How much is America taxing its rich?

Lots, at least for some:

It might be fair to have the rich pay half their income . . . but when you factor in other taxes, many of them do. My old colleagues moving to New York City from London were frequently heard to say "What is this rubbish we’ve been talking about America having low taxes? My taxes are higher here!" That’s because New York State and New York City together levy an additional income tax of 10% once your income is over $100K, which pushed two-income families above Britain’s 40% top tax bracket. A 50% tax rate on top incomes would result, for New Yorkers, in a 60% effective total income tax rate total, with their incomes further eroded by the city’s 10% sales tax. Since pretty much the entire increase in inequality in the last few decades seems to have come from a few zip codes in the high tax zones around New York and San Francisco, this matters.

There are broader lessons.  First, tax incidence is tricky.  If location is such an enormous source of economic value, will local income tax rates, and also sales tax, in fact fall on landowners in those cities?

Second, not all of these people can convert their labor income into capital gains income, which is taxed at a much lower rate.  In other words, high-earning Manhattan journalists face exorbitant rates of taxation, as do doctors without their own practices.  That’s one reason why it is becoming a city of equity holders.

Third, those who can opt for capital gains, for tax reasons, end up with more exposure to income risk than they ideally want.  Boo-hoo for the billionaires you might say, but the added risk raises income inequality for the winners who constitute the top one percent, relative to other income classes.  That doesn’t bother me much, but the policy is helping create a result it was designed to counteract.

Fourth, if you’re planning on raising marginal tax rates on the wealthy, there may be less "give" in the system than you might have thought.  This of course depends on tax incidence, but if behavioral considerations matter, many people resent nominal marginal rates of 60 percent, even if they are earning some of it back in the form of higher wages.


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