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Taxing the rich

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Over at the Globe and Mail Economy Lab our friend Stephen Gordon argues that there are only limited revenues to be gained by taxing the rich.

He plays around with some back of the envelope calculations based on CRA data on the incomes of those making more than $500,000 -- accurately enough, I think -- and concludes that each percentage point increase in the marginal tax rate of this very affluent group would yield only $400 million per year in increased annual revenues. Thus "a tax on millionaires is unlikely to generate much new revenue." (Those of you out there inclined to pile on Stephen should note that he does not oppose higher taxation of the very affluent on equity grounds.)

The problem with Stephen's approach is that he does not include the option of raising the taxable incomes of the very affluent by ending or limiting preferential treatment of the property income which goes to the very top of the income distribution. This is actually much more important than the marginal tax rate issue, as has been recently highlighted by Warren Buffett who points out that he pays much less tax than his secretary since his income is in the form of capital gains (taxed at 15 per cent in the U.S.) rather than wages.

The tax section of last year's Alternative Federal Budget -- drafted by fellow PEF blogger Toby Sanger -- modestly raised the top federal income tax rate to 31.5 per cent, applicable to those with incomes of over $250,000. That resulted in quite modest additional federal revenues of $1.6 billion -- though more could be raised by introducing a sequence of higher tax brackets since much of the income of the very top is concentrated in the hands of those at the very, very top.

The Alternative Federal Budget also proposed to include all capital gains income in taxable income, up from 50 per cent today. This was calculated to raise an additional $4.9 billion in annual revenues. Half of all capital gains go to taxpayers with incomes over $250,000.

More revenues from the very affluent could also be gained by taxing stock options as wage income, and by introducing an inheritance tax on large bequests.

So, much more is to be gained from the very affluent than Stephen's calculations suggest.

Just how much is to be gained in the U.S. is highlighted by Robert Reich who takes President Obama to task for excessive timidity in his recent proposal to increase taxation of top incomes.

The rising income share of the very top has in Canada been revealed through analysis of tax data in a CCPA study by PEF blogger Armine Yalnizyan, based on data compiled by Michael Veall. The top 1 per cent now get 14 per cent of all income, and the share of the top 0.1 per cent has climbed even faster.

Extreme inequality in the U.S. was brought home to me in a recent blog post by Krugman which links to U.S. data on the top 400 taxpayers. This tiny group -- just .002 per cent of all U.S. taxpayers -- accounted for 4.55 per cent of all U.S. dividend income, and 10.5 per cent of all capital gains income in 2008. Their effective tax rate has fallen from 29.35 per cent in 1992 to 18.1 per cent in 2008.

So, there is more to be gained by squeezing the very rich than you allow, Stephen, even though I agree that major expansion of social programs and public services will require many more of us to pay some more.

This article was first posted on The Progressive Economics Forum.

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