Suggested Discussion Outline

[johnkarls]

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SUGGESTED DISCUSSION OUTLINE

A. Identifying The Top 1% (from p. 46 of Winner-Take-All-Politics = the focus of our 8/8/2012 meeting)

40.8% - Non-financial executives & supervisors
18.4% - Financial (no break-down for hedge-fund managers who are taxed at 15% capital gains rates)
6.2% - Lawyers
4.7% - Real estate
4.4% - Medical
3.6% - Entrepreneurs
3.1% - Arts, media & sports (NB: movie stars are also taxed at 15% capital gains rates)
3.0% – Computer, math, engineering, technical
15.8% - Miscellaneous


B. Questions

B-1. Is it wise to engage in class warfare?

B-2. Should President Obama continue to reward campaign contributors (hedge fund managers and Hollywood movie stars) with 15% capital-gain-treatment of their income?

B-3. Would complete confiscation of the income of the top 1% have a significant impact on the U.S. government’s annual deficit?

[Per Winner-Take-All-Politics, the focus of our 8/8/2012 meeting, at p. 39 -- (A) the top 1% earns 14% of “national income” –- (B) US Gross Domestic Product = $16 trillion –- (C) so the top 1% apparently earn $2.24 trillion which, if taxed at 100% rather than 35% and not diminished by the elimination of any financial incentives, is $1.456 trillion, which is more than the $1 trillion annual deficit.]

B-4. Are there any categories in the top 1% (please see Section A above) that should be spared if the top income-tax rate is increased substantially?

B-4-a. Would any Golden Geese be killed (for example, trading and hedge-fund management concentrating more in London)?

B-4-b. Are any activities and/or competencies worth encouraging/preserving by not increasing their top rates substantially? (for example, medical & entrepreneurs)


C. The failure of Stiglitz (our author) to notice America’s permanent under-caste which is a substantial portion of the 99% he claims to represent

C-1. No effective proposals vis-à-vis America’s “Apartheid” (to use Jonathan Kozol’s terminology) K-12 education system which perpetuates America’s permanent under-caste and prevents any escape

C-2. No recognition that America also has an “Apartheid” judicial system


D. Proposed Six-Degrees-Of-Separation E-mail Campaign

D-1. Proposed Subject = Confirming that the $4 TRillion - $5 TRillion of reductions in the payroll and capital expenditures 2005-2007 forced upon the CHUMP American companies that had not exported American jobs did in fact cause the 2008-201? economic meltdown, and that those reductions would have caused the economic meltdown whether or not any of the employees who lost their jobs as a result of the reductions had less than 20% equity in their homes.

D-2. Reason for the Campaign = President Obama’s Deficit Reduction (“Simpson Bowles”) Commission has proposed another $4 TRillion - $5 TRillion of reductions in the payroll and capital expenditures of the CHUMP American companies that have not exported American jobs [without apparently knowing what it is doing when it recommends a "territorial system" of corporate taxation -- just like Congress didn't apparently know what it was doing when it enacted the American Jobs DESTRUCTION Act of 2004 which also compelled the CHUMP American companies that had not exported American jobs to repay $4 TRillion - $5 TRillion of borrowing from the tax-haven subsidiaries of the American companies that had exported American jobs (the $4 TRillion - $5 TRillion in both cases representing the profits from exporting American jobs -- and piling up for several decades prior to 2004 in the first case and piling up since 2005-2007 in the latter case)].

D-3. The proposed recipient of the e-mail campaign = Princeton Economics Nobel-Laureate Prof. Paul Krugman. He would not only have the resources (including students) to do the necessary research, but he has his own megaphone in the form of his NY Times OpEd column.

