Paul Krugman, Kevin Drum & Capital Gains

Kthulu:

The main reason the rich pay so little is that most of their income takes the form of capital gains, which are taxed at a maximum rate of 15 percent, far below the maximum on wages and salaries. So the question is whether capital gains — three-quarters of which go to the top 1 percent of the income distribution — warrant such special treatment. 

Defenders of low taxes on the rich mainly make two arguments: that low taxes on capital gains are a time-honored principle, and that they are needed to promote economic growth and job creation. Both claims are false. 

When you hear about the low, low taxes of people like Mr. Romney, what you need to know is that it wasn’t always thus — and the days when the superrich paid much higher taxes weren’t that long ago. Back in 1986, Ronald Reagan — yes, Ronald Reagan — signed a tax reform equalizing top rates on earned income and capital gains at 28 percent. The rate rose further, to more than 29 percent, during Bill Clinton’s first term. 

Low capital gains taxes date only from 1997, when Mr. Clinton struck a deal with Republicans in Congress in which he cut taxes on the rich in return for creation of the Children’s Health Insurance Program. And today’s ultralow rates — the lowest since the days of Herbert Hoover — date only from 2003, when former President George W. Bush rammed both a tax cut on capital gains and a tax cut on dividends through Congress, something he achieved by exploiting the illusion of triumph in Iraq. 

Correspondingly, the low-tax status of the very rich is also a recent development. During Mr. Clinton’s first term, the top 400 taxpayers paid close to 30 percent of their income in federal taxes, and even after his tax deal they paid substantially more than they have since the 2003 cut. 

Kevin Drum:

So it's a good time to get a little wonky and ask why capital gains and carried interest are taxed at only 15 percent, while ordinary labor income is taxed at rates as high as 35 percent. If you're the cynical sort, you think the answer is simple: Rich people make lots of their money via capital gains and carried interest, and the Republican Party is dedicated to making the lives of rich people easy and prosperous. So they've made sure those tax rates are low. 

Maybe so. But there's an official, noncynical answer too: Capital gains are profits from investments, and a high level of investment is good for the economy. Low tax rates on capital gains encourage investment and therefore benefit the entire economy.
But is this true? If it were, you'd expect to see some kind of long-term correlation between capital gains rates and the total amount of capital gains income. The lower the rates, the more the income. Let's roll the tape:

Do you see a correlation? I don't. What you see is two things. First, when people know rates are about to go up, they sell their assets quickly to beat the tax man and take advantage of the current rates. You can see that in 1968 and 1986. Second, capital gains skyrocket during investment booms. You can see that during the dot-com bubble of the late '90s and the housing bubble of the aughts. When you remove those artifacts, there's pretty much nothing left. No matter what the tax rate is, the level of capital gains pokes along at about the same rate. 

... 

As the Congressional Research Service concluded in a study a couple of years ago, capital gains tax cuts "are unlikely to have much effect on the long-term level of output or the path to the long-run level of output (i.e., economic growth)."

So what about carried interest? What's that all about? Carried interest is a feature of the way partnerships are taxed, and private equity funds are essentially partnerships. In a partnership, it's frequently the case that one person puts up the money and another person manages the business. Both partners get equity in the enterprise: The former gets ordinary, garden variety equity and the latter gets "sweat equity." When the enterprise is sold off (hopefully at a profit), both are taxed at capital gains rates. 

Bain Capital acted as a managing partner in most of its transactions, so this was a pretty good deal for them. After all, most of us who work as managers, even if our pay comes in the form of a bonus that's based on the profitability of the company, have to pay ordinary income tax rates. That's because this kind of work is known as "labor." But if you manage a private equity fund, that exact same kind of work is defined as sweat equity and gets taxed at capital gains rates. 

This is pretty hard to defend. If it walks like a duck and quacks like a duck, it's a duck. Except in this one case, where it's sweat equity. There's really not much justification for it. 

So this is where we end up. Mitt Romney pays low tax rates on his capital gains because this is supposed to encourage him to invest his money. But it turns out that it doesn't. And he pays low tax rates on his carried interest because his job of managing companies that other people own was conveniently redefined as sweat equity and therefore treated as capital gains. It's a nice deal for the rich, who get nearly all of the benefit of these policies, but neither of them is really defensible. It's one thing for Mitt Romney to have gotten wealthy running Bain Capital. Good for him. But he ought to pay the same taxes on his earnings as the rest of us.

