Saturday, January 31, 2009

There Is Nothing More Imprudent Than Excessive Prudence

Apropos of the previous post, here are some graphs on federal personal income tax collections.

The difference between effective rates for 2001 and 2006 is pretty big. Not surprisingly, taxes collected as a percentage of GDP fell from 9.58% to 7.77%. That's good news for current taxpayers, but not so much for future taxpayers. On the plus side, the odd hump at the low end was cut down, though not completely eliminated.

In the second scenario in the previous post, I made the personal income tax be the major source of new revenue for a national healthcare system. Using 2006 AGI data, I projected what the possible yield might be for a certain set of effective tax rates. To get to around 14% of GDP, top effective rates had to be over 50%. Nominal marginal rates would be higher, potentially much higher if loopholes remain plentiful. Using somewhat more progressive rates than the 2001 figures, along with closing some loopholes at the top end, yielded about 9.5%. The top nominal rate for that year was 39.1% for taxable income above $297K.

Despite being as progressive as nearly anyone, I'm not comfortable with marginal rates higher than 40% (39.5%, actually). Why? I don't really know why; I assume it's because I've absorbed a small amount of the anti-tax rhetoric that is always floating about. On the other hand, I am very, very comfortable with pushing effective rates as close to nominal rates as possible, especially at the high end. But keeping marginal rates lower than 40% means most new revenue would have to come from other sources - corporate income taxes, excise taxes, or a VAT.

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