Several members of Congress, and individuals aspiring for higher offices, tout higher marginal tax rates on high income earners as an effective tool to address income inequality and fund additional government spending programs. Individuals of this persuasion often point out that marginal tax rates were around 90% during the 1950’s and 1960’s and GDP still grew between 4-5% per year. Joe Nocera’s recent Bloomberg article discusses the often omitted story of the great American past time, tax avoidance. He highlights how high earning entertainers like Frank Sinatra and Bing Crosby used loopholes in the tax code to shield large portions of their income and reduce their effective tax rate to about half of their 90% marginal rate.
My inner-cynic thinks that talk about raising marginal rates on high earners is more about scoring political points with a voting base and a means to usurp power by making/protecting tax loop holes for preferred special interest groups more valuable. If the goal was to actually increase the tax revenue collected from high earners and create a more equitable tax code, the focus would be on closing and/or capping the value of loopholes in the tax code.
I think the optimal tax code would be a single tax rate for all filers with an exemption on the first $X of income (i.e. 1-1.5x the poverty line). This would significantly lower the effective rate for low income earners and high earners’ effective rates will approach the actual tax rate. I would treat all entities as pass though entities so all income is taxed at the individual filer level. This would simplify things and eliminate the need for an additional tax rate for capital gains and dividends. The single tax rate also eliminates the ability to selectively (punitively) raise taxes on specific groups of individuals/corporations.
I am not a tax policy expert, but I agree with Joe Nocera’s parting shot below.
I’m not saying we couldn’t do with more taxes on the rich. But let’s be careful. When Bing Crosby won’t give a concert, it’s safe to say that the marginal tax rate is too high
Please use the comment section to criticize my tax plan or share any interesting articles or opinions on improving tax code.