The Past and Future of Taxing the 1%

Taxing a country is like robbing a bank, in at least one respect. You have to go where the money is. In the U.S., it's at the top.

Under Obama's budget, total tax rates for the rich -- and, really, for the entire country -- would likely hit their highest levels in about 40 years. After raising taxes in the Affordable Care Act, and raising rates on household income over $450,000 after we jumped the fiscal cliff, the president has proposed a budget that would continue to push taxes up on the richest families by limiting their deductions.

The piece I wrote yesterday about the trajectory of taxes drew a lot of questions in the comment section. Let me try to clear some of them up here.

First, let's look at the history of effective tax rates -- that's income taxes, payroll taxes, excise taxes, corporate taxes, the whole shebang -- for the top 1 percent; the top 5 percent (minus the very top percentile); and the total country. This graph is borne from CBO data you can play with here:

Screen Shot 2013-04-24 at 4.51.32 PM.png

The biggest story is that total tax rates have fallen for everybody since the late 1970s, because, as you know, we kept cutting taxes. The second biggest story is that those tax cuts were offset slightly by income gains, as families got richer during good times (mostly the 1990s) and passed into higher tax brackets. Third, note that the first Reagan tax cut, coinciding with a recession, collapsed rates dramatically at the top; Bush I and Clinton raised taxes on the rich to help close the deficit in the early 1990s.

Still with me? Okay, this is where things get a little wonky.

To show you THE FUTURE of taxes, I'm about to show you graphs using data from the Tax Policy Center. But the graphs above came from the Congressional Budget Office, which uses a different calculation for income. Is it totally 100% kosher to switch data sets from CBO to TPC? No. The following analysis is not 100% Kosher. But, like eating ricec akes five days after Passover, it is very close.

Let me show you exactly how close. The difference between effective federal tax rates between CBO and TPC in their overlapping years -- 2004 through 2009 -- is about 1 percentage point or less. In light red, TPC estimates higher taxes for the rich and overall. In the deep red, CBO data estimated higher taxes for the lowest income.

Screen Shot 2013-04-24 at 4.12.20 PM.png

Understanding that we're working with imperfect data, let's gaze upon the past and future of effective federal tax rates on the rich. Here it is, from 1979 to 2003 (CBO data) with projections through 2023 (TPC data).

Screen Shot 2013-04-24 at 5.34.31 PM.png

This graph isn't written in stone. It's divined from a White House budget, which means it might as well be written in wet clay. With crayons and dreams. Republicans are steadfast against raising taxes, and Democrats don't seem jazzed to fight for another tax hike in a still-weak economy with immigration and gun control crowding out the budget for playing time.

But even if the graph isn't a picture of the future, it is a picture of something very much like the future.

The tax code is getting more progressive for two reasons. First, the rich are getting richer. The top 20 percent's share grew from 55 percent to 68 percent since 1979. According to research by Emmanuel Saez, income rose 11 percent for the top percentile of earners in the recovery, and approximately 0 percent (or worse) for everybody else.

Second, while the rich earn a bigger share of the economic pie, Washington will continue to need a bigger slice. In the recession, federal revenue as a share of the economy hit a half-century low. In the next ten years, it will need to exceed its half-century average.

Taxes are going up. Probably on everybody. But they'll have to go up the most on the rich because, ultimately, taxation is quite a lot like bank robberies in at least one respect: You have to go where the money is.