The Top 1% Finally Get Screwed

After months and months of criticism about how well the top 1% do financially compared to the other 99% of earners, the very rich may get their comeuppance. A Tax Policy Center analysis of the effects of the fiscal cliff on taxes shows that:

If all the scheduled increases take effect, the top 1 percent would experience the largest tax increase as a share of income - 7.2 percent, or an average of over $120,000 per taxpayer.

For the 99%, the number does not seem as bad:

Federal tax collections would jump by more than $500 billion in 2013, more than 20 percent above what they would be without the cliff. Nearly 90 percent of all households would face tax increases averaging nearly $3,500. Middle-income taxpayers would see an average increase of almost $2,000.

Of course, "bad" is a matter of perspective. A family that earns $50,000 or even $75,000 may suffer the burden of an increase in their taxes of several thousand dollars more than the rich will suffer from the tens of thousands of dollars in additional taxes they will pay if the fiscal cliff problem cannot be resolved.

The effects of the "tax the rich until they bleed" plan would get a powerful test if the Tax Policy Center analysis is correct. One theory about the rich is that many own small businesses, and a higher income tax will cause them to cut the expenses of these businesses, which may be workers in part, to make up for the loss of their after-tax incomes. Another is that the rich will become more lazy. Their incentives to work hard to create more income will be undermined by the fact that much of any increase in their earnings will be taxed at an extraordinarily high rate. This assumes that people who work hard to become rich have no incentive other than money.

It is just as likely as anything else that the rich will cut the amount of money that they spend. An additional annual tax of $120,000 is a lot of money. A high-end Mercedes costs that much. And the taxes on a vacation house in Sun Valley, Idaho might be above $100,000. The same holds true with the salaries of one maid and one chauffeur together. In other words, the higher tax on the 1% might affect, very modestly, the way the well-to-do live. Whether that hurts gross domestic product is hard to tell. Each rich person will make a different set of decisions about how to make up for the new taxes, if they need to make up for them at all.

The argument to tax the rich more than in the past has gained momentum, and for good reason. Bloomberg writes:

The recovery that officially began in mid-2009 hasn't arrived in most Americans' paychecks. In 2010, the top 1 percent of U.S. families captured as much as 93 percent of the nation's income growth, according to a March paper by Emmanuel Saez, a University of California at Berkeley economist who studied Internal Revenue Service data.

So, there is a fair case to raise taxes for this group, but it may cost the sale of a Mercedes or the job of a maid.

Douglas A. McIntyre

Filed under: 24/7 Wall St. Wire, Tax Tagged: featured