The administration has “backed a tax plan that analysts say would greatly benefit the wealthy.” I want to unpack that and take a closer look at what it might mean.
“The Trump tax plan drops the top bracket from 39.6 to 35 percent, and allows for the possibility of a 25 percent top rate through a pass-through entity.” The Washington Post Fact Checker
I want to explore two questions. Would the proposed income tax changes reduce the taxes paid by the average wealthy tax payer (say the top ten percent, who in 2016 paid 80% of all income taxes)? Would that be a good thing or a bad thing and in what ways should we judge that question?
To evaluate the impact on taxes paid by dropping the marginal tax rate from 39.5 to 35 percent we must also take into account the increase in taxable income resulting from broadening the tax base (eliminating some of the existing deductions from taxable income such as State and Local Taxes and interest paid on other than mortgage debt, etc). The conventional wisdom of tax reform is to lower the rates and broaden the base. This can be done in amounts that leave tax revenue unchanged (revenue neutral). Whether the wealthy pay more or less from the proposed modest drop in the tax rate will depend on how successful congress is in fighting off the special interest groups that will try to preserve their special interest deductions.
There are two other important considerations when evaluating the revenue impact of a rate cut. To the extent that lower marginal tax rates encourage greater investment, the economy will grow more than otherwise. This is an additional way in which the tax base is increased and with it the tax revenue generated from whatever the tax rate might be. While there is no case in which the economy grew fast enough to recover all of the revenue lost from cutting the rate, faster growth generally recovered some of it. But a bigger revenue boost can also come from the wealthy repatriating more of their income held abroad to be taxed in the U.S.
But let’s assume, all things considered, that lowering the marginal tax rate for the wealthy reduces the taxes they pay. Is that a good or a bad thing? Leaving aside the point above about increasing economic activity in the U.S., what should the standard of judgment be of what is fair? Obviously people with more income should pay more taxes but how much more? If current tax rates (and deductions) are unfairly high for the wealthy, then lowering them is a good thing. If they are unfairly low, they should be raised. In short, it is not necessarily appropriate to say that something that lowers the taxes paid by the wealthy is a bad thing. The core question is thus: what is our standard of fairness?
Tax burdens are generally discussed in relation to the share of ones income paid in taxes. Rather than comparing the fairness of a millionaire with an income of $5,000,000 paying $1,000,000 in taxes with the average American family income of $50,000 paying $10,000, we look at the tax burden in relation to the share of ones income paid in taxes. In the preceding example, both the millionaire and the average family are paying 20% of their incomes in taxes. In fact, the average share of income paid in taxes of the top 10% of income earners was almost 20% in 2012 while the bottom 50% (most of whom paid no federal income taxes) was 3.3%. A flat tax rate (same marginal rate for everyone), which means that a person with twice the income pays twice the tax, is my standard of fairness. Many others believe that it is fair for the rates to be progressive (higher marginal rate for higher incomes).
My point is that it is wrong to conclude that any reduction in the taxes paid by the wealthy is good or bad unless we have first agreed on the standard of fairness and whether existing tax payments exceed or fall below that standard.
It is important to note also that there are many other taxes that people pay. While most America families pay no federal income taxes, they do generally pay wage (social security) taxes, sales taxes, property taxes and other taxes. “The Principles of Tax Reform”
Warren's space 
An otherwise lucid discussion suffers from a major flaw — as dos almost all such discourses: income, wealth and behavior are all relevant to fairness, but each in tension with the other two. The government wants revenue, and taxes are a particularly popular way, these days, for it to raise revenue. But a tax on anything is a disincentive for that “anything” — in this case activities that generate taxable income. Economists would expect people to shift away from such activity (reducing income; reducing taxable income).
For the middle class, wealth and income are largely synonymous. For the truly wealthy, income is largely irrelevant to lifestyle (think Buffett at $100K/year or Steve Jobs at $1/yr). For most, great wealth allows for flexibility in financial matters, including deferring or even foregoing income in any particular period of time (think Buffett and Jobs again). That allows for a great deal of “unfairness” as the wealthy can reduce taxable income in ways most in the middle class cannot.
If a wealthy person uses all his taxable income to feed the hungry, what should his taxes be? If he uses all his taxable income to create 1o,000 well paying jobs, how much should he be taxed? And if he spends it all on wine and women? None of these choices are available of members of the middle class.
An income tax that seeks to generate revenue for the government, but also subsidize activities deemed “good” (rearing children; giving to philanthropic causes) also cannot escape unfairness.
That’s just a preface for the issue of whether all should pay: 1) the same amount; 2) the same per cent of taxable income; or 3) varying percentages (with the richer usually paying a higher percentage of their income)
Bob, this is one of the reasons I would abolish all income taxes (corporate and personal) and rely only (other than user fees) on a uniform consumptions tax (preferably a VAT) http://www.caymanfinancialreview.com/2013/07/12/The-principles-of-tax-reform/
The liquidity effect of wealth, or more specifically of the surplus net worth, gives that “very wealthy” person more freedom to choose foolishly, as well as wisely, while the hard-pressed “middle class” family slavishly worries about high credit card balances with monthly payments due.
The “socialist justice” argument is that this very enlarged freedom of choice is what must be “unfair’ by those who can have it – particularly if it is inherited, unearned.
Nothing is going to make this envy perception go away. It is not rational, but emotional, so logical argument against this envy-error is for self-satisfaction not for persuasion.
A flat VAT strictly focused on final consumption with one rate would satisfy the economic conditions, and the “welfare tax credits” could be handed out like EBT payments, with a debit card from the Fed directly perhaps. But how to limit the largess?
The “Pre-Bait” of the so-called FAIR Tax is sneaky, and seldom mentioned by that group, because it keeps the individual family hooked to an income-return filing [IRS] system and income reporting. It it is “bait” for Big Mother State to measure our “social worth,” and subsidize favored pet groups.
But any such EBT tax-credit needs to be rationed. I think the payments system the US has today could measure a family’s other card-paid consumption purchases and subsidize them according to the “socialist justice” formula, without changing quoted shelf prices.
“Income” as measured by accountants is not really a good metric for the relative freedom of choice of those who have liquid-surplus-net-worth and those who manage credit less well.
We are all “poor” if indeed wants are unlimited. It’s subjective.
Good stuff as always
We all pay taxes. Income tax is only part of the burden the state coffers demand of us. We all pay FICA at 14.6% of income. We all pay about 25 cents of every dollar in fossil fuel excise taxes. And while the poorer generate less in total Federal Income Tax revenue, we all pay consumption taxes and – the wealthy pay a great deal more in consumption taxes as they do consume more.
As for the bonus of repatriating income from overseas, maybe. If the predictions are accurate it will be a one-off event with a big gain. But the marketplace is not yet attractive to the shift of taxable capital back to the United States. When one can borrow US dollars at 2 to 3 percent and earn 5 to 8 percent in US dollar-denominated securities there is a strong incentive to keep the money offshore.
An open-ended question. “At what percent of total tax burden do we, as a human, loose our freedom? At 0% tax, we are not participating as citizens. At 100% tax, we are no longer citizens but property of the state. Where does that shift occur?
Though not the question you asked, an interesting study by researchers at the Institute for Market Economics in Bulgaria found that “The evidence indicates that the optimum size of government, e.g. the share of overall government spending that maximizes economic growth, is no greater than 25% of GDP (at a 95% confidence level) based on data from the OECD countries.” It is government spending, whether tax or debt financed, that determines the command of resources that it takes from us.