Progressive and Regressive Taxes and Marginal Tax rates

Posted by PITHOCRATES - January 6th, 2014

Economics 101

(Originally published July 9th, 2012)

The Beatles fled Britain to Escape a Confiscatory Top Marginal Tax Rate of 95%

George Harrison wrote Taxman.  The song appeared on the 1966 Beatles album Revolver.  It was an angry protest song.  For George Harrison was furious when he learned what exactly the progressive tax system was in Britain.  In the song the British taxman is laying down the tax law.

Let me tell you how it will be
There’s one for you, nineteen for me
‘Cause I’m the taxman, yeah, I’m the taxman

Should five per cent appear too small
Be thankful I don’t take it all
‘Cause I’m the taxman, yeah I’m the taxman

That’s one for you, Mr. Harrison.  And nineteen for us.  The government.  Meaning that for every £20 the Beatles earned they got to keep only £1.  This is a 95% top marginal tax rate.  A supertax on the super rich imposed by Harold Wilson’s Labour government.  So if the Beatles earned £1 million because of their incredible talent and hard work touring in concert, working on new albums in the studio and making movies, of that £1 million they got to keep only about £50,000.  While the government got £950,000.  If they earned £10 million they got to keep about £500,000.  While the government got £9,500,000.  As you can see 5% is a very small percentage.  Which is why George Harrison got so angry.  The harder they worked the less of their earnings they were able to keep.

Is this fair?  George didn’t think so.  Nor did his fellow Beatles.  For they fled Britain.  Moved to another country.  Becoming tax exiles.  For they were little more than court minstrels.  Who the government forced to entertain them.  Earning a lot of money so they could take it away.  To help pay for an explosion in social spending Harold Wilson unleashed on Britain.  Socializing the UK like never before.  And all those social benefits required a lot of taxes.  Hence the progressive tax system.  And marginal tax rates.  Where the super rich, like the Beatles, paid confiscatory tax rates of 95%.

The Top Marginal Tax Rate was around 70% under President Carter and around 28% under President Reagan

As social spending took off in the Sixties and Seventies governments thought they could just increase tax rates to generate greater amounts of tax revenue.  For governments looked at the economy as being static.  That whatever they did would result in their desired outcome without influencing the behavior of those paying these higher tax rates.  But the economy is not static.  It’s dynamic.  And changes in the tax rates do influence taxpayer behavior.  Just ask the Beatles.  And every other tax exile escaping the confiscatory tax rates of their government.  Because of this dynamic behavior of the taxpayers excessively high tax rates rarely brings in the tax revenue governments expect them to.

Even when it comes to sin taxes government still believes that the economy is static.  Even though they publicly state that taxes on alcohol and tobacco are to dissuade people from consuming alcohol and tobacco.  (The U.S. funded children’s health care with cigarette taxes clearly showing the government did not believe these taxes would stop people from smoking).  Perhaps some in government look at sin taxes as a way to discourage harmful habits.  But the taxman sees something altogether different when they look at sin taxes.  Addiction.  Knowing that few people will give up these items no matter how much they tax them.  And that means tax revenue.  But unlike the progressive income tax this tax is a regressive tax.  Those who can least afford to pay higher taxes pay a higher percentage of their income to pay these taxes.  For sin taxes increase prices.  And higher prices make smaller paychecks buy less.  Leaving less money for groceries and other essentials.

Most income taxes, on the other hand, are progressive.  Your income is broken up into brackets.  The lowest bracket has the lowest income tax rate.  Often times the lowest income bracket pays no income taxes.  The next bracket up has a small income tax rate.  The next bracket up has a larger income tax rate.  And so on.  Until you get to the high income threshold.  Where all income at and above this rate has the highest income tax rate.  This top marginal tax rate was around 70% under President Carter.  Around 28% under President Reagan.  And 95% under Harold Wilson’s Labour government in Britain.  An exceptionally high rate that led to great efforts to avoid paying income taxes.  Or simply encouraged people to renounce their citizenship and move to a more tax-friendly country.

