Obama/Biden and Romney/Ryan Issues

Election Economics: Tax Matters

Sep 10, 2012 • Behavioral Economics, Businesses, Economic Debates, Economic History, Economic Humor, Government, Households, Labor, Macroeconomic Measurement, Regulation, Thinking Economically, Uncategorized, US Presidential Election • 115 Views    No Comments

The candidates agree that tax proposals need to focus on reducing the deficit and on government spending. After that, the divide on tax policy is considerable.

To narrow the gap between revenue and spending, President Obama supports a higher tax rate for the more affluent to fund government spending. By contrast, former Governor Romney says let’s avoid tax increases and be more frugal about most of what we spend.

For us to decide and defend the position that we support, first let’s look at a definition, then at some history and finally at where we are now.

A Definition:
With marginal rates, we divide income into slices, each having a different tax rate. So, very hypothetically, if you earn $30,000, then for the first $10,000 of income, you could pay 5%, then 10% on the next $10,000, and, 20% for the next $10,000.
Some History:
1) Tax rates: Going as far back as the constitutional amendment that legalized the income tax, in 1913 the top marginal rate was 7%, in the 1950s a whopping 92%, and then between 1986 and 1993, 28%. During 1993, the top rate increased to 39.5% and now it is 35%. In 1985, there were 14 marginal tax brackets with the highest, 50%. The 1986 tax act cut the number of brackets down to 2 although some say there was a third 33% bracket because of a surcharge on certain high incomes.
2) Tax revenue: Since 1945, whatever the top rate, the amount of revenue has remained a somewhat constant proportion of GDP. (Please see graph at bottom.)
Where are we now?
1)Those who are more affluent receive a higher proportion of the nation’s income and are paying a larger proportion of all taxes. Specifically, while the income of the top 5% has increased, they are the source of more than 40% of all tax revenue.
2) Due to expire at the end of 2012, the top marginal income tax rate is 35%. Should it and other temporary tax relief provisions be extended? The list of all the possible extensions is here (at the end of the attached article).
This takes us to your goals and always remembering that whatever you support, you are creating incentives, tradeoffs (there is no free lunch), and unintended consequences.
Sources and Resources:
When people say to you that the tax system has become more complex than ever before, you can show them this 1915 tax form. For a superb discussion of current tax dilemmas through the lens of history, this econtalk interview is ideal and well worth the hour or at least a look at the transcript. Finally, if you can access WSJ.com, this (gated) David Wessel analysis of tax issues is very good.
If you want to smile, this 5-minute Pink Panther video about the tax collector is fun.

 

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