The Fleecing of Main Street: Taxes and the Wall Street Bank

This post by Ezra Klein got me thinking back to one of the simple calculations I performed recently had to do with flat taxes on a sample population. It essentially showed to maintain our current revenue levels, we would need about a 33% tax rate, and this would reduce discretionary spending. I recently expanded this calculation to look at the standard rate, a lowered rate on the middle class, and a flat tax. It calculated income available for spending (both staples and discretionary), as well as money saved, and money put towards the wall street bank, either in the form of stocks, speculation, or angel/venture funds.

Here's the data for the current standard rates, with income in thousands, and population in millions:

These numbers mirror published data, since about 70% of our $14 trillion GDP is consumer spending. In terms of what is available to main street and small businesses, only 67% percent of the funds left after taxes are available. Also of interest is the fact that under this taxation scheme, upper middle and low upper class pay more taxes as a percent of their income than upper class, without counting the disparity that capital gains introduces.

Now let's look at a Flat Tax.

In order to achieve the same revenue level for the government, we must have a 35% tax rate. Everyone pays the same, but it's higher for almost everyone. However, this reduces consumer spending nearly $1 trillion and reduces percent of funds available to Main Street by 3%.

Finally, let's look at lowered tax rates for most income classes, with higher taxes for the upper 2%.

Same revenue level, but now, everyone up to earners of $250,000 have a lower tax rate and lower effective tax rate. Earners from $250,000 to $1 million have the same taxes as under the Bush Tax Cuts. Earners over $1 million now pay 55% and earners over $5 million pay 65%. By doing this consumer spending rises $600 billion and 79% of funding is available to Main Street. This money comes from somewhere though, and that's reducing the money in the Wall Street casino by $2 trillion. Even though there is a loss in savings, the strength of Main Street should be enough that banks put some of their excess capital to work lending to small businesses again.

It basically boils down to anyone not wanting to raise taxes on the rich is just looking to put money into the pockets of the wealthy. With high marginal rates on high income earners, we can reduce the tax burden on the majority of Americans while maintaining the same level of revenue and higher levels of consumer spending. It may even result in more money for small businesses as the majority of Americans will now have excess money they must now save, which can be packaged in loans for small businesses.

Laffer Curve and Marginal Tax Rate

Interesting article on the Laffer Curve and what the optimal tax rate should be. Most of the comments against a high marginal tax rate speak to longevity for GDP growth. Lucky for me, I found some great data today on the top marginal tax rates and GDP growth vs previous year. Year to year growth is somewhat random, and since we're talking about maintaining growth, that implied using a moving average. I examined both a 5 year moving average and a 15 year moving average. I placed the moving average on the graph both at the time it is calculated, and also offset by the length of the average. For the offset case, the marginal tax rate of 1920 would correspond to the gdp growth moving average calculated in 1935. 1940 with 1955, etc. And now for the charts.

5 Year MA, GDP vs Marginal Tax Rate

The five year MA is relatively uninteresting. The only period with any real information is during the great depression. Increasing the marginal tax rate produced gdp growth over a 5 year period, with GDP finally collapsing around World War II (Some other day I'll post the charts that show war effect on GDP growth). Once the war end, GDP fluctuated, with increases in tax rates seeming to sustain GDP growth for about 10-15 years.

15 Year MA, GDP vs Marginal Tax Rate

Now this is where it gets interesting. Increasing the marginal tax rate produces increases in GDP growth, up to about 70% (as verified by tax theoreticians). Above that will cause GDP growth to stall out (WWII doesn't help either). A reduction from 95 to 92% along with post war efforts caused an increase in GDP growth which was sustained until the marginal tax rate was lowered to 70%. GDP growth then fell off and fluctuated around 3% until taxes were lowered. Taxes lowered boosted GDP growth for about a year. After that GDP growth continued its decline, until taxes were raised, providing a minimal boost.

The easiest conclusion to draw is that for sustained GDP growth, high marginal tax rates (50-70%) are optimal. Low marginal tax rates would boost GDP growth for short periods, but overall result in declines to GDP growth.

Let me know if you see any trends that I missed. Even with a 15 year MA, it's still a noisy data set.