When the Critical Mass of People turn from Taxpayers to Benefit Recipients it will Herald the End of the Republic

Progressive taxes are supposed to be fair.  By transferring the tax burden onto those who can most afford to pay these taxes.  But the more progressive the tax rates are the less tax revenue they generate.  What typically happens is you have a growing amount of low-income earners paying no income taxes but consuming the lion’s share of government benefits.  The super rich shelter their higher incomes and pay far less in taxes than those high marginal tax rates call for.  They still pay a lot, paying the majority of income taxes.  But it’s still not enough.  So the middle class gets soaked, too.  They pay less than the rich but the tax bite out of their paychecks hurts a lot more than it does for the rich.  Because the middle class has to make sacrifices in their lives whenever their tax rates go up.

As social spending increases governments will use class warfare to increase taxes on the rich.  And they will redefine the rich to include parts of the middle class.  To make ‘the rich’ pay their ‘fair’ share.  And they will increase their tax rates.  But it won’t generate much tax revenue.  For no matter how much they tax the rich governments with high levels of spending on social programs all run deficits.  Because there just aren’t enough rich people to tax.  Which is why the government taxes everything under the sun to help pay for their excessive spending.

If you drive a car, I’ll tax the street,
If you try to sit, I’ll tax your seat.
If you get too cold, I’ll tax the heat,
If you take a walk, I’ll tax your feet.

Don’t ask me what I want it for
If you don’t want to pay some more
‘Cause I’m the taxman, yeah, I’m the taxman

Now my advice for those who die
Declare the pennies on your eyes
‘Cause I’m the taxman, yeah, I’m the taxman
And you’re working for no one but me.

This is where excessive government spending leads to.  Excessive taxation.  And confiscatory tax rates.  Taking as much from the wealth creators as possible to fund the welfare state.  And as progressive tax systems fail to generate the desired tax revenue they will turn to every other tax they can.  Until there is no more wealth to tax.  Or to confiscate.  When the wealth creators finally say enough is enough.  And refuse to create any more wealth for the government to tax or to confiscate.  Leaving the government unable to meet their spending obligations.  As the critical mass of people turn from taxpayers to benefit recipients.  Heralding the end of the republic.

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Progressive and Regressive Taxes and Marginal Tax rates

Posted by PITHOCRATES - July 9th, 2012

Economics 101

The Beatles fled Britain to Escape a Confiscatory Top Marginal Tax Rate of 95%

George Harrison wrote Taxman.  The song appeared on the 1966 Beatles album Revolver.  It was an angry protest song.  For George Harrison was furious when he learned what exactly the progressive tax system was in Britain.  In the song the British taxman is laying down the tax law.

Let me tell you how it will be
There’s one for you, nineteen for me
‘Cause I’m the taxman, yeah, I’m the taxman

Should five per cent appear too small
Be thankful I don’t take it all
‘Cause I’m the taxman, yeah I’m the taxman

That’s one for you, Mr. Harrison.  And nineteen for us.  The government.  Meaning that for every £20 the Beatles earned they got to keep only £1.  This is a 95% top marginal tax rate.  A supertax on the super rich imposed by Harold Wilson’s Labour government.  So if the Beatles earned £1 million because of their incredible talent and hard work touring in concert, working on new albums in the studio and making movies, of that £1 million they got to keep only about £50,000.  While the government got £950,000.  If they earned £10 million they got to keep about £500,000.  While the government got £9,500,000.  As you can see 5% is a very small percentage.  Which is why George Harrison got so angry.  The harder they worked the less of their earnings they were able to keep.

Is this fair?  George didn’t think so.  Nor did his fellow Beatles.  For they fled Britain.  Moved to another country.  Becoming tax exiles.  For they were little more than court minstrels.  Who the government forced to entertain them.  Earning a lot of money so they could take it away.  To help pay for an explosion in social spending Harold Wilson unleashed on Britain.  Socializing the UK like never before.  And all those social benefits required a lot of taxes.  Hence the progressive tax system.  And marginal tax rates.  Where the super rich, like the Beatles, paid confiscatory tax rates of 95%.

The Top Marginal Tax Rate was around 70% under President Carter and around 28% under President Reagan 

As social spending took off in the Sixties and Seventies governments thought they could just increase tax rates to generate greater amounts of tax revenue.  For governments looked at the economy as being static.  That whatever they did would result in their desired outcome without influencing the behavior of those paying these higher tax rates.  But the economy is not static.  It’s dynamic.  And changes in the tax rates do influence taxpayer behavior.  Just ask the Beatles.  And every other tax exile escaping the confiscatory tax rates of their government.  Because of this dynamic behavior of the taxpayers excessively high tax rates rarely brings in the tax revenue governments expect them to.

