Something good about higher marginal tax brackets

[jdw_fire]

I was exposed to an unexpected mix of topics today that gave way to an interesting idea. It started this morning with all the talk of another large bank bonus. Then as I was listening to a Paulsen interview that was discussing the reasons for the near collapse of our economy I happened to look at a FIRE and Money thread on IRA conversion to Roth and read "Thanks for posting that document of historical income tax rates - it's hard to imagine there having been a 94% tax bracket at one point! That would put a damper on my motivation to earn more." And wow a thought crossed my mind that before then was totally against how i thought about taxes. Up until then i was against higher taxes and all for tax reductions but the thought was that maybe higher (very much higher at the top end of the scale) tax rates on the higher income earners was a good thing. Let me explain, from what i have heard the main reason we got so close to a financial melt down was the greed of people in the financial industry, it got totally out of hand. So when i read "it's hard to imagine there having been a 94% tax bracket at one point! That would put a damper on my motivation to earn more" the thought that came to mind was we could have used that with those out of control greedy financial people. So maybe we need that now to prevent (or at least discourage) that type of greedy behavior in the future. And it would have the added benefit of collecting some revenue to combat our debt (but that is just a side "benefit"). I havent given this a great deal of thought and i would like to hear everyones thoughts on the subject as a part of me would like this not to be a good idea.

 

[haha]

 

[jdw_fire]

dont know what that means, how bout you use words instead of smilies

 

[NW-Bound]

...the thought that came to mind was we could have used that with those out of control greedy financial people.

I hate these bastards as much as anyone else. But it would be far better to keep them from earning outrageous amounts in the first place using what I consider illicit means.

Just taxing the hell out of them will not stop the problem. They will "steal" even harder if the loopholes are not closed. They would still be rich, and all the heavy taxing means a greater and greater portion of the nation's wealth ends up in Uncle Sam's hands.

Sorry, but I prefer the wealth of the nation to remain in the hands of the people, not the bureaucrats and politicians in Washington. You've got to fix the problem at the roots. For example, no more subprime loans to people with undocumented and inflated incomes, bundled into CDOs sold to naive investors. No more bail-outs. Stop the thieves by locking up the cookie jar, not by sharing in their loots.

 

[jdw_fire]

I hate these bastards as much as anyone else. But it would be far better to keep them from earning outrageous amounts in the first place using what I consider illicit means.

i dont hate them, or anyone for that matter, my thought is that if we deincentivize (sp) greed maybe we get less of it

Just taxing the hell out of them will not stop the problem. They will "steal" even harder if the loopholes are not closed. They would still be rich, and all the heavy taxing means a greater and greater portion of the nation's wealth ends up in Uncle Sam's hands.

i dont have a problem with people being rich, i just was thinking that if massive income was deincentivized maybe we wouldnt have as big a problem as we had earlier

Sorry, but I prefer the wealth of the nation to remain in the hands of the people, not the bureaucrats and politicians in Washington.

actually so do i

For example, no more subprime loans to people with undocumented and inflated incomes, bundled into CDOs sold to naive investors. No more bail-outs. Stop the thieves by locking up the cookie jar, not by sharing in their loots.

ok that fixes the past problem but what about any future 1?


my thought here is that if we deincentivize large incomes maybe we minimize the effects of greed

 

[NW-Bound]

I do not hate rich people either, only the ones that get rich by stealing, in my view. That includes not just people in the mortgage industry that caused us this mess, but various CEOs in different industries who ruin the companies they run, bankrupt their shareholders and lay off the workers while awarding themselves big salaries.

I do not hate Warren Buffet. I dislike Bill Gates for certain reasons, none of which has to do with the fact that he is rich.

Deincentivizing high incomes may have the effects of reducing the drive for people to work hard. Our high-tech industries are still leading the world. Why take the risk to change it, to turn this country into another socialist European nation?

 

[Texas Proud]

I don't know when it was 94%.... but when I was doing taxes back in the 80s it was high... but the highest you had to pay on EARNED income was 50%... so unless you change that... no disencentive...


Also, for people like these... I do not think they will be disencentived... they like the game... the power.


I think all companies that dealt with AIG should have had a haircut... even up to 50%... would have saved a lot of our money and that would have made the people who bought the insurance think a bit about how good it really was... individuals would not have lost anything...

GM should not have been given to the unions... this was political payback...

Well, lot of other things... but that is getting into political discussion which I want to stay out....

But I don't think it would make that big of a difference and hurt everybody else who earn big dollars legitimately....

 

[ziggy29]

Keep in mind that the obscenely high tax brackets were very rarely ever paid out because there were a plethora of deductions and loopholes to shield most income from taxation.

The significant reduction of top tax brackets in the Reagan era also came with the closing and expiration of the vast majority of these writeoffs.

 

[Zathras]

What would help deincentivize behavior like that is actually letting the companies go bankrupt.
Without consequences, why would anyone avoid high risk?
Increasing taxes on 'uberwealthy' not only takes away part of the reward for greedy people, but also for hard workers, innovators, etc.
No, I think the way to go is 99% fewer loopholes in the tax code, a lower tax rate and a simpler tax system.