Oh, and none of these earnings are subject to taxation for Social Security. And if the capital gains come from stocks and bonds (except for those purchased in initial offerings), they're not coming from investments, they're coming from gambling.

Good News, For a Change

It's beginning to look like we might be turning the economy around.

From Steve Benen at Political Animal:

The general trend on initial unemployment claims over the last two months has been largely encouraging, though there have been setbacks. Last week, for example, was a step in the wrong direction.  

This week’s report, however, was a very pleasant surprise. Initial claims not only dropped sharply, they fell to a level unseen in nearly four years. 

The number of Americans who filed requests for jobless benefits sank by 52,000 last week to 352,000, the lowest level since April 2008, the U.S. Labor Department said Thursday. Claims from two weeks ago were revised up to 402,000 from 399,000. Economists surveyed by MarketWatch had projected claims would fall to a seasonally adjusted 375,000 in the week ended Jan. 14. The average of new claims over the past four weeks, meanwhile, dropped by a much smaller 3,500 to 379,000.

In terms of metrics, keep in mind, when these jobless claims fall below the 400,000 threshold, it’s considered evidence of an improving jobs landscape. When the number drops below 370,000, it suggests jobs are actually being created rather quickly.

Steve also provides this chart tracking initial unemployment claims, and that arrow around 2009 is when Obama's stimulus package began spending money.

The Republicans have been slamming Obama's job creation record lately -- Romney has claimed that Obama has lost 2 million jobs, and Gingrich has been calling him a "food stamp president". (Bonus fun fact: Bush II had more people go on food stamps, about a half million more.)

But this graph shows quite clearly that Obama stemmed a horrific rise in initial unemployment claims, and has been -- slowly -- adding jobs ever since.

Another way to look at this would be to consider total (non-farm) employment, as Krugman did with this chart from FRED (the St. Louis Fed's wonderful collection of economic data. Jobs continue to tank once Obama took office, but once his stimulus plan was passed and dollars started moving out the door, things turned around.

Now, if the stimulus would have been bigger, the economy would have bounced back more quickly (and we still have quite a ways to go). But it's pretty hard to argue that Obama didn't stop the economic downturn and put us back on the right path.

T's for Taxes; T's for Tennessee -- Part I (Marginal Tax Rates & Brackets)

No discussion of saving America would be adequate without an examination of taxes. (We’ll leave corporate taxes for another time, and will focus solely on personal income taxes here.)

In short, the 1% have done really, really well under the tax changes of the last 30 years, and the loser has been the federal government and its much ballyhooed deficit.

Let’s start with what we’ve got now. Below are the brackets and marginal rates for a married couple filing jointly in 2011. (All tax charts courtesy of the Tax Foundation.)

2011 Married Filing Jointly
Marginal	Tax Brackets
Tax Rate	Over	But Not Over
10.0%	$0	$17,000
15.0%	$17,000	$69,000
25.0%	$69,000	$139,350
28.0%	$139,350	$212,300
33.0%	$212,300	$379,150
35.0%	$379,150	-

As you can see, taxes are ridiculously high, and if you make more than $379,150, then 35% of your income is going to the federal government.

Actually – that’s not true at all. Many people think the top bracket affects all income, but that’s not how marginal tax rates work. The 35% only affects that portion of income above $379,150. The first $17,000 gets taxed at 10%; the second bracket ($17,001 - $69,000) is taxed at 15%; and so on. In fact, let’s walk through the whole thing, using a very well-off couple who made $600,000.

2011 Taxes on $600,000
Marginal	Tax Brackets		Amount
Tax Rate	Over	But Not Over	Taxed	Tax
10.0%	$0	$17,000	$17,000	$1,700.0
15.0%	$17,000	$50,000	$33,000	$4,950.0
25.0%	$69,000	$139,350	$70,350	$17,587.5
28.0%	$139,350	$212,300	$72,950	$20,426.0
33.0%	$212,300	$379,150	$166,850	$55,060.5
35.0%	$379,150	$600,000	$220,850	$77,297.5
				$177,021.5

Under the current tax regime, a married couple earning $600,000 have an effective tax rate of just under 30% in federal income tax – not 35%.

