Tuesday, July 29, 2014

Capital in the 21st Century: Rethinking the Progressive Income Tax (Chapter 14)

The progressive income tax, or any progressive tax is a relatively new phenomena, beginning in only the last 100 years roughly. Before the early 1900s, and specifically WW1, taxes, of any sort really, never crossed the 10% of income threshold. However, pinging off of the last chapter, admitting we live in a social state, going back to 10% top tax rates on anything really would mean a near impossible ability to fund the things like education, Social Security, healthcare (Medicare) and infrastructure that we like. So let’s just say that eliminating or drastically reducing the progressive income tax is off the table. Although due to international competition (which doesn’t entirely exist because 8% of the world’s wealth is hidden in tax havens anyway) a possible dystopian future scenario exists where nations would revert to very low income taxes to “save jobs”, meaning try hard to keep the billionaires and multimillionaires happy and in their home country.

However, the USA is a remarkable country in the history of the world. In the 1930s through the 1980s we averaged an 81% top marginal income tax rate. That’s astronomical! Yet that was also a time of enormous growth and innovation. The two, in history at least are correlated. Now correlation does not prove causation, but perhaps it is worthy of further inspection as a battle rages for the difference between a top marginal income tax rate of 35% and 39.6%. On the whole, it’s insignificant, because nothing above 50% will likely deter highly paid employees from selling their employers on paying more and more. In other words, at 80% tax, there is no point in arguing for another million dollars, because you can only keep $200,000, but when that tax rate is only 35%, you could keep $650,000 of that million dollar raise. Piketty argues for a return to 80% top marginal tax rates, with a rate below that of 50-60% for incomes in the top 5% of people, that is incomes above above $200,000.

Nothing in this chapter really struck me as crazy. He advocates only for tax rates that have been tried in the last 100 years. The challenge is those with the most to gain from lower top marginal tax rates argue the hardest for low top marginal tax rates. In short, when it comes to the progressive income tax, it's a great invention, but there are too many exemptions (like the long term capital gains tax) and the trend seems to be reducing tax rates instead of increasing tax rates.


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