“Putting Numbers to a Tax Increase for the Rich” is a nytimes article aiming to quantify the richness of America’s rich bastards.
All of the data are misleading due to the fact that the Times uses average rather than media income. So the average after-tax income of someone in the top income quintile is $238,685. The typical person in that quintile is likely earning much less, however, because the average includes people who enjoy $50 million in a good year (perhaps an entrepreneur cashing out of ten years of investment in a startup).
It also turns out that the Times calculates “after-tax income” by looking only at federal income taxes. This makes it easier to conclude that a rich bastard could pay more without being discouraged from working. Thus a person in the 95-99% area, has an average pre-tax income of $405,492, pays federal taxes of about 25 percent, and ends up with an “after-tax income” of $303,273. But what if that person lives in Manhattan? New York state tax is roughly 8 percent of gross and New York City tax is about 3.65 percent of gross. Considering that state taxes are deductible for the purpose of calculating federal tax, let’s call this a 10 percent rake. Now the rich bastard has an average after-tax income of about $260,000. The rich bastard also has to buy some goods and services in Manhattan where sales tax is nearly 9 percent. Suppose that $100,000 is spent each year within the city, including on restaurant meals. That’s another $10,000 to the government, so the after-tax income is $250,000. Finally, if this person owns a condominium he or she will pay perhaps another $20,000 per year in property tax, about $5,000 of which will be refunded in the form of lower federal taxes. So the true after-tax income is $235,000 and the total tax rate is about 42 percent.
Suppose that the high income of this rich bastard did not go unnoticed in the world of romance. After 10 years of Upper East Side boredom, the spouse decided that it would be more fun to start having sex with younger companions and sued the rich bastard for divorce, obtaining custody of two children. Under New York family law, the victorious plaintiff would be entitled to 25 percent of the defendant’s gross income, a non-deductible $100,000 per year. Now the income after child support is $135,000. (Concrete example from the nytimes of a law firm partner earning $375,000/year who can barely afford to survive in Manhattan. This is partly due to the fact that he was mined out for $125,204 per year by a divorce plaintiff.)
Suppose that our example rich bastard is a male. Post-divorce he decides to start dating. His new friend becomes pregnant and decides that she wants to keep the kid but ditch the father. Now he is on the hook for 17 percent of 75 percent of his income (the 25 percent paid to his first plaintiff is deducted for the purposes of calculating child support). That’s a non-deductible $51,700. This leaves our rich bastard, the target of the Democrats’ proposed new taxes, with $82,300 in spending power with which to (1) sustain himself in the New York metropolitan area, (2) provide a place for children to stay every other weekend, and (3) pay whatever additional federal taxes are imposed by Congress.
[Note that, depending on the income of the first plaintiff, the example rich bastard might have less after-tax and after-divorce-litigation money. In addition to child support profits, the first plaintiff might be entitled to alimony of about 30 percent of the pre-tax income. This would be a tax-deductible $121,678 per year.]
Readers: What do you think of the nytimes analysis? Is the U.S. full of low-hanging fruit ripe for the picking by the IRS? Or does looking only at federal taxes grossly distort the data?
The other problem with this is that even if you raise rates you can harvest what – $50 billion a year more in tax revenue? But the Federal deficit is running at $400 billion plus (down from a trillion/year).
What do these hypothetical child support and alimony examples have to do with income taxes? Would someone earning the median income not be similarly affected? You sound like a men’s rights advocate.
I’m confused by your opening statement: “All of the data are misleading due to the fact that the Times uses average rather than media income.”,
because assuming a non-regressive tax (a safe assumption), computing the tax on the average income is an underapproximation of the actual tax, thus a correct approximation for the purpose of the nytimes article. It’s true that computing the tax on median instead of average would result in an even lower amount, but that would simply be a worse approximation of the actual tax amount.
Will all respect, as it stands that statement sounds like disinformation to me.
Average income is more appropriate for many of the calculations the article makes (e.g. the potential revenue a rate change would generate from a particular income segment). To me, showing the quintiles and then further breaking down upper quintile does (at least partially) make up for using average instead of median incomes. Median numbers would be better for some purposes but including both averages and medians would make an already complicated article more so. I agree that not including a column in the tables for total tax burden (including state taxes) is misleading, but for the purposes of this article I would argue that average state tax burden would be more appropriate than the burden in a high tax state.
While not perfect, the article does illustrate that a substantial amount of money could be raised from higher taxes while leaving upper income folks with what still looks like a lot of money to most Americans. I haven’t cranked the numbers but I suspect that even with the higher rates, the top 1% would still be taking home a lot more (inflation adjusted per capita) income than they did 30 or 40 years ago. They were rich then and would continue to be even richer now.