Even when it comes to sin taxes government still believes that the economy is static.  Even though they publicly state that taxes on alcohol and tobacco are to dissuade people from consuming alcohol and tobacco.  (The U.S. funded children’s health care with cigarette taxes clearly showing the government did not believe these taxes would stop people from smoking).  Perhaps some in government look at sin taxes as a way to discourage harmful habits.  But the taxman sees something altogether different when they look at sin taxes.  Addiction.  Knowing that few people will give up these items no matter how much they tax them.  And that means tax revenue.  But unlike the progressive income tax this tax is a regressive tax.  Those who can least afford to pay higher taxes pay a higher percentage of their income to pay these taxes.  For sin taxes increase prices.  And higher prices make smaller paychecks buy less.  Leaving less money for groceries and other essentials.

Most income taxes, on the other hand, are progressive.  Your income is broken up into brackets.  The lowest bracket has the lowest income tax rate.  Often times the lowest income bracket pays no income taxes.  The next bracket up has a small income tax rate.  The next bracket up has a larger income tax rate.  And so on.  Until you get to the high income threshold.  Where all income at and above this rate has the highest income tax rate.  This top marginal tax rate was around 70% under President Carter.  Around 28% under President Reagan.  And 95% under Harold Wilson’s Labour government in Britain.  An exceptionally high rate that led to great efforts to avoid paying income taxes.  Or simply encouraged people to renounce their citizenship and move to a more tax-friendly country.

When the Critical Mass of People turn from Taxpayers to Benefit Recipients it will Herald the End of the Republic

Progressive taxes are supposed to be fair.  By transferring the tax burden onto those who can most afford to pay these taxes.  But the more progressive the tax rates are the less tax revenue they generate.  What typically happens is you have a growing amount of low-income earners paying no income taxes but consuming the lion’s share of government benefits.  The super rich shelter their higher incomes and pay far less in taxes than those high marginal tax rates call for.  They still pay a lot, paying the majority of income taxes.  But it’s still not enough.  So the middle class gets soaked, too.  They pay less than the rich but the tax bite out of their paychecks hurts a lot more than it does for the rich.  Because the middle class has to make sacrifices in their lives whenever their tax rates go up. 

As social spending increases governments will use class warfare to increase taxes on the rich.  And they will redefine the rich to include parts of the middle class.  To make ‘the rich’ pay their ‘fair’ share.  And they will increase their tax rates.  But it won’t generate much tax revenue.  For no matter how much they tax the rich governments with high levels of spending on social programs all run deficits.  Because there just aren’t enough rich people to tax.  Which is why the government taxes everything under the sun to help pay for their excessive spending. 

If you drive a car, I’ll tax the street,
If you try to sit, I’ll tax your seat.
If you get too cold, I’ll tax the heat,
If you take a walk, I’ll tax your feet.

Don’t ask me what I want it for
If you don’t want to pay some more
‘Cause I’m the taxman, yeah, I’m the taxman

Now my advice for those who die
Declare the pennies on your eyes
‘Cause I’m the taxman, yeah, I’m the taxman
And you’re working for no one but me.

This is where excessive government spending leads to.  Excessive taxation.  And confiscatory tax rates.  Taking as much from the wealth creators as possible to fund the welfare state.  And as progressive tax systems fail to generate the desired tax revenue they will turn to every other tax they can.  Until there is no more wealth to tax.  Or to confiscate.  When the wealth creators finally say enough is enough.  And refuse to create any more wealth for the government to tax or to confiscate.  Leaving the government unable to meet their spending obligations.  As the critical mass of people turn from taxpayers to benefit recipients.  Heralding the end of the republic.

www.PITHOCRATES.com

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LESSONS LEARNED #13: “If you were to live under the socialist maxim ‘from each according to his ability to each according to his need’ you would find yourself surrounded by needy people with no ability.” -Old Pithy

Posted by PITHOCRATES - May 13th, 2010

KEY TO CIVILIZATION growth is the food supply.  Food surpluses in particular.  Before dependable food surpluses, life was short, harsh and miserable.  Especially for women.  When they weren’t working in the fields they were giving birth and raising children.  High infant mortality rates, though, inhibited population growth.  Most of the children women gave birth to didn’t survive to adulthood.  So there was a constant state of child rearing.  But few children survived to help with the business of family life.

