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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Out of Control State Spending – Greece, France, the U.K. and the U.S.A.

Posted by PITHOCRATES - December 15th, 2010

Greece Burning – Public Sector Pay and Pensions Bankrupting the Nation

Things got ugly in Greece during their 2010 financial crisis.  At least three died one day during rioting (see Greek financial crisis explained posted 5/6/2010 on The BBC).

Three people, including a pregnant woman, have been killed during riots in Athens.

And why were the Greeks rioting?

Many of the protesters are public service workers, whose salary comes from the tax payer…

They object to their government’s plan to get Greece’s economy back under control.

It includes a freeze on public sector pay, raising the tax on fuel, and cutting pensions.

And why did Greece find herself in a position to take these austerity measures?

For years, Greece has been spending money it doesn’t have.

The government there took advantage of the economic good-times to borrow money and spend it on pay-rises for public workers and projects such as the 2004 Olympics.

France Burning – Early Retirement Age Bankrupting the Nation

Things weren’t much prettier in France.  They, too, were facing out of control state spending.  So they, too, tried to cut their spending.  And it didn’t go over well with the people (see Proposed retirement age change prompts riots in France by The Associated Press posted 11/4/2010 on The Chicago Sun-Times).

Workers opposed to a higher retirement age blocked roads to airports around France on Wednesday, leaving passengers in Paris dragging suitcases on foot along an emergency breakdown lane.

Outside the capital, hooded youths smashed store windows amid clouds of tear gas.

Riot police in black body armor forced striking workers away from blocked fuel depots in western France, restoring gasoline to areas where pumps were dry after weeks of protests over the government proposal raising the age from 60 to 62.

And what was their greatest fear of these austerity cuts?

Many workers feel the change would be a first step in eroding France’s social benefits – which include long vacations, contracts that make it hard for employers to lay off workers and a state-subsidized health care system – in favor of “American-style capitalism.”

The United Kingdom Burning – Cheap College Tuition Bankrupting the Nation

Meanwhile, in the U.K., they’re having their own riots.  And the rioters attacked the Royal Family.  Fortunately for Prince Charles, his car took the brunt of the attack (see Prince Charles’s car kicked in tuition riot by The Associated Press posted 12/9/2010 on CBC News). 

“We can confirm that the royal highnesses’ car was attacked by protesters on their way to their engagement at the London Palladium this evening. The royal highnesses are unharmed,” a statement from Prince Charles’s press secretary said.

And why were the people rioting?  Much like in Greece and France, the U.K.’s generous social benefits are bankrupting the nation.

Cameron’s government describes the move as a painful necessity to deal with a record budget deficit and a sputtering economy. To balance its books, the U.K. passed a four-year package of spending cuts worth $129 billion, which will lead to the loss of hundreds of thousands of public sector jobs and cut or curtail hundreds of government programs.

The government proposed raising the maximum university tuition fees in England from $4,780 a year to $14,000. Students reacted with mass protests that have been marred by violence and have paralyzed some campuses.

Not Burning Yet – Social Security and Medicare Bankrupting the Nation

Social Security and Medicare are going broke.  And will.  It’s just a matter of time.  When they came into being, there was an expanding birth rate.  Actuaries counted on those birth rates to continue.  But they didn’t.  The baby boom generation had only about 3 children per family.  Whereas their parent’s generation often had 10 kids or more.

Social Security is like a Ponzi Scheme.  There are no retirement accounts.  Payroll taxes from workers today pay the retirees of today.  Think pyramid scheme.  As long as the base of the pyramid (those workers paying taxes) grows at a greater rate than the tip of the pyramid (those collecting benefits) the scheme works.  But with the reduction in birth rates and our aging population, the pyramid has inverted.  The tip of the pyramid is growing at a greater rate than the base is.  As the ‘size’ of the tip and the base approach each other, eventually one worker will support one retiree.  And if a retiree lives on, say, $30,000 a year, do the math.  In a two-income family, one income will support a retiree.  And nothing else.  And that just ain’t sustainable.  Ergo, Social Security will go broke.

