"It profits me but little that a vigilant authority always protects the tranquillity of my pleasures and constantly averts all dangers from my path, without my care or concern, if this same authority is the absolute master of my liberty and my life."

--Alexis de Tocqueville, Democracy in America

Thursday, November 15, 2012

Taxing the Rich

I don't want to be mean, but much of the problem in American politics in talking about taxes and tax rates stems from very basic facts about the intelligence of our citizenry.  To wit:

Again, I don't want to be mean, but it is simply a matter of fact that, given a normal distribution of intelligence in a bell curve, half of American have IQs of 100 or below and 16% have IQs of 85 or below.   Many of these people may be decent, law-abiding, wonderful people, but an honest person should agree that they are not very likely to be able to understand in any serious way the implications of tax policy or to be able to do the math necessary to understand the impact of a change in tax policy on, for instance, our national deficits or debt.   Demogogues play to this unavoidable fact by talking about "the rich paying their fair share"... in other words, they address people who have relatively childlike intelligence with relatively childish, emotional appeals.  

With regard to the current argument about whether to increase tax rates on the supposed wealthy, Americans who earn more than $250,000 a year, consider the following:

  • A useful approximation for these people are the top 5% of earners in four-person households, who earned greater than $268,000 in 2009.
  • The top 5% of earners paid 63.9% of federal income taxes in 2009.
  • In 2009, the federal government took in approximately $1.05 trillion in 2009.  
  • That means that the top 5% paid about $670 billion in income taxes in 2009.
  • If the "Bush tax cuts" for the "wealthy" had been in effect, their tax rates would have gone up approimately 4%, using the absolute top marginal rates of 36% (current) and 39.6% (proposed).
  • That means that they would have paid, assuming no impact on economic activity and no changes in behavior to avoid taxes, approximately $27 billion more in income tax under the rates proposed by President Obama.
  • The federal deficit is currently running at something like $1.1 trillion.   So what Obama is proposing would cut the deficit by about 2.5%.   Again, assuming no adverse economic impacts from raising taxes on the most productive people in our economy.
  • Where is the other 97.5% supposed to come from?   No one knows.
Now, that's easy for me and you to understand.   But it's sadly impossible for a significant number of (dare I say it?) Democratic voters to understand. 

Maybe they would understand this... in order to close the deficit using only income tax rate hikes, we would have to more than DOUBLE them, which would surely send the economy into a depression.   But maybe not.

This is supposedly why we have a representative government... to make sure that the dumbest among us aren't driving policy.   But when a goverment is elected by pandering to the innumeracy of functional economic illiterates, what hope do we have that they will act rationally?

No comments:

Post a Comment