Tags: Shiller | Wealth | Tax | Rate

Yale’s Shiller: Wealth-Adjusted, Top Tax Rate Would Be 75 Percent

Thursday, 08 March 2012 07:21 AM

Trillions of dollars in debt overshadow the U.S. economy and the economic growth needed to pay for it remains elusive. As the political parties parry over raising — or lowering — tax rates in an election year, Yale professor Robert Shiller offers a simple enough solution: Tie tax rates to income equality.

If we had done so in 1979, Shiller figures, the tax rate on high-income individuals today would be a historically high 75 percent, yet it would reflect the enormous increase in their wealth over time.

Such a tax system is called “inequality indexation,” he writes in an opinion column published by Bloomberg News.

Editor's Note: The IRS’ Worst Nightmare — How to Pay Zero Taxes

“In the future, nations would be wise to index their tax systems to inequality. Under such a system, the government would not legislate fixed income-tax rates for each tax bracket, but would instead prescribe a formula that tied tax rates to statistical measures of pretax inequality,” Shiller explains.

“If income inequality were to increase, tax rates would automatically become more progressive. Inequality indexation could be considered a kind of insurance — against worsening inequality.”

In a study he conducted with tax expert Leonard Burman at Syracuse University, Shiller and Burman looked back at what would have happened if such a system were adopted years ago in the United States.

“We found that if one had been legislated in 1979, freezing after-tax income inequality at the then-current level, the marginal tax rate on high-income individuals would have increased to an extraordinarily high level, more than 75 percent,” Shiller writes. “This indicates how much economic inequality has worsened since 1979.”

That might sound high, but it would be at least more systematic and predictable than how most societies approach taxation, after the fact and reactively, with all of the political and economic percussions we are seeing now, Shiller maintains.

“Societies have great trouble dealing with the issue of inequality in a systematic manner. The principle has never been articulated that some degree of inequality is a good thing, that there should be some who are richly rewarded for their business success (or their parents’ success), but that society should put some limits on this inequality,” Shiller writes

As a result of the unsystematic way of approaching the topic of who pays, “the wealthy instinctively oppose any increase in their taxes, fearing that acquiescing even to a limited extent might leave them open to a haphazard series of tax increases that, in combination, could amount to confiscatory taxation,” he writes.

Of course, Shiller and Burman’s theoretical indexed tax system would have been in place since 1979. As it goes now, nearly no acceptable level of tax increase on the rich will balance the books, according to a recent study by the Pew Charitable Trusts and the Tax Policy Center.

If the Bush tax cuts and the Alternative Minimum Tax exemption are extended (but not the payroll tax break), the top individual tax rate would need to be between 43.6 percent and 45.4 percent for years on end to bring debt-to-GDP down to 60 percent from over 100 percent now, the study reports. That’s not just taxing the well-off: All tax rates would climb across the board.

If taxes are raised only on the top three brackets but dividends and capital gains taxes are left the same, the top income rate would have to surge to make it up, to around 90 percent. That assumes the richest Americans won’t defer income to avoid the hit.

If the Bush tax breaks expire and the automatic cuts take place as scheduled, you still end up with a similar top rate of around 45 percent and the corresponding higher rates on everyone below that mark.

Raising rates on just the very wealthiest but leaving investment taxes alone would necessitate a top rate of up to 57.7 percent, assuming the breaks go away, closing in on double the current top tax rate of 35 percent.

Editor's Note: The IRS’ Worst Nightmare — How to Pay Zero Taxes

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Thursday, 08 March 2012 07:21 AM
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