CNBC ran a story yesterday with the headline "The rich do not pay the most taxes, they pay ALL the taxes." The story has thousands of Facebook shares. And its premise is completely false. The article goes on to present data regarding the federal personal income tax, which is indeed paid almost entirely by people with high incomes. People with low incomes pay negative federal personal income taxes (that is, the government sends them checks) because of the earned income tax credit.
The coalition’s confusion over its plan to remove child benefit from people in the 40% tax band raises an issue that all politicians would rather ignore: namely, the structure of marginal taxes.
The problem with withdrawing child benefit is that someone earning just under £42,745 faces a massive marginal tax rate because she would lose child benefit if she gets a pay rise.
Felix Salmon and Kevin Drum ponder the American middle class’ implacable opposition to taxing the rich as a means of closing the budget deficit. Their comments are interesting, but I’m seeking evidence that any such opposition exists.
By James Kwak
Christina and David Romer’s new paper, “The Incentive Effects of Marginal Tax Rates: Evidence from the Interwar Era,” is available as an NBER working paper (if you are so lucky). Given the current debates about taxes, the paper is likely to garner some attention.
IF YOU live in a developed country your taxes will probably increase. Politicians won't necessarily tell you this. They would rather pretend that someone else will pay for our profligacy. In America, Republicans claim they can cut spending enough that taxes won’t need to increase. But if they are to balance the budget over the long run, they will have to make drastic cuts to services and entitlements: large enough to rattle an armchair libertarian. Across the aisle, Democrats often say we can close the gap if the “rich pay their fair share”.
INEQUALITY fosters resentment, but so can redistribution. That’s especially true when tax revenues go toward people considered less than deserving (currently, that group seems to be public-sector unions). But so far, one group is considered perennially entitled: the elderly. Americans are concerned about the growing deficit. Many would like to see less spending instead of higher taxes. But despite the expected entitlement debt-bomb, cutting entitlements to the elderly is still off limits.