[johnkarls]

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The Federal Income Tax came into existence in 1913 with the ratification on 2/3/1913 of the Sixteenth Amendment to the U.S. Constitution permitting income taxes to be levied without apportioning the tax among the states in proportion to population. Since then, the top income tax rates have been, according to the Tax Foundation which is the most respected source for information on tax matters --

7% -- 1913-1915 -- on income over $11,332,304 (1913 bracket adjusted for inflation per Tax Fdn)
15% -- 1916 -- on income over $41,170,573 (1916 bracket adjusted for inflation per Tax Fdn)
67% -- 1917 -- on income over $35,059,316 (1917 bracket adjusted for inflation per Tax Fdn)
77% -- 1918 -- on income over $14,859,578 (1918 bracket adjusted for inflation per Tax Fdn)
73% -- 1919-1921 -- on income over $12,969,920 (1919 bracket adjusted for inflation per Tax Fdn)
58% -- 1922-1923 -- on income over $2,671,186 (1922 bracket adjusted for inflation per Tax Fdn)
46% -- 1924 -- on income over $6,560,808 (1924 bracket adjusted for inflation per Tax Fdn)
25% -- 1925-1931 -- on income over $1,282,169 (1925 bracket adjusted for inflation per Tax Fdn)
63% -- 1932-1935 -- on income over $16,378,075 (1932 bracket adjusted for inflation per Tax Fdn)
79% -- 1936-1940 -- on income over $80,712,095 (1936 bracket adjusted for inflation per Tax Fdn)
81% -- 1941 -- on income over $76,319,600 (1941 bracket adjusted for inflation per Tax Fdn)
88% -- 1942-1943 -- on income over $2,753,124 (1942 bracket adjusted for inflation per Tax Fdn)
94% -- 1944-1945 -- on income over $2,549,768 (1944 bracket adjusted for inflation per Tax Fdn)
91% -- 1946-1951 -- on income over $2,301,329 (1946 bracket adjusted for inflation per Tax Fdn)
92% -- 1952-1953 -- on income over $1.693.431 (1952 bracket adjusted for inflation per Tax Fdn)
91% -- 1954-1963 -- on income over $1,668,250 (1954 bracket adjusted for inflation per Tax Fdn)
77% -- 1964 -- on income over $1,447,610 (1964 bracket adjusted for inflation per Tax Fdn)
70%* -- 1965-1981 -- on income over $712,316 (1965 bracket adjusted for inflation per Tax Fdn) **
50% -- 1982 -- on income over $96,495 (1982 bracket adjusted for inflation per Tax Fdn)
50% -- 1983 -- on income over $124,580 (1983 bracket adjusted for inflation per Tax Fdn)
50% -- 1984-1986 -- on income over $176,653 (1984 bracket adjusted for inflation per Tax Fdn) ***
38.5% -- 1987 -- on income over $106,659 (1987 bracket adjusted for inflation per Tax Fdn)
28% -- 1988-1990 -- on income over $33,856 (1988 bracket adjusted for inflation per Tax Fdn) ***
31% -- 1991-1992 -- on income over $81,218 (1991 bracket adjusted for inflation per Tax Fdn) ***
39.6% -- 1993-2000 -- on income over $388,200 (1993 bracket adjusted for inflation per Tax Fdn) ***
39.1% -- 2001 -- on income over $297,350 (2001 bracket adjusted for inflation per Tax Fdn)
38.6% -- 2002 -- on income over $307,050 (2002 bracket adjusted for inflation per Tax Fdn)
35% -- 2003-2012 -- on income over $311,950 (2003 bracket adjusted for inflation per Tax Fdn)***

NB: the bracket amounts listed above were for single taxpayers -- please see the section below entitled “Joint Returns and the Marriage Penalty” for a discussion of 1949-1992 when joint-return brackets were larger than single-taxpayer brackets.

* The 70% top tax rate shown for 1965-1981 was cut by the Tax Reform Act of 1969 to 50% for “earned income" (please see the following section for investment/passive income).

** This non-inflation-adjusted top bracket was increased in 1977 by 2.2% and in 1979 by 6.0%.

*** This top bracket was automatically increased each year for inflation.


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INVESTMENT (PASSIVE) INCOME

Historically, 50% of capital gains was exempt from income tax and the remaining 50% was taxed at the regular income tax rate subject to a 50% cap (in other words, the top capital gains rate was the 50% not exempt at the 50% cap rate = 25% top capital-gains rate).

Also historically, dividends (subject to a small exemption that will be omitted from the following discussion for the sake of brevity) and interest were taxed at the regular rates.

President Nixon’s Tax Reform Act of 1969 phased out the capital-gains cap over 3 years, raising the top capital gains rate to 35% (that is, the 50% not exempt at the regular top rate of 70%).

