Marginal Income Tax Rates and Refined Musings

So, I’ve been thinking further about some of what I wrote yesterday.

The first is the idea of raising the top Marginal Tax Rate back to 39.5%. Will this really increase tax revenues? My hunch is yes; and the data might seem to indicate that. Using http://www.irs.gov/, and http://www.econstats.com/ I was able to pull a few numbers. I pulled the nominal GDP from 1986 to 2005 (they had it to 2008 Q2, but my data range was limited to 2005) and I used the IRS website to pull the total income tax revenue for the top 1% of earners from 1986 to 2005. (It should be noted that more than the top 1% pay at the top rate, but the data was broken in top 1%, 5%, 10%, 25%, 50%; so getting the income tax revenue by the top Marginal Rate payers was not possible with these sources) Using either the IRS site, or the OMB figures from http://www.whitehouse.gov/ I was able to get the top Marginal Rates for each of those years. For each year I divided the income tax revenue that the Top 1% of earners paid by the GDP of that year – I call this ratio “Top 1% income tax paid as a percent of GDP” (T1%GDP). I then took an average of these ratios for each of the distinct Marginal Rate periods. One thing that was interesting is that income from the Top 1% changed at a different rate, sometimes in the other direction, than the Marginal Rate did. Case in point, when the top Marginal Rate went from 48% in 1987 to 33% in 1988 (a reduction of 31.2%) income from the T1%GDP, grew 1.4%; when the Marginal Rate went from 33% to 31%, a 6.1% reduction, again, T1%GDP grew 4.3%; when the marginal rate went to 39.6% from 33%, a growth of 27.7%, T1%GDP grew 47.1%; and, finally, when the Marginal Rate went from 39.6% to 35%, a reduction of 11.6%, the T1%GDP fell 16.7%. If, in 2006 and 2007, the Marginal Rate was 39.6%, and the same average %GDP was pulled in as during the actual 39.6% years, that would have represented an additional $70 billion in revenues. Of course, I have to add the caveat that there are plenty of other things happening in these year besides changes in the Marginal Tax Rate that could affect revenue, and the sample sizes are small, but revenue would most like go up.

The second thing I was thinking about is that if LLC’s and S-Corp’s were allowed to be at a lower Marginal Tax Rate then the highest individual Marginal Tax Rate (my suggestion was 30% small corps, 39.6% for individuals) that every individual that earned more than $250k would find a way to convert their income into a small business income. While some of this happening isn’t too bad, allowing everyone to do it would be counterproductive. Unfortunately, I couldn’t find any data on the size of small business produced the most amount of employment. If, say, firms that had $8 million in revenue, and $1 million in net income produce 90% of small biz jobs, I would create a second, Marginal Tax Rate tier for small businesses that bumped up to 39.6% for any net income above and beyond $1 million. However, since it is an accepted fact that most small business do not do more the $1 million in revenue (much less $1 million in net income) a very rigorous study would have to be done to determine the right level of net income to boost a business from the discounted small business income tax rate to the full on 39.6% small business income tax rate.

Hmmm, I will have to think about these things further.

Later,

B