in the middle of reading Rebellion, Rascals and Revenue: Tax Follies and Wisdom Through the Ages (Princeton University Press, 2021) by Michael Keen and Joel Slemrod.  This delightful volume provides an entertaining history of taxation, which they define as “the extraction of resources by coercive rulers.”  This got me thinking about taxation in the US.

The population of New York City is almost 8.5 million.  65,000 of these people play 51% of the taxes.  In other words, 0.8% of the residents of the city pay 51% of the taxes.  The top 1% of earners nationally – 1.4 million people — pay 40% of federal income taxes.  The top 10% pay 70%.  The top 25% pay 87%.

Is this a good or bad situation?  Let’s just assume that federal, state, and local budgets are a given.  We have to fund these budgets somehow.  Medicare, Medicaid, and Social Security consumes 50% of the federal budget, so many millions of people depend on these budgets.  We need the 1% to pay these bills.  Perhaps we could get them to pay for everything.

Double the taxes on the 0.8% of New York residents.  Then, 99.2% of the population of the city would live tax free.  Increase the taxes of the top 1% nationally by 150%.  Then 99% of the US population would live tax free.  Other than for the top earners, the US would be a tax-free country.  I can imagine 99% of the electorate voting for this.

What would the 1% do?  They would certainly lobby to avoid this fate.  As they provide a huge fraction of campaign donations, they might motivate legislative relief.  Yet, the electorate favoring the tax-free model might turn these Members out of office and replace them with tax-free advocates.

The 1% could abandon New York, and then the US.  They could move their investment funds, hedge funds, banks, and corporations to more tax-friendly havens.  Alphabet, Amazon and Apple might be among the first immigrants, followed by Facebook, Microsoft, and Twitter.  They would relist on the exchanges of their new home countries.

Without the 1%, taxes on the middle class would have to increase substantially to meet the budget requirements noted above.  This might work if we could greatly increase their incomes.  Here is an extreme scenario.  A one-time redistribution of all the wealth in the world would result in something like $20,000 per person.  What would happen then? 

Perhaps they would all invest in index funds.  Very unlikely.  They would buy food and clothes and perhaps plots of land.  Although, who would own anything to sell?  Slowly but surely, I imagine these expenditures would creep back into the hands of the most talented.  Eventually, we would be back in the same place, perhaps decades or even centuries later.

An alternative strategy would be to use these resources to prepare everyone to fend for themselves in our complex world.  Everyone would be educated.  Appropriate, productive jobs would be created.  New wealth would be created.  A portion of everyone’s $20,000 would be invested in this endeavor.  I can imagine that many would not be pleased that this happened to their allotment.

This sounds overwhelming.  Is there a more straightforward way to achieve income tax equity?  We simply need to increase median per capita income in the US to parity with Sweden (16% higher than US) or, better yet, Singapore (51% higher).  This would increase personal income in the US by $1.5-4.6 trillion.  In 2020, the total income taxes collected in the US was $3.7 trillion.  Thus, the increases due to higher median incomes could easily contribute significantly to the US tax revenue.

How can we increase incomes by 16-51%?  We need higher-paying jobs?  This requires greater productivity for existing jobs or, for new jobs, greater value added.  The 25 million new jobs in the skilled technical workforce, that I have discussed in earlier posts, provide opportunities for substantially higher incomes.  The average starting salary for a new STEM graduate is $70,000; for a non-STEM graduate is it $30,000.  It may be reasonable to assume that the newly minted entrant to the skilled technical workforce will earn $50,000 at the outset.

25 million people earning $50,000 amounts to $1.25 trillion.  Thus, improving the incomes of one-sixth of the US workforce, results in almost achieving the low end of the above goal.  If another 50 million people earn an additional $20,000 due to higher productivity, we add another $1 trillion.  Improving the incomes of just half of the US workforce heads us toward the middle of the above goal.

Achieving these impressive outcomes requires that we provide the US workforce with the knowledge, skills, and tools to be competitive in the global marketplace.  Education, training, and internships will be key.  We can afford this investment because more people will be paying higher taxes, while also enjoying the personal benefits of significantly higher incomes.  And, coercive rulers can still extract resources from the 1%.

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