Crazy Taxes

Bruce Bartlett at NYT’s Economix continues to point out how nonsensical the tax code is. As far as I know, there is very little evidence that lower rates on capital income (dividends, interest and rent) and capital gains (realizing a gain on an investment) actually increase the capital stock. And (again, as far as I know) that’s the only economic reason that you would tax this income differently than wage and salary income (after all, we want to encourage work as well).

I think he may misunderstand this chart (or perhaps he just didn’t explain it well):

I believe this chart is dividing up people along two dimensions. First it divides people by income (quintiles and then the top 1%). Then within each group, it divides them by average tax rate. So if you are in the fourth quintile with few deductions and all labor income, you end up paying 26%. If, on the other hand, you are in the top 1% with all capital income, lots of deductions, and a fancy accountant, you can pay an average federal tax rate of 8.7%.

The idea supports Bartlett’s main thesis which is that these rates lack both vertical and horizontal equity. It’s possible for someone in the top 1% to pay a lower tax rate then someone in the middle quintile (lack of vertical equity) and it’s possible for two people with the exact same incomes to pay wildly different average tax rates (lack of horizontal equity).


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