Judge Posner has an interesting blog post entitled Taxing Wealthy People More Heavily. One of his arguments against increasing the taxes on people with a million or more in income is that they would then have a strong incentive to keep their income under a million. I hadn’t understood President Obama’s proposal of 25% on such incomes to refer to 25% on everything made that year; but maybe he did. I figured he was referring to a marginal tax rate – income, regardless of the source, in excess of a million at 25%. That would, I think, negate one of Judge Posner’s arguments against increasing taxes on high incomes.
He disregards proposals to switch to a consumption tax for practical reasons:
While there are good theoretical arguments for replacing income with consumption taxes, as discussed by Becker, the administrative and transitional costs would be staggering; and so with any effort to overhaul the federal income tax system rather than just tinker at the edges of it.
He also describes a tax on wealth (as opposed to income) as “an uncommonly silly idea.”
My proposal is simply to revert to the Clinton-Gingrich era tax structure. We know that it worked better than the present structure in terms of funding the government, and I don’t recall folks at the time crying out under the oppressive boot heel of communism.
“One of his arguments against increasing the taxes on people with a million or more in income is that they would then have a strong incentive to keep their income under a million. ”
Yes, that is exactly why I’ve kept my annual income under a million…
Funny, Paul.
I disagree with the concept that people would generally “cap” their income to avoid higher taxes. I find that the more one is “taxed”, the more one struggles to make more money. The psychology of a fish on a hook sounds more reasonable than the fish who refuses the hook.
Sure, some people might “cap” their income, but I imagine that their income might not be much more than the cap figure in the first place. The idea that most of the “1%” would lower their incomes under the cap is ludicrous on the face of it.
For whatever reason, your fish on a hook analogy made me think of a line I heard about stressed grapes making better wine.
:)
Transitioning to a consumption tax would absolutely have some costs involved. That being said, I don’t see why those adminstrative costs would be THAT significant. A transition to a consumption tax would be an investment in our future.
Considering the future prospects of our current tax code, and the length of time a consumption tax would be in force, I am surprised that Posner believes the cost would not be worth the investment. Posner is known for his cost-balancing analysis. I would certainly have liked to have seen some of that analysis in this blog post.
I fully agree with Posner though that a super-easy way to improve revenue generation would be to hire more IRS Agents. One of the many things Bush stupidly did was try to take the teeth out of the IRS.
Along the lines of enforcement, some effort should be made to see that low end violators aren’t seen as more attractive IRS targets than high end. I’ve seen reports that low end violators (e.g. earned income tax credit) are more heavily prosecuted than higher end ones. I can see where that might be true just because the low end cases are simpler and require fewer resources to prosecute because, among other things, poor people don’t have as many resources with which to fight the IRS.
The reason that they go after EITC fraud is because it is so common and easy to do. And without the deterrent affect of widespread enforcement, it would be even more rampant than it already is.
It is also fairly easy to enforce, especially compared to going through a business audit, which is where the tax fraud among the rich lies. Most of the enforcement is done with computers, it isn’t difficult to compare tax returns to bank accounts.
I finished my taxes on Saturday, so this topic is fresh with me. It reminds me of my finest tax preparation hour, way back in 1994, when I qualified for the EITC coming out of college with my first job (I had only worked for part of the year). It’s been all downhill since then.
My understanding is that there are a variety of “red-flags” that will almost ensure an audit. The home-office deduction is another one which affects more middle class. Gift and estate tax returns are heavily audited as well, and this mostly affects the rich. I think it has more to do with IRS laziness than anything else.
Rush boasts that he has been audited by New York State every single year since he started his show. Even though he moved out of New York and sold his condo, they still audit him every year.
The idea that the poor get audited more than the rich is preposterous. The IRS has limited human resources, and they assign them where they can get the best bang for the buck.
Automated cross references between your various tax documents is not an audit.
Doug: Just saw this article on yahoo. IMHO, all 12 of the audit red flags are deductions and issues generally faced by the rich.
http://finance.yahoo.com/news/irs-audit-red-flags–the-dirty-dozen.html
We know that it worked better than the present structure in terms of funding the government,
No we don’t. We know that we had an internet bubble that generated capital gains tax revenue that was totally unsustainable. But that is about all we can say.
Point of fact, tax revenues peaked in 2007 at 18.5% of GDP for that economic cycle. The previous peak was 20% in 2001. Previous peaks were in the 19% range. We were closer to the “normal” peak in 2007 than we were in 2001.
There is no doubt that tax rates have to go up a bit, the question is how best to do it. I would like to see us jettison just about every tax deduction out there (mortgage interest, state and local taxes, employer paid health insurance deductibles, 401(k)s and pensions, etc.) to broaden the tax base (and greatly increase taxes on higher incomes as a result), while lowering rates a bit. Increase the incentives to work and save.
Peyton Manning, among NFL, major league baseball and NBA players, is really struggling to keep his AGI under $1 million. Yeah sure. Whatever.