The Moral Imperative for the Continuation of Low Tax Rates for the Top Income Fractiles

Or lack thereof

Reports indicate that one of the reasons the “grand bargain” failed was the refusal of one party to accede to an increase in tax rates on households with AGI above $250,000. [1]. I can understand this reluctance, given that the share of total income going to the top 5% of households fell from 38.7% to 36.5%, going from 2007 to 2008 (just ignore the increase of 17.6 percentage points in the previous 30 years). Below is an updated graph from our forthcoming book Lost Decades by myself and Jeffry Frieden, illustrating the grievous harm that these households have endured.

Figure 1: Pretax income shares (including realized capital gains) accruing to top 5% of households (blue line) and to top 1% (red line). Source: updated version of Piketty and Saez (2007).In 2008, the threshold income for the top 5% was $152,726. The top 1% of households (with a threshold income of $368,238) also suffered a decline in their income share, which fell from 23.5% to 21%. This was in contrast to previous experience. From Lost Decades

Over the course of the Bush expansion, two-thirds of the country’s income growth went to the top 1 percent of the population. These very rich families … saw their incomes rise by more than 60 percent between 2002 and 2007, while the income of the rest of the nation’s families rose by 6 percent.

Hence, I can see why individuals in these households, failing to see continued growth in their income share, would want to maintain the low tax rates they have become accustomed to. The rates being levied at the top of the income distribution are illustrated below.

Figure 2 from Paul Kedrosky.

For those who are unable to detect sarcasm, please note the first paragraph was written tongue-in-cheek.

This post originally appeared at Econbrowser and is reproduced here with permission.

3 Responses to "The Moral Imperative for the Continuation of Low Tax Rates for the Top Income Fractiles"

  1. JPBulkoMBA   July 14, 2011 at 1:37 pm

    Yep, poor poor rich folks! I now understand their plight …

  2. mannacio   July 27, 2011 at 10:23 pm

    Here's the conundrum: Why has it been so easy to fool so many people into voting for candidates whose goals are to reduce mddle class entitlements and increase the share going to the rich. Most of the Tea Party faithful aren't rich. Are they just stupid?

    My hope is they are just ignorant and I have interesting tax data which I think helps to buttress your point. The data, through 2008, shows the straight line regression increase in average income in each tax bracket available from 2001 (when .1% data bagan to be collected). The important point, though I know its not new, is that the bottom 90% of income earners struggle to stay even with inflation while almost all real GDP gains go to the top 5%.