A brief follow-up to yesterday's post on the richest 400 Americans and their surprisingly low tax rates. Reader Ryan Clutter points to the Tax Update Blog, which informs us that the richest 400 Americans usually earn that status via one-time capital gains, and that membership in that elite group changes drastically from year to year.
David Cay Johnston has prominently advanced the argument that taxpayers with the highest incomes fail to pay their proper share of taxes, disadvantaging the merely wealthy. Statistics show that the income tax is progressive until you get to the very top 1/10 of 1 percent; then the effective rate goes down.
Much of this is because of the break for capital gains taxes. As we've said before, it's probably not worth diddling with the tax law just to beat up on statistical outliers. To solve the "problem" would require raising capital gains rates, a step widely believed to be bad economic policy (even the Clinton administration retained a lower capital gain rate). Doing so would punish taxpayers across the board, just not at the highest levels. It would also increase the double tax on corporate income, which most economists consider a bad thing.
Statistical outliers or rank inequity? I ran the critique by Johnston, who responded:
"Government policy, including taxes, should encourage wealth creation, but what the data show is that the gains in income and the reductions in taxes are both very narrowly concentrated at the top. This is not the result of some immutable law, but rather of the mix of hard work, luck and inheritance that make some rich alloyed with government policies which I have shown in numerous ways take from those with less and redistribute to those with more."