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Taxing the Wealthy

[digg-reddit-me]Liberal orthodoxy has made the state dependent on a volatile source of revenues – high income tax rates on the wealthy.

That’s George Will in his most recent column. As phrased, I’m not sure it makes sense. A tax rate is not a source of revenue. A tax is. And while an income tax rate can be volatile – that doesn’t seem to be Will’s point – it is that the revenue generated from the tax is. So, let me correct Mr. Will:

Liberal orthodoxy has made the state dependent on a volatile source of revenues – taxes paid by the wealthy.

Now, I won’t argue about the volatility of any financial strategy based on depending on just a few individuals to generate revenue. 

But let’s pose a hypothetical for a moment. What if those that made over $200 million were taxed at a lower rate than everyone else – let’s say 18% – and those who made less than $100,000 were taxed at a 35% rate. And what if – even given this, the revenue generated from taxing those making over $200 million far exceeded the vast majority who made less.

Wouldn’t that complicate things just a bit?

And now, what if it were true?

The stats here are national – not based on California which Will is talking about. And there are only concerning the top 400 taxpayers who despite being just over 1/one millionth of the population, pay nearly 2% of all income taxes. But based on my previous research, I’m pretty confident the pattern holds – that those at the top of the income scale pay a lower rate of taxes than those at the bottom (Warren Buffett famously explained that he was taxed at a lower rate than his secretary)  – and yet because wealth and income is so concentrated in America, the richest 5% pay about 60% of all taxes.

Volatility is built into any system in which wealth is concentrated – which is why I’m not sure Will’s point here is well-founded. What does he suggest is a more stable type of taxation? If wealth were distributed more broadly, then our economic system – and tax revenues  – would undoubtedly be more stable – but I doubt this is what Will wants. If consumption were taxed rather than income, then the system would likely be even more unstable – especially in a downturn such as now when everyone is cutting back. So, what is the solution?

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