 

[jdw_fire]

What would help deincentivize behavior like that is actually letting the companies go bankrupt.
Without consequences, why would anyone avoid high risk?

i agree

Increasing taxes on 'uberwealthy' not only takes away part of the reward for greedy people, but also for hard workers, innovators, etc.

i think you have mistaken the "uberwealthy" with the very high income people. when i think of high income people i think of CEOs of (and other high ranking people in) large publicly held companies and pro sports players, both of which, i have heard arguments from mutliple people, make too much money. so maybe deincentivizing the paying of such salaries isnt such a bad thing.

when it comes to the "hard workers", how many of them have a very high income except the people selling things like the CDOs and CDSs which got us into the problem we just went thru? and this is exactlly the group from whom i want to remove the reward.

when it comes to "innovators" if you are talking about the invention of something that is produced and then sold, the inventor probably has a company that is building and selling said product and the inventor becomes "uberwealthy" by owning the company when the value of the company rises, not from huge salaries. so i dont think this would be such a disincentive to invention as you are concerned about, provided CG taxes are kept reasonable.

No, I think the way to go is 99% fewer loopholes in the tax code, a lower tax rate and a simpler tax system.

i am all for a simpler tax code and, per ziggy, would be required for higher marginal rates on very high incomes to work as the disincentive i have suggested.

 

[Independent]

I was exposed to an unexpected mix of topics today that gave way to an interesting idea. It started this morning with all the talk of another large bank bonus. Then as I was listening to a Paulsen interview that was discussing the reasons for the near collapse of our economy I happened to look at a FIRE and Money thread on IRA conversion to Roth and read "Thanks for posting that document of historical income tax rates - it's hard to imagine there having been a 94% tax bracket at one point! That would put a damper on my motivation to earn more." And wow a thought crossed my mind that before then was totally against how i thought about taxes. Up until then i was against higher taxes and all for tax reductions but the thought was that maybe higher (very much higher at the top end of the scale) tax rates on the higher income earners was a good thing. Let me explain, from what i have heard the main reason we got so close to a financial melt down was the greed of people in the financial industry, it got totally out of hand. So when i read "it's hard to imagine there having been a 94% tax bracket at one point! That would put a damper on my motivation to earn more" the thought that came to mind was we could have used that with those out of control greedy financial people. So maybe we need that now to prevent (or at least discourage) that type of greedy behavior in the future. And it would have the added benefit of collecting some revenue to combat our debt (but that is just a side "benefit"). I havent given this a great deal of thought and i would like to hear everyones thoughts on the subject as a part of me would like this not to be a good idea.

I've thought the same thing. At one time we said we didn't want income tax rates to become too high because that we discourage talented people from working harder. At some point, it stops being talent and hard work and becomes gambling with other people's money. That's something I'm not afraid to discourage.

On a related topic, Obama's budget has a line for changing the treatment of "carried interest". That's the item that allows hedge fund managers (among others) to pay 15% tax on their fees by treating them as capital gains instead of earned income.

 

[Gone4Good]

The problem with using the tax code to de-insentivize greedy bankers is that it impacts everyone else too. The tax code is a pretty blunt tool.

Far better, in my view, is to regulate the hell out of the banks to make them boring and stable and less of a casino for the employees. Once that happens pay will come down. And then our best and brightest will have to find their fortunes doing something else . . . like building something productive.

 

[Martha]

We could take some lessons from Canada on how to keep your banking system stable.

 

[Gone4Good]

I don't know when it was 94%....

Briefly in 1944 & 45. But it's been above 60% for the majority of the 20th century.

 

[haha]

Increasing marginal tax rates is about the most roundabout and least effective way there could possibly be to take risk out of our financial system.

But I bet you would make a lot of tax lawyers and accountants very, very happy.

I sometimes wonder where some of the ideas floated around here come from. Mars? Russia?

Ha

 

[unclemick]

I'm thinking something non-monetary - like water boarding til the Norwegian widow gets her dividends restored.

I know. I know. Sour grapes.

But how about checking with Buffett and his pay system for BRK's companies?

Performance tied to book value?

heh heh heh - We gonna let the board's of directors get off scot free? Where's the fiduciary responsibility there. Yes I 'm a Boglehead. Sort of. .

 

[audreyh1]

What would help deincentivize behavior like that is actually letting the companies go bankrupt.
Without consequences, why would anyone avoid high risk?

The company going bankrupt doesn't seem to disincentive those folks taking the excessive risk as they are long gone with their short-term profits by the time their scheme finally blows up.

This sad fact is what so surprised Alan Greenspan himself!

Audrey

 

[NW-Bound]

The only solution is to strip then cane these bastards in a public square!

Or let Uncle Mick use their naked butts as practice targets for his plastic BB gun.

 

[kumquat]

We could take some lessons from Canada on how to keep your banking system stable.

Well, here are some views by Canadians about this.

 

[Independent]

The problem with using the tax code to de-insentivize greedy bankers is that it impacts everyone else too. The tax code is a pretty blunt tool.

