The Rich Can Help with the Economic Crisis, but Cannot Solve It

Jan 14, 2009 by

One solution that has been suggested for ending the economic crisis has been increasing income taxes on the wealthy. While doing so can increase the amount of money raised, it is in my opinion unlikely to solve the problem we are facing. The problem is that the wealthy are suffering from the economic crisis as well. As bonuses are being slashed, even people with highly-demanded skills are earning less income. As a result, raising income taxes on the wealthy may not provide the added revenue needed.

For instance, imagine that Martin the Millionaire made $1 million in 2008, and also received a $1 million bonus, for total compensation of $2 million. In 2009, the going gets rough, and Martin only receives a $500,000 bonus, for total compensation of $2 million. In 2008, the highest tax bracket was 35%, and applied to all income earned by a single individual or a married couple filing jointly over $357,701. Needless to say, Marvin the Millionaire is so well compensated that his entire bonus currently falls in the 35% tax bracket. So, in 2008, his bonus provided the nation with $350,000 in tax revenues. This may sound like stating the obvious, but to raise the same amount of revenues from Marvin’s bonus in 2009 (when Marvin received half the bonus), we’d have to substantially raise Marvin’s taxes. How high?

$2,000,000 – $357,701 = $1,642,299 of income taxed at the 35% level in 2008, for $574,805 generated from Marvin from this bracket in 2008.

In 2009, the threshold for the highest tax bracket slightly increased to $372,951 for single individuals and married couples filing jointly. Marvin’s taxable income in the highest bracket for 2009 is:

$1,500,000 – $372,951 = $1,127,049.

(I will ignore the fact that the switch in the bracket cut-offs has now made $15,250 more of Marvin’s income taxed at the 33% level. In the scheme of things, I don’t think it will affect this calculation much.)

So, to raise $574,805 of taxes from Marvin’s money in the highest tax bracket, the rate would now have to be around 50%. But, if we truly want to tax high earners to make up for revenue short-falls in other parts of the economy, we would have to raise the marginal tax rate to even higher than that. After all, we’ve had a budget deficit for nearly the entire last decade, and back then we were still collecting Marvin’s taxes. So, if Marvin is really going to make any difference, he’d have to face a substantial tax increase. Governor Paterson (D-NY) realized that this would be a serious issue and as a result decided to call for a broad range of taxes affecting people in all segments of the economy. While the rich can potentially pitch in, they will likely need a lot of help from everyone else.

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