Malnutrition and famine were common.  Feudalism provided a precarious balance between life and death.  For centuries the common people (i.e., peasants) eked out survival on their landlord’s manor.  The lord owned the land.  The peasants worked it.  Most of the bounty went to their lord.  But they kept what they grew on a small strip of land for themselves.  Just enough for subsistence.

But England changed all that.  By 1750, her agricultural output was second to none.  Private property.  Free market economy.  Capitalism.  Increased productivity.  Specialization.  These all combined to provide incentive.  Incentive produced food surpluses.  Food surpluses produced profits.  Reinvested profits improved farm yields.  This produced more profit.  And the cycle continued.  In less than a century feudalism would disappear from England.  There, you either worked land you owned or were paid wages to work land owned by others.  People began to live longer and healthier lives. 

The British Empire ruled the civilized world in the 19th century.  Representative government.  Abolition of slavery.  Free trade.  The Industrial Revolution.  These things, and others, gave them wealth, power and moral authority.  A lot of good came from this island kingdom.  Including the United States.  They weren’t perfect.  There was a learning curve.  But the modern capitalistic economy which they gave us liberated the masses.  It let us do what we wanted to do, not just what we had to do.  In particular, women, who could do more than just raise families and work in the fields.  One day, she could even become prime minister of Great Britain.

FOOD SURPLUSES BEGET industrialization.  Food surpluses beget everything, really.  Food surpluses release human capital to do everything else we do besides farming.  England was at the van of this modernization.  Others followed.  In time. 

Russia abolished serfdom (i.e., feudalism) in 1861.  Industrially backwards at the time, this liberty awakened a dormant human capital.  They followed the English model.  In time, with the advent of steamship and rail transportation, Russian grain competed with other European producers.

Joseph Stalin, looking to jump ahead in the industrialization process, implemented collective farming in the late 1920s.  He turned away from the English model.  The government became land owners.  It was feudalism on a grand scale.  Large collective farms would produce vast food surpluses that could feed industrial cities.  And there would still be surpluses left over to export to raise capital to build these industrial cities.  At least, that was the plan.

With less incentive came less productivity.  What land the former serfs had come to own was lost to the state.  The state took so much of the harvest that there was little food left for those who labored to grow it.  And the price the state paid for their crops was less than it was before collectivization.  The ‘free’ serfs were earning less and working more.  They didn’t like it.  And chose not to participate.  Collectivization became forced collectivization. 

Deportations, terror, murder and famine followed.  Perhaps more than 5 million starved to death during the famine of 1931 and 1932.  Others were to follow.

Forced collective farming produced famines elsewhere.  In China, during Mao Zedong’s Great Leap Forward, forced collectivization produced even greater famine deaths.  Historians estimate that 20-30 million, maybe more, starved to death in the famine of 1959–62.  Though hard numbers aren’t available, North Korea suffered a devastating famine in the late 1990s that claimed millions.  But in the West, in the 20th century, famine was unheard of.  When the United States suffered during the great Dust Bowl of the 1930s, there was no corresponding famine despite the loss of productive farmland.

WITH INDIVIDUAL LIBERTY comes incentive.  With incentive comes productivity.  A small island nation of free land owners could produce grain to feed themselves with surplus left over for export.  Nations with great fertile tracts farmed by forced collectivization led to famine.  Slaves have little incentive other than to subsist.  The collective good means little to them when they are starving.  They continue to sacrifice.  And continue to suffer.  Even if they do produce a few more bushels of grain.  So if the suffering is the same, what is the incentive to work harder?

As individual liberty declines, those in power tend to exploit those they rule.  In the name of the state.  Or the common good.  This is easy to see when it results in famine or revolution.  Not easy to hide those things.  But it is a little more difficult to see when the results are more benign.  Longer unemployment benefits, for example.  I mean, those are pretty nice.  Hard to see the downside in them.  As it is in other benefits these rulers give us.  So we are seduced as they whisper these sweet nothings in our ears.  And soon we willingly cede our liberty.  A little at a time.

WITH THE RISE of individual liberty, there was a corresponding decline in the ruling elite thanks to representative government.  Great Britain gave this gift to us and the United States took it to incredible heights.  The oppressed everywhere immigrated to the United States to feed a growing industrial demand.  Being new, we did not know all the affects of industrialization.  When the bad things came to light, we addressed them.  Great Britain, for example, was one of the first to protect women and children from the worse of industrial society.  Still, working conditions could be harsh.  As could life in the industrial cities.  Poverty.  Filth.  Disease.  And it was the wretched state of life in these slums that gave birth to a new school of thought on industrialization. 