Izzie: per the article, raising taxes on the top 1% raises $157 billion which if applied to the deficit brings it to near sustainable levels.
Like John, I do not see how the discussion about child support and alimony expenses is germane to the issues raised in the NY Times article.
Guys, women don’t go for child support and alimony from broke bleep-bleeps. What women do try “wild night with a man to get a child support vehicle” financial planning are not going to have that wild night with a retail clerk pulling down 35k a year or even a city employee making 70k a year. They are going to aim for the guys making “rich bastard” money, as our host put it. So while it may be a hobbyhorse, it’s a pretty relevant one to the main topic.
Also, one of the problems with “Tax the rich mofos” articles is that these taxes inevitably fall on the not-quite-as-rich mofos, who can’t use fancy accounting tricks to protect their money.
I agree that federal taxes only wildly distorts the data.
Why is calculating the interaction between child support and income tax important? Democrats have been calling for a return to the good old days of a 90-percent top income tax rate, e.g., on incomes over $1 million. Supposedly we had this rate in the 1950s (in fact what we had were tax shelters). But in the 1950s the child support guidelines that provided for unlimited child support entitlement, even after a one-night sexual encounter, were still 30+ years in the future (see http://www.realworlddivorce.com/History ). And state income tax rates were lower. So it wouldn’t have been possible for a high-income American simultaneously to owe 12 percent to state and local governments, 90 percent to the Feds, 15 percent of income to a child support profiteer, and 25 percent of income to an ex-spouse (with only the state tax deductible). Politicians don’t like being constrained by arithmetic but it doesn’t take a Singapore- or Shanghai-grade education to see that these numbers add up to 100 percent of income.
Another difference from the 1950s, aside from the now-guaranteed profitability of casual sexual encounters, is the social environment. Having a child out of wedlock in the 1950s was a source of shame and could lead to social ostracism; today the media celebrates “single parents” as heroes. Being divorced in the 1950s was a serious barrier to social acceptance; today the successful divorce plaintiff can be fully accepted in most communities. Would a man in the 1950s have been awarded $20 million that had been entirely earned over a 20-year period by his career-oriented wife? It seems unlikely, but today he would be entitled to his 50% share of the accumulated assets even if he went into the courtroom and said “I was getting bored after two decades of watching cable TV and playing Xbox while Marcia went to her executive job. I would really like to start having sex with 22-year-old girls from Craigslist.” Could a healthy working-age man in the 1950s have been awarded a lifetime of alimony from a harder-working wife? With a bit of attention to settling in the right state, he can make that work in 2015.
If we consider that hunting for alimony and child support has now been opened up to twice as many people (men as well as women), that child support profits have been enhanced by 10X or 100X, and that child support profits are now available following casual sex rather than a marriage, it is much more likely that “high income” and “being mined out by a family law plaintiff” will intersect than they did in the old days. Thus an analysis like the nytimes did is incomplete.
What makes the financial consequences of divorce different from the consequences of other forms of irresponsible behavior?
If the rich bastard from the example had a huge credit card debt, or felt the need to own a manhattan apartment he/she couldn’t really afford, would you also argue that these things need to be compensated for by lower tax rates?
Michiel: the difference between a court order to pay alimony or child support and the credit card debt that you posit is that the credit card debt could be discharged in bankruptcy. The expensive apartment that you posit could be sold. A court order to pay child support is functionally the same as a tax from another jurisdiction in that the person will be put in prison if he or she does not pay. Thus it becomes an issue when the combination of taxes and court orders exceed 100 percent of a person’s income.
Mr. Greenspun, I really don’t mean to be insolent. [remainder removed]
[Moderator: This is an example of the kind of posting that doesn’t fit http://philip.greenspun.com/blog/comment-moderation-policy/ , e.g., “Comments that attack another person’s motivation, intelligence, or character are bad because they degrade the quality of the discussion and discourage thoughtful comments by others. For some reason, human beings often are confident that they can discern the hidden motivation for another person doing or saying something. Trained psychiatrists and psychologists, however, do very poorly at this task, so what hope is there for a lay person?” Alternative perspectives are welcome, of course, but a statement that people who don’t agree with you are stupid is not helpful. Please try to keep the discussion centered on ideas, not other people.]
“per the article, raising taxes on the top 1% raises $157 billion which if applied to the deficit brings it to near sustainable levels.”
How much is a “sustainable” deficit?
$157 billion is based on a static analysis – what happens in real life is that when rates go up, people hire tax lawyers to find ways not to pay taxes or else they just work less.
Izzie:
(Sustainable Deficit) <= (GDP Growth) * Debt / GDP
as the Debt to GDP ratio will shrink or stay the same.