Tax burden

A friend of mine recently argued, "raising taxes slightly on the highest income earners produces large amounts of revenue. " That seems like a reasonable argument, until you take into account how few rich people there are relative to everyone else. Here are some of my back of the envelope calculations based on numbers provided by the Tax Foundation:

• If you raised everyone's tax rate by 1% you would generate about $17 billion more from the top 1%, and about $67 billion from everyone else.

• If you raise taxes on the top 1% by 20 percentage points, (from 35-55%), you raise about $337 billion. Raise tax rates on everyone by 5 percentage points, and you raise about $421 billion.

• If you raise taxes on the top 1% by 50 percentage points, (from 35-85%) you raise about $842 billion. Raise tax rates on everyone by 10 percentage points, and you raise about $842 billion (not a typo).
  

Of course, all of this ignores behavior changes and incentive effects. If you raise rates 20 or 50 percentage points, the static analysis above would not hold, because people would go out of their way to earn less. It’s not that they would be “lazy”, the word some have used to try and disparage the supply side argument. It’s that at 85% marginal rates, people spend more time sheltering income than earning income. At 85%, the return on sheltering income would be so much higher than just about anything else you could do with your money.

Below is an amazing graph from the American Enterprise Institute. Conventional wisdom says that the payroll tax is progressive because it is capped. But maybe the proper way to measure is to take into account what everyone puts in versus what you get out. If you get more out than you put in, that is a negative tax, and if you put in more than you get out, it’s a positive tax.

The graph below from shows just who is really paying the social security tax. Hat tip to Veronique de Rugy.