In 1844 Friedrich Engels wrote The Condition of the English Working-Class to expose life in these slums.  He would collaborate 4 years later with Karl Marx on a treatise called The Communist Manifesto.  And from this Marxism, Communism, socialism, collectivism, etc., would follow.  As economic systems go, these would all prove to be failures.  But the essence of them lives on.  State planning.

You see, it was capitalism that gave us the industrial slums.  And that was good propaganda for a ruling elite looking to rule again.  So they whispered sweet nothings into our ears.  They talked about a Social Utopia.  From each according to his ability to each according to his need.  Fair taxation (i.e., only the ‘rich’ pay taxes).  Social safety nets (paid for by taxes of the rich).  Shorter workdays.  Longer paid vacations.  More government benefits.  A burgeoning welfare state.  Free stuff for everyone.  Again, paid for by taxing the rich who have exploited the working class.

What evolved was the elimination of the middle class.  You had the evil rich (and the middle class were, for all intents and purposes, rich because they didn’t need government help) whose wealth the government taxed away.  And the poor.  The poor who the government would now take care of.  If elected.  And they were.  They seduced a great many people with their utopian vision.  Even in the West. 

Great Britain and the United States would fall to this seductress, too, thanks to the Great Depression.  It was capitalism that gave us the Great Depression, after all.  The greed of the money people.  And so these great nations declined from greatness.  They became welfare states, too.  They had short respites during the 1980s.  Margaret Thatcher helped rejuvenate Great Britain.  Ronald Reagan, the United States.  But the ruling elite whispered more sweet nothings in our ears and the decline continues.

In 2010, our appetite for state benefits appears to be insatiable.  And we may have run out of wealth to tax away to pay for it.  California is on the brink of bankruptcy.  New Jersey elected a governor who proposed draconian spending cuts to stave off bankruptcy.  Other ‘blue’ states (i.e., states who vote Democrat) are also in trouble.  Underfunded pension obligations.  Demands of teacher unions.  Of government worker unions.  Everyone is there with their hand out.  None of them are willing to sacrifice for the common good.  No, they expect others to do the sacrificing.

THE OBAMA ADMINISTRATION has increased federal spending to such record levels that Communist China is concerned about our fiscal/monetary policies.  As they should be; they hold a lot of our debt.  The federal government has ‘bailed out’ private industry and taken de facto control.  They have created a healthcare entitlement that will cost more than a trillion dollars.  More spending is coming.  And it is all for the greater good.  They are vilifying those who are not poor, taxing away what wealth they can from them and giving it to the poor.  When about half the electorate doesn’t pay any income taxes, there is little opposition to raising taxes on those who do.  For if the ‘rich’ complain, the government vilifies them.

Where will it all end?  It is difficult to say.  How will it end?  Badly.  We can look at Europe who we seem to be emulating.  They’re further down The Road to Serfdom than we are.  With the excessive government spending, there will have to be greater government revenue (i.e., taxes).  Previous methods of taxation may prove insufficient.  Hello value added tax (VAT).  It’s all the rage in Europe.  It’s a multiple tax.  At every stage of production, government is there.  Taxing.  From the raw materials to the final assembly, government is there at every stage.  Taxing.  VATs will increase government revenue.  But they will also make every day life more expensive.  VATs increase the sales price of everything you buy.  And you pay it again at checkout.  It’s everywhere.  Everything will cost more.  From manicures to lattes to toilet paper to tampons.  And this is a tax everyone pays.  Even the poor.  It is a regressive tax.  The rich will pay more, but the poor will feel it more.  This hidden tax will take a larger portion of what little the poor has.

But how bad can it really get?  In 2010, I guess the answer would be to look at Greece to see what happens when a country can no longer sustain her welfare state.  And the people aren’t all that keen on losing the government benefits they’ve grown accustomed to.  It isn’t pretty.  But when you start down that road (from each according to his ability to each according to his need), the taking and giving always get bigger.  It never gets smaller.  And when you reach a critical point, government just can’t sustain it any longer.  And it crashes.  Like in Greece.

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