Ditto for Medicare.

Obamacare – Tinder, Gasoline and a Match

All right, we’ve seen how out of control state spending has led to austerity measures throughout Europe.  And rioting.  We have two huge entitlement programs pushing our county down the same path.  Europe is cutting costs (even when cities are burning in the process).  And what do we do?  We double down.  We add a third entitlement behemoth that will make Social Security and Medicare look tiny in comparison.

Obamacare.  Affordable health care for everyone.  Because the government is going to force everyone to buy health insurance.  Because the more people who pay premiums, the lower each premium needs to be.  Think pyramid scheme.  You need more to pay in (the base) than collect benefits (the tip).  Because this ain’t insurance.  It’s the mother lode of welfare entitlements.  And it’s also something else.  Unconstitutional (see Opposition to Health Law Is Steeped in Tradition by David Leonhardt posted 12/14/2010 on The New York Times).

On Monday, a federal judge ruled part of the law to be unconstitutional, and the Supreme Court will probably need to settle the matter in the end.

But that doesn’t stop the Obamacare cheerleaders.

We’ve lived through a version of this story before, and not just with Medicare. Nearly every time this country has expanded its social safety net or tried to guarantee civil rights, passionate opposition has followed.

The opposition stems from the tension between two competing traditions in the American economy. One is the laissez-faire tradition that celebrates individuality and risk-taking. The other is the progressive tradition that says people have a right to a minimum standard of living — time off from work, education and the like.

Yes, the two competing traditions.  The individuality and risk-taking that has defined America until Woodrow Wilson and the Progressives came along.  And the entitlement mentality.  Also known as European Socialism.  Like they have, had, have in Greece, France and Great Britain.  And we’ve seen how that has worked.  But we don’t learn from the lessons of history, do we?

The federal income tax, a senator from New York said a century ago, might mean the end of “our distinctively American experiment of individual freedom.” Social Security was actually a plan “to Sovietize America,” a previous head of the Chamber of Commerce said in 1935. The minimum wage and mandated overtime pay were steps “in the direction of Communism, Bolshevism, fascism and Nazism,” the National Association of Manufacturers charged in 1938.

When my dad worked gross pay meant something.  Today it’s all about net pay.  What’s left after taxes.  Taxes have grown so great that a single wage earner has trouble raising a family.  Unlike those families back before the baby boom.  When a single wage earner could raise 10 kids.  So, yes, the federal income tax has greatly changed the American experiment in individual freedom.

Social Security has ‘Sovietize’ America.  Retirees live in fear of losing their state benefits.  And they know that it’s in their ‘best interest’ to support the state.  And they do.  At the voting booth.  Potato.  Tomato.  The only difference is that we don’t have gulags in Siberia here.  But we don’t need them.  Because the threat of cutting a retiree’s benefits scares them enough to toe the party line.

And now we want to add national health care to the mix.  Because every other rich country has jumped off that bridge.

It is clearly one of the least radical ways for the United States to end its status as the only rich country with millions and millions of uninsured.

There’s a reason why the U.S. does not pay for millions and millions of uninsured here.  Why?  See Greece, France and the U.K. above. 

Guaranteeing people a decent retirement and decent health care does more than smooth out the rough edges of capitalism. Those guarantees give people the freedom to take risks. If you know that professional failure won’t leave you penniless and won’t prevent your child from receiving needed medical care, you can leave the comfort of a large corporation and take a chance on your own idea. You can take a shot at becoming the next great American entrepreneur.

With every previous major expansion of the safety net, history has had a chance to prove the naysayers wrong. It may yet in the case of universal health coverage. But the decision now seems to rest with the nine members of the Supreme Court.

Again, see Greece, France and the U.K. above.  As nice and compassionate as it sounds, it just doesn’t work.  European Socialism.  If it did, it would have worked in Greece, France and the U.K.  But it didn’t.  And that should scare the hell out of us here.  Because we’re heading down the same road.

And history may just prove the naysayers were right.

www.PITHOCRATES.com

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