Far better, in my view, is to regulate the hell out of the banks to make them boring and stable and less of a casino for the employees. Once that happens pay will come down. And then our best and brightest will have to find their fortunes doing something else . . . like building something productive.

Not exactly "everyone else". I was thinking of a higher marginal rate that begins at $1 million of annual income. That's not "everyone else" in my neighborhood.

I have trouble figuring out what collateral harm that would do. Would Peyton Manning decide he's going to become an accountant because he's paying a high marginal rate on his income over $1 million?

From a different perspective, I don't think it would hurt if some of the extremely bright people who have gone the Harvard-to-Wall Street route would have done something else.

But I have to admit these comments are a little tongue in cheek. It simply isn't going to happen. Your idea has at least a slim chance of becoming law. Figure out what financial activities are really capable of bringing down the whole system, regulate and insure them, then carve everything else away so we are regulating and insuring no more than necessary. I'm glad to see that Obama's willing to give Volcker a platform to argue that.

 

[unclemick]

The only solution is to strip then cane these bastards in a public square!

Or let Uncle Mick use their naked butts as practice targets for his plastic BB gun.

Stick with cane - I have yet to hit a squirrel in 5-6 trys at 50 paces and I swear one squirrel gave me the paw version of the middle digit.

More target practice?

Plus the squirrel proof bird feeder is soo good - even the birds don't like it.

heh heh heh - those unentended consequences can be a pain the the pa-tooty. .

 

[jdw_fire]

Not exactly "everyone else". I was thinking of a higher marginal rate that begins at $1 million of annual income. That's not "everyone else" in my neighborhood.

I have trouble figuring out what collateral harm that would do. Would Peyton Manning decide he's going to become an accountant because he's paying a high marginal rate on his income over $1 million?

From a different perspective, I don't think it would hurt if some of the extremely bright people who have gone the Harvard-to-Wall Street route would have done something else.

exactly, higher marginal rates on the much higher incomes wont affect that many people but will deincentivize massive greed.

Figure out what financial activities are really capable of bringing down the whole system, regulate and insure them, then carve everything else away so we are regulating and insuring no more than necessary.

and just how is this done? who has the crystal ball that will provide the knowlegde of everything "capable of bringing down the whole system"?


and i was thinking of another reason to deincentivize these very high salaries. it seems that recently there has been a growing feeling of an impending class war in this country. as the middle class looks to be disappearing and the upper income class just keeps pulling away from everyone else, are the seeds of some kind of revolt being sown? so would deincentivizing very high salaries close this gap (or at least prevent it from widening it) and calm the class war feelings? i wouldnt want the USA to experience what russia did in the early 20th century.

 

[Gone4Good]

The company going bankrupt doesn't seem to disincentive those folks taking the excessive risk as they are long gone with their short-term profits by the time their scheme finally blows up.

This sad fact is what so surprised Alan Greenspan himself!

Audrey

But its even worse than that. According to the theory, competition and free markets can police themselves because there are two self interested parties performing due-diligence on each side of every trade. But here is a summary of what Hank Paulson writes in his new book . . .

Henry M. Paulson Jr. recalls dining with some of Wall Street's most powerful bankers on June 26, 2007, not long before the credit bubble imploded.

All were concerned with excessive risk taking in the markets and appalled by the erosion of underwriting standards," he writes in his penetrating memoir, "On the Brink." Yet they felt forced by competitive pressure to make loans they didn't like, the former U.S. Treasury secretary says.

"Isn't there something you can do to order us not to take all of these risks?" was the gist of a question posed by Charles O. Prince, the chief executive who was still at Citigroup Inc. as the bank bumbled toward disaster.

So instead of self policing, the competitive market essentially pressured banks to take risks the company's CEO's were uncomfortable with. And its true. There is no doubt that if one of these banks said in early 2003 "we're not getting involved in RMBS or structured credit products" the CEO would be gone by 2006.

 

[ERD50]

I'm flabbergasted by this thread.

The idea that taxing wealth nearly out of existence is somehow going to curb greed seems about as workable as the idea that spray painting everyone green is going to curb prejudice. And that's before we even start on the 'unintended consequences'.

-ERD50

Quotes- The Sneetches

...

My friends”, he announced in a voice clear and clean,
“My name is Sylvester McMonkey McBean.
And I’ve heard of Your troubles. I’ve heard you’re unhappy.
But I can fix that, I’m the Fix-It-Up Chappie.

I’ve come here to help you.
I have what you need.
And my prices are low. And I work with great speed.
And my work is one hundred per cent guaranteed!”

Then, quickly, Sylvester McMonkey McBean
Put together a very peculiar machine.
And he said, “You want stars like a Star-Belly Sneetch?
My friends, you can have them for three dollars each!” ...

 

[jdw_fire]

I'm flabbergasted by this thread.

The idea that taxing wealth nearly out of existence is somehow going to curb greed seems about as workable as the idea that spray painting everyone green is going to curb prejudice. And that's before we even start on the 'unintended consequences'.

-ERD50

you havent been paying attention, it isnt taxing wealth, it is taxing very high incomes. (and i expected more substance from you)