But there are doubtless people out there who feel 30% is way too high, even for such a well-to-do couple. (For the sake of comparison, the median household income in 2010 was about $50,000, and these folks are rocking twelve times that.) So let’s turn back the clock to 1982, when Ronald Reagan strode the earth. One of his first achievements was the Kemp-Roth tax bill, passed the year before, which both simplified taxes and cut rates dramatically. Here’s what the marginal tax rates looked like back then (and with the dollars adjusted for inflation).

1982 Married Filing Jointly (2011 Dollars)
Marginal	Tax Brackets
Tax Rate	Over	But Not Over
0.0%	$0	$7,906
12.0%	$7,906	$12,788
14.0%	$12,788	$17,671
16.0%	$17,671	$27,670
19.0%	$27,670	$37,203
22.0%	$37,203	$46,969
25.0%	$46,969	$57,199
29.0%	$57,199	$69,523
33.0%	$69,523	$81,846
39.0%	$81,846	$106,493
44.0%	$106,493	$139,511
49.0%	$139,511	$199,035
50.0%	$199,035	-

So … taxes were actually much greater under Reagan. Much, much greater. Here's how our $600,000 couple would have done back then (and all figures are adjusted for inflation).

1982 Taxes on $600,000 (2011 Dollars)
Marginal	Tax Brackets	Amount		Marginal
Tax Rate	Over	But Not Over	Taxed	Tax
0.00%	$0	$7,906	$7,906	$0.00
12.00%	$7,906	$12,788	$4,882	$585.84
14.00%	$12,788	$17,671	$4,883	$683.62
16.00%	$17,671	$27,670	$9,999	$1,599.84
19.00%	$27,670	$37,203	$9,533	$1,811.27
22.00%	$37,203	$46,969	$9,766	$2,148.52
25.00%	$46,969	$57,199	$10,230	$2,557.50
29.00%	$57,199	$69,523	$12,324	$3,573.96
33.00%	$69,523	$81,846	$12,323	$4,066.59
39.00%	$81,846	$106,493	$24,647	$9,612.33
44.00%	$106,493	$139,511	$33,018	$14,527.92
49.00%	$139,511	$199,035	$59,524	$29,166.76
50.00%	$199,035	$600,000	$400,965	$200,482.50
				$270,816.65

Our couple would be forking over almost an extra $100,000, and have an effective tax rate of just over 45%. And this is under Reagan! And people were happy!

There are two big reasons people paid more under Reagan. Firstly, there were a bunch more rates -- the 39%/44%/49%/50% tax brackets just don't exist today at all, and we top out at a measly 35%. Secondly, the brackets haven't kept pace with inflation, with more and more people sliding into lower brackets. 

So … in a nutshell … the reason the deficit has been going up so much is that the amount of money coming in through taxes has been going down so much. 

What's even worse is that the benefits of these tax cuts have been unequally distributed. We saw above how a $600,000 couple makes out like bandits today, but what about someone in the middle? What about that median household with an income of $50,000?

2011 Taxes on $50,000
Marginal	Tax Brackets		Amount
Tax Rate	Over	Taxed	Taxed	Tax
10.0%	$0	$17,000	$17,000	$1,700.0
15.0%	$17,000	$50,000	$33,000	$4,950.0
				$6,650.0

And in 1982?

1982 Taxes on $50,000 (2011 Dollars)
Marginal	Tax Brackets	Amount
Tax Rate	Over	But Not Over	Amount Taxed	Tax
0.00%	$0	$9,258	$9,258	$0.00
14.00%	$9,258	$14,977	$5,719	$800.66
16.00%	$14,977	$20,695	$5,718	$914.88
18.00%	$20,695	$32,404	$11,709	$2,107.62
21.00%	$32,404	$43,569	$11,165	$2,344.65
24.00%	$43,569	$55,006	$6,431	$1,543.44
				$7,711.25

So changes in the tax code saved this household about $1000.  Pro rating this over thirty years means our median household would have saved itself a grand total of $30,000. Our well-off couple, on the other hand, would have saved $3 million dollars.

These numbers are high, though, because the decline in taxes from Reagan to Obama didn't happen all at once. But they show two things: first, taxes were much higher in the good old days and, secondly, that these effects really add up over time. When the government is, in effect, giving the rich $100 in savings for every dollar you get, the rich are going to do really, really well.

And during the 50s, taxes were even higher, and nobody complained. Here are the marginal rates for 1953.

