Interesting (Tax) Reading

Trying to stay far away from political comment, but even Cain's brand new (old flat tax idea) but simple 9-9-9 plan (what little of it has been actually published) already appears to have a number of "exeptions, exemptions, deductions, and special provisions".

Chip PS: I'm sending this again because the Moderator rejected the 1st one for being top-posted, not content. ????

========================================= MODERATOR'S COMMENT: And we do appreciate not top posting.

you should read some of the senate speeches against the social security bill back in the 30's.

I read Studs Terkel's "Hard Times" about the Depression. Before reading it, I hadn't realized how Frankly Roosevelt was villified by some - it made the Wall Street Journal/Rush Limbaugh crusade against Bill Clinton look like a lovefest. However, I don't think the Social Security debate was about the complexity of the tax code. And while this group seems like an apt place to discuss the tax code, it isn't an apt place to discuss social policy.

Cain's "9-9-9" plan is explicitly intended as a bridge to the Fair Tax. The "Corporate Income Tax" he proposes seems to work out to be more of a VAT. What seems curious is that the Fair Tax proponents propose a "prebate" that would refund a portion of the tax on a more or less flat basis by person, to mitigate the regressivity. Cain does not seem to propose that. Obviously the prebate causes a significant increase in the needed tax rate, but without it, a consumption tax is vastly more skewed in favor of the well-off.

One thing I must admit to wondering is this. When I began working in

1977, I think the top marginal tax rate was 70%. It came down to 50% in the first Reagan tax cuts, and then to 28% in the 1986 tax bill. I know at times it's been as high as 91%. I did always kind of wonder how the system functioned with a top rate of 91%, or even 70%.

{I'm trying very hard here to stay away from anything that would represent a political or value-choice point of view, and just stay with historical fact.}

[snip]

Some recent points of view below. You have to read the whole article... just don't look at the graphs.

Mike Kimel (analytic economist.. you can google him) wrote a series of articles (7 Parts) called The Effect of Individual Income Tax Rates on the Economy. Each part covered a span of years. You can google the title to find all 7 parts. However, in the following blog post, he provides an excellent summary of the results.

Eliot Spitzer (yeah... that Eliot Spitzer) took a crack at it in an article for Slate.com:

And finally, a 1996 article in the National Tax Journal that looked at taxation and economic growth and tax reform. It goes beyond just looking at how tax rates affect the economy.

There were lots of ways to avoid this, so when people say the wealthy pay much less not, it is not really true.

You could form personal service corporations and pay a lower corporate tax rate. You could form personal holding companies, and pay a lower corporate tax rate. You could "collapse" your corporation, and not pay the full tax rate. There were capital gain tax benefits. You could use accelerated depreciation on investment buildings and count the paper losses against your ordinary income. And on and on.

Much of this was done away with in exchange for lower brackets. Aside from a period of adjustment, things got simpler. Now we have added lots more stuff to the tax code, and again people are suggesting it is time to simplify in exchange for lower tax brackets.

this pertains to marginal rates, not effective rates.

Yes, but wasn't the question by Hank how the system operated when marginal rates were 91% and 70%?

"I did always kind of wonder how the system functioned with a top rate of 91%, or even 70%."

A lot of wealthy people bought a lot of tax exempt bonds. Tax shelters (e.g. investments in movies) were common, and loopholes allowed large deductions for investments made with non-recourse debt. Some families had partnerships owned by hundreds of trusts, to split income up into so many parts that the income was at the lowest rate possible.

There were probably others, but those are the ones I recall. Of course, those aren't available anymore. But people will come up with others if the need arises.

yes, but this article was analyzing decades of economic activity with respect to marginal rates. That is highly flawed, when it is doubtful that many people actually succumbed to the 91% or 70% marginal rates. There are a lot more variables to be considered in order for such a study to make any sense. In my previous post, I noted some of these variables.

And a lot of people cheated. With a high tax rate, cheating has a higher payoff.

I was certainly aware of things like accelerated depreciation and unlimited passive activity losses. I also recall capital gains being treated as ordinary income but only 50% of the gain being included. And I guess that executive compensation was not on the magnitude it is today. I seem to vaguely recall that George Romney made $250,000 when he was president of American Motors in the 1960's, at a time when the average auto worker probably made about $10,000. I guess there probably are fewer "loopholes" today (keeping in mind that one man's loophole is another's Essential Feature for Economic Growth and Efficiency).

Do you have evidence for this?

Tons of loopholes ("drilling for cattle feed") so it was rare that anybody ever paid anything close to those rates.

Seth

I lived as a kid during WWII. IIRC, not only were the marginal tax rates high, but any income above $25,000 was taken as tax. It is amazing what an existential war will drive people to accept. You also were not able to switch jobs easily, especially if they helped support the war. That was one reason why non-cash benefits such as health insurance were given in lieu of wages. I was a time when some rich people signed up as a dollar a year men.

Aside from the United States becoming the true arsenal of democracy, we were coming out of a depression. There was plenty of capacity. The whole world was clamoring for war goods. That situation enabled significant redistribution of wealth that ended the depression by using stored wealth to finance the war. Such a redistribution is very difficult to do in peacetime, especially when those with the wealth have bought the politicians. It is not that having a war is good economics. War requires activity that can only be obtained by spreading wealth more equitably. Taxation, borrowing, and inflation were the methods used.

If you think about it, is there or will there ever be hard evidence of the true amount of cheating? Some will always get away with it and not be part of any statistic.

But I think it is well established that the higher the probable payoff, the more likely one is to gamble -- and cheating is a form of gambling. I can't imagine why taxes would be any different. Plus, common sense (there's that dangerous term again) dictates that before the degree of computerized 3rd party reporting that we have today, it was easier to hide transactions.

What are the results of TCMP audits? Are they disclosed?

Stu

Not necessarily. These days the government does estimate the tax gap, which is a measure of the amount of cheating. Perhaps they audit people and find people underpaying by $100 each in 5 of 100 audits, so they just multiply $500 by the total number of tax returns divided by

100. Or maybe someone published an autobiography after their death and came clean.

Yeah, I get the logic of it.