Red Planet to the rescue

    By Flavius on Fri, 10/07/2011 - 3:56pm |

    of my understandably unread blog on marginal tax rates. (Yawn)

    1952: tax table  Adjusted for Inflation

     

    Marginal Tax Rate: 

    22.2% up to $16.9K

    24.6% up to $33.9K

    29.0% up to $50.8K

    34.0% up to $67.6K

    38.0% up to $84.7K

    42.0% up to $101.6K

    48.0% up to $118.5K

    53.0% up to $135.5K

    56.0% up to $152.4K

    59.0% up to $169.3K

    62.0% up to $186.2K

    66.0% up to $220.1K

    67.0% up to $270.9K

    68.0% up to $321.8K

    72.0% up to $372.6K

    75.0% up to $423.4K

    77.0% up to $508.0K

    80.0% up to $592.7K

    83.0% up to $677.4K

    85.0% up to $762.0K

    88.0% up to $846.7K

    90.0% up to $1,270.1K

    91.0% up to $1,693.4K

    92.0% from $1,693.4K up

     
    Now compare to today's rates:

    2011

    Married Filing Separately

    Married Filing Jointly (Double the dollar amounts, below).

    Marginal Tax Rate:

    10% up to $8.5K

    15% up to $34.5K

    25% up to $69.7K

    28% up to $106.2K

    33% up to $189.6K

    35% from 189.6K up

     Thank you RP
     
    Let us assume that most conservatives agree with Adam Smith that most people work harder and smarter on behalf of their self-interest. And that working for the "common good" rather than making things better, leads to the "tragedy of the commons".
     
    And let's assume that industry is right that, "you can't  inspect quality into a product, you build it in". . And applying that to AIG's business of insuring sub-prime swaps, you could try to control risk by having the risk officer issue procedures and making spot checks. But it would be better if you could encourage the trader not to take the risk in the first place.
     
     
    OK  so far?
     
    On the back of an envelope I calculate that applying the 1952 tax rates (inflation adjusted) to an AIG trader's $6M bonus would have left him with only $1.5M. But at today's rates he keeps $4.2M.
     
    But this understates the true increase in bonuses . When the top marginal rate was 92% that was purely theoretical.  It would have been simply dumb to pay a trader-or a shortstop or an actor - $6M  when their motivation would  only reflect  the $1.5 they actually got to keep. In passing Suskind's Confidence Men   mentions that Salomon's John Gutfreund was being paid  $3M when he took it public, half of what several AIG traders were paid  in  2009  after the tax payers rescued  it.
     
    Big bonuses get paid for big deals. And big deals that go bad can cause banks to fail. Like AIG in 2008. AOBTW no one is in a hurry to hire a trader who causes their employer to fail.
     
    Question: Are there any traders who would do a deal that could wipe out their bank in exchange for bonus of $1.5M after tax? What would Adam Smith say?
     
    Next question: would  there be more guys who would do it if that bonus were $4.2M? Adam? 
     
     
    We've met the enemy and it's the reduced progressivity of our tax code.

     

    Comments

    Happy to be of assistance, Flavius.

    Your argument has wings, may it fly straight to the ears that need to hear it.

    It's also interesting to look at the mid-range of the income scale. When my father was building his Main Street furniture business in the 50s, he could look forward to paying 40%—50%—60% of his taxable income if the store did well.

    Guess what? That didn't slow him down a bit. I never met a more enthusiastic young business man. He co-founded the local Chamber of Commerce, too. And paid his taxes proudly.

    Those were the days.


    by Red Planet on Fri, 10/07/2011 - 6:41pm

    Thank you to the both of you.


    by Verified Atheist on Sun, 10/09/2011 - 7:52am

    I'm too young to have paid 92% (only thing for which I'm too young ) but I certainly paid 70%. I won't say it never occurred to me to complain, just that I never did. Since I believe in a  government that does things and if I want it to do things I have to expect it to collect the money to pay for them  

    Lest the above makes me seem tiresomely patriotic, I'll point out that like, e.g. GE,  I have also sheltered money off shore. Not that I moved off shore, that I made there and left there. Because 

    Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the treasury. There is not even a patriotic duty to increase one's taxes. Over and over again the Courts have said that there is nothing sinister in so arranging affairs as to keep taxes as low as possible. Everyone does it, rich and poor alike and all do right, for nobody owes any public duty to pay more than the law demands: Taxes are enforced  exactions, not voluntary contributions. To demand more in the name of morals is mere cant."

    -  Learned Hand

     

    You might wonder why I made that money off shore. Because it required regulatory approval to do it here, which I couldn't get. So I went someplace where I could.


    by Flavius on Mon, 10/10/2011 - 9:27pm

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