1953 Married Filing Jointly (2011 Dollars)
Marginal	Tax Brackets
Tax Rate	Over	But Not Over
22.2%	$0	$16,807
24.6%	$16,807	$33,615
29.0%	$33,615	$50,422
34.0%	$50,422	$67,230
38.0%	$67,230	$84,037
42.0%	$84,037	$100,845
48.0%	$100,845	$117,652
53.0%	$117,652	$134,460
56.0%	$134,460	$151,267
59.0%	$151,267	$168,075
62.0%	$168,075	$184,882
66.0%	$184,882	$218,497
67.0%	$218,497	$268,919
68.0%	$268,919	$319,342
72.0%	$319,342	$369,764
75.0%	$369,764	$420,187
77.0%	$420,187	$504,224
80.0%	$504,224	$588,261
83.0%	$588,261	$672,298
85.0%	$672,298	$756,336
88.0%	$756,336	$840,373
90.0%	$840,373	$1,260,560
91.0%	$1,260,560	$1,680,746
92.0%	$1,680,746	-

And here's what a couple making $600,00 would have paid in taxes.

1953 Taxes on $600,000 (2011 Dollars)
Marginal	Tax Brackets	Amount	Amount
Tax Rate	Over	But Not Over	Taxed	Tax
22.2%	$0	$16,807	$16,807	$3,731.26
24.6%	$16,807	$33,615	$16,807	$4,134.64
29.0%	$33,615	$50,422	$16,807	$4,874.16
34.0%	$50,422	$67,230	$16,807	$5,714.54
38.0%	$67,230	$84,037	$16,807	$6,386.84
42.0%	$84,037	$100,845	$16,807	$7,059.13
48.0%	$100,845	$117,652	$16,807	$8,067.58
53.0%	$117,652	$134,460	$16,807	$8,907.96
56.0%	$134,460	$151,267	$16,807	$9,412.18
59.0%	$151,267	$168,075	$16,807	$9,916.40
62.0%	$168,075	$184,882	$16,807	$10,420.63
66.0%	$184,882	$218,497	$33,615	$22,185.85
67.0%	$218,497	$268,919	$50,422	$33,783.00
68.0%	$268,919	$319,342	$50,422	$34,287.22
72.0%	$319,342	$369,764	$50,422	$36,304.12
75.0%	$369,764	$420,187	$50,422	$37,816.79
77.0%	$420,187	$504,224	$84,037	$64,708.73
80.0%	$504,224	$588,261	$84,037	$67,229.85
83.0%	$588,261	$672,298	$11,739	$9,743.37
				$384,684.24

So under Obama, the tax load is $177,000. Under Reagan, it was $270,000. And under Eisenhower, it was $384,000 -- for an effective tax rate of 64%.

We don't even have a marginal tax rate of 64% any more. Neither did Reagan! But Eisenhower had marginal tax rates as high as 92%! (This top rate was later reduced to 91%.)

So how do we get out of this mess? More tax brackets -- lots more tax brackets. And higher marginal tax rates. Right now, a hedge fund manager making a billion a year (and in 2010, there were six of them, and they made a total of $15.1 billion, the equivalent of 302,000 median household incomes) pays the same top marginal tax rate as a couple making $360,000. 

That's ... insane. But we can fix it. And using Reagan's tax code is a pretty good place to start. 

But would taxing the well off make that much of a difference? According to Krugman:

The I.R.S. reports that in 2007, that is, before the economic crisis, the top 0.1 percent of taxpayers — roughly speaking, people with annual incomes over $2 million — had a combined income of more than a trillion dollars. That’s a lot of money, and it wouldn’t be hard to devise taxes that would raise a significant amount of revenue from those super-high-income individuals. 

For example, a recent report by the nonpartisan Tax Policy Center points out that before 1980 very-high-income individuals fell into tax brackets well above the 35 percent top rate that applies today. According to the center’s analysis, restoring those high-income brackets would have raised $78 billion in 2007, or more than half a percent of G.D.P. 

I’ve extrapolated that number using Congressional Budget Office projections, and what I get for the next decade is that high-income taxation could shave more than $1 trillion off the deficit. 

... 

So raising taxes on the very rich could make a serious contribution to deficit reduction. Don’t believe anyone who claims otherwise.

And that's just on the top 0.1 percent.

Disclaimer: The brackets above cannot be used to calculate actual tax liabilities without including other factors, most notably -- deductions. But they are indicative of tax liabilities over time, and between the well-off and the just-getting-by.