President Carter’s Revenue Act of 1978 increased the capital-gains exemption to 60%, thereby reducing the maximum capital gains rate to 28% (that is, the 40% not exempt at the regular top rate of 70%).

President Reagan’s first tax cut from 70% to 50% applied only to “unearned income” [e.g., dividends, interest and the 60% of capital gains that was not exempt for a new top capital-gains rate of 20% (that is, 40% not exempt at the new top rate of 50%)] since, as noted in the first footnote to the schedule above and in the next section entitled “Which Post-World War II Presidents Cut Tax Rates,” President Nixon’s Tax Reform Act of 1969 had already cut the top rate on “earned income” from 70% to 50%.

When President George H.W. Bush raised the top regular rate from 28% to 31% in 1991, the top capital-gains rate remained capped at 28%.

When President George W. Bush signed the Jobs and Growth Tax Relief Reconciliation Act of 2003, the 28% top rate on capital gains and the 35% top rate on dividends were dropped to 15%.


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WHICH POST-WORLD WAR II PRESIDENTS CUT TAX RATES

The tax cuts in 1964 and 1965 from 91% to 70% were proposed by President Kennedy and enacted posthumously by the Tax Reform Act of 1964.

President Nixon proposed the tax cut of 70% to 50% for “earned income” which was enacted as part of the Tax Reform Act of 1969.

President Reagan proposed two sets of tax cuts = (1) the tax cuts enacted by the Economic Recovery Act of 1981, and (2) the tax cuts enacted by the Tax Reform Act of 1986.

[President George H.W. Bush agreed to raise taxes by signing the Omnibus Reconciliation Act of 1990.]

[President Clinton raised taxes by signing the Omnibus Reconciliation Act of 1993.]

President George W. Bush proposed the tax cuts enacted by the Economic Growth and Tax Relief Reconciliation Act of 2001 and the Jobs and Growth Tax Relief Reconciliation Act of 2003.


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JOINT RETURNS AND THE MARRIAGE PENALTY

Prior to 1949, the brackets for single taxpayers and joint returns were identical. Accordingly, couples comprising partners who each earned income were taxed at higher rates if they were married.

From 1950 to 1886, the brackets for joint returns were approximately double the brackets for single taxpayers. Accordingly, married couples comprising partners who each earned income were not penalized. However, married couples with only one income earner now had a “marriage advantage” because the income earner could now take advantage of the spouse’s income-tax brackets that would otherwise have gone to waste.

From 1986 to 1992, the brackets for single taxpayers were more than 50%, but less than 100%, of the joint-return brackets. Accordingly, couples comprising two equal income earners, for example, would pay higher taxes if they were married -- for a partial restoration of the pre-1949 “marriage penalty.” But couples comprising only one income earner could still receive a part of the advantage of the non-income-earning spouse’s income-tax brackets that would otherwise have gone to waste.

Since 1992, the single brackets and joint-return brackets have been identical. Accordingly, the full pre-1949 “marriage penalty” for couples comprising two income earners has been restored.


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GENERAL COMMENTS

As can be seen from the schedule that begins this essay, the top income tax rates were quite modest until WW-I.

Top rates were extremely high during WW-I and again during WW-II/Korea. And it was not until a decade after the close of the Korean War that a President (viz., John Kennedy) proposed reducing these extremely-high rates.

[However, it should be noted that during the 1950’s when the extremely-high rates prevailed, corporations began providing their executives with large non-taxable “fringe benefits” (which, despite non-taxability to the recipients were still deductible by the corporation) such as free cars, free housing, lavish expense accounts for such things as “three-martini lunches” etc., etc. -- which were gradually whittled away over the decades as rates came down.]

[It should also be noted that since the 1950's to the present time, stock options have also been popular -- in general, stock options provide capital-gains rates for the increase in the employer's stock price occurring after the stock option is awarded.]

The schedule also dramatizes the oft-made point that FDR and his economic advisers did NOT understand Keynesian economics, because they mistakenly thought that taxes should be raised to pay for New Deal programs. Doing so, of course, offset the stimulative effects of the New Deal programs.