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.

Comments

I'm confused how a 50% top marginal rate could ever result in a 60% effective rate, even given an extra 10% to the state (which is generally deductible unless you are under AMT).

If the effective rate is ever greater than the marginal rate, something is strange.

Also, we can look at the opposite correlation of the inequality/greater equity holdings equation.

Rising inequality increases the pool of folks with excess income beyond whatever luxury purveyors may soak from them. Most aren't gonna want their x bazillion dollars sitting around in a savings account. Some advisor told them that was a bad idea.

So they'll buy equities or property. That might help explain some of the curious lack of volatility and easy credit over the last several years.

Marton: What are the outlays for healthcare in London vs. Manhattant?

Not that I want to swap systems.

She probably meant "total effective marginal rate," not "total effective average rate." That would make the marginal rate only 55% if state income taxes are deductible, but most of the high earners are probably hit by the AMT, so 60% is the right marginal rate.

Caveat Bettor- I've seen a number of British executive contracts and without exception they obtain their own helath insurance and try to get the employer to cover it. Its anecdotal, but conforms to intuition: what wealthy Brit permits the Government to ration his medical care?

I still don't understand where we get to a 60% income tax rate in the U.S. New York State's highest rate is 6.85%, or 4.45% if you account for its deductibility against the highest federal rate (and the very, very wealthy won't pay AMT). NYC is 3.648%. The highest federal rate is 35%.

That cannot add up to 60% or even 50%. I'm not sure how you translate sales tax or property tax into an incoem tax rate, but I can't imagine it delivers you to 60%.

Like Megan, I'm always a little disappointed when articles about total taxes paid ignore plenty of the other taxes that people pay. Incidence on sales and businesses taxes can be tricky, but it's important, too. As are licensing and registration fees, excise taxes, and all the rest of the ways that governments raise revenue from the citizenry.

If you want to be overly judicial, you might even check to see if public business-like services charge you a premium for their services. (Does your state charge a premium on your energy bills to cover costly renewable energy?) That, too, taxes our incomes, even if it's not directly a tax.

All things considered, I wouldn't be surprised if most people end up generating government revenues of over 50 percent of their income.

It was several years ago that I last went through the exercise of determining the total tax bite on my New Jersey based household. Tallying all income taxes (Federal and State), "social" taxes and unemployment taxes, County and Municipal Property Taxes, Fire District taxes, sales and use taxes, excise taxes, Franchise taxes (on all utility bills), various taxes disguised as "fees" (i.e.,"phone and internet connectivity fee".etc.), the amount of taxes actually paid in a year came to 48.9% of our two-earner household income.

There are also no state/county/local income taxes in Britain. But there is a 17.5% (hidden) sales tax on everything, as wll as much higher taxes on gasoline.

When I discovered that Australia now collects a smaller percentage of GDP in tax than the U.S. I was surprised. But then I realized that most workers in the U.S. will receive social security whereas most Australians currently working will receive little or no government pension. Instead we have a forced savings program that isn't counted as tax to fund retirement. These sorts of things will need to be considered when comparing tax rates.

"There are also no state/county/local income taxes in Britain."

Huh? Ever heard about council tax? I pay 1400 pounds per month for a 1 bdrm flat. To which I must add 105 pounds per month in council tax.

http://www.adviceguide.org.uk/index/
life/tax/council_tax.htm

J: What you're describing is a property tax. I was speaking of income taxes.

Your property tax of 105 quid/month is aboput $2500/year, which is not so different from what you'd pay in many parts of the US. However, my point was that when comparing US to UK rates, in the UK there is but one income tax, whereas in the US people often look only at the federal income tax, overlooking the state and local level ones (which, in my case are about 5% combined.) Also, those taxes are totally non-progressive and you do not get to deduct a penny from them.

If taxes were too high in NY or SF, rich people would be living in cheaper areas, say, Indianapolis.

Not happening. Arguably, we should raise the tax rate in NY so that we can redistribute the nation's wealth more equitably, geographically speaking.

I did not say that there was a general benefit to geographical distribution. What I was saying is that, if the taxes in NY or SF are too high, we would be seing an exodus of the rich to places with lower marginal tax rates (caused by lower state tax rates).

Since those who are most affected by the tax rates are staying, one can only conclude that they think the benefits of living in NY or SF are worth the costs. Isn't that the invisible hand of the market working?

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?

Uh... New York and SF landowners are not exactly poor, so I'm not sure what your point is. Of course taxing the urban land rent directly would involve no excess burden (so the effective tax rate might be lower) but this is a pure gain in efficiency, not a change in progressivity.

Another quest:

In the U.S., state income tax varies by state from 0% to close to 20% top marginal rate. Some states allow localities to charge income taxes. California does not, though San Francisco (uniquely in CA) has a payroll tax of 1%, but that only applies to wages and salaries earned in SF proper (which holds maybe 10% of the Bay Area's population). People anticipating large capital gains can move to states with no (or low) income tax for the year of the sale, saving themselves the state income tax on the gain. Nevada has become popular with California retirees for this reason (among others).

Property taxes vary from 1% to slightly over 3% of the value of the house, with many local quirks. For example, California only allows re-assessment of 2% per year, until the house is sold, then the house is reassessed to the purchase price; Iowa has a system where the tax rate is close to 3%, but each county has a "rebate" based on growth in total assessed value in the county - the rebate is generally just below 50%.

Many states and localities have transfer taxes on real estate; mostly on the order of 1% as far as I know.

Renters do not directly pay property taxes.

The tax rules on houses have changed in the past decade - one may now realize up to $250,000 profit on a house tax-free ($500,000 if married filing jointly), provided one has lived in the house 2 of the past 5 years, and has not used the exemption in the previous tax year. People turning 65 can take a larger tax break on a house sale one time in their life.

Sales taxes vary from 0 to near 10% - I think Alameda County (in California) now has the highest sales tax, at 8.75%, since last I heard, Manhattan's 10% rate was lowered to 8%.

When my oldest child was contemplating a college education, my wife and I sat down and explained the economic "facts of life" to her, including the various sources of money and levels of taxation. When we were done answering questions and explaining figures, an appalled look set on her face. "Dad, this is nuts! No one should have to pay more than twenty percent of their income as their share of running the government!" From the mouths of children...

The annoying issue is that billionaires aren't hurt by high taxes; they can structure their income so that they cook it into capital gains that are never realized, hide it in complex foundation/charitable schemes, or have it go offshore. Cashflow taxes hit the "upper-middle" hardest, since the type of income they have is the most heavily taxed kind: salary/wage/bonus income.

Income from assets is much easier to "reprocess" into lower tax schemes and is likely to form the bulk of the income of the very rich.

The top NY state rate is 6.85 and the top city rate is 3.648, according to the NY State website and the Federation of Tax Administrators. These taxes are deductible in computing federal tax, unless the taxpayer is subject to the AMT. Most of the super-rich (those who are well into the top federal bracket of 35%) are not subject to the AMT; it tends to be an upper middle phenomenon, where the AMT rates tend to be closer to the rates under the regular tax. I seriously doubt if they are many New Yorkers paying effective rates anywhere close to 50%. Keep in mind the FICA or self-employment tax (other than the Medicare portion) is capped at wasges of less $100K. This is likely a case of cognitive misperception by an unhappy Brit.

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