Thought for the Day – August 6, 2011

US average income was $54,283 in 2009. Of the 235,413 US taxpayers who reported earning $1 million or more in 2009, 1470 paid no federal income tax (way up from 959 in 2009). Not only was average income down $1,106 from 2007, but so too was the number of people reporting any income at all — down 4.2 million filers (single or married households).

Of course, the economy is so much better now than it was in 2009, so we don’t have to worry.

2 thoughts on “Thought for the Day – August 6, 2011

  1. This is an entirely pointless statistic without knowing the actual details. OBVIOUSLY it’s not as simple as “I earned $1M, but I’m choosing to not pay any tax on it because I am a mean old rich person.” OBVIOUSLY, there is a reason. And not all the reasons are evil.

    On possibility is that this is the result of tax-free municiple bonds, which cities NEED in order to attract the investors needed to keep having cities. Since munis offer such low, by comparison interest rates, and only a dope would invest in them without further incentive, one provided incentive is that the income is not taxable. Would it be better if this income was taxable? Hardly.

    There are other possible explanations as well.

    The point is, and MUST be, that Governments and societies need and want investors to keep investing. One way to do this is to lessen the charges and uncertainty in doing so. When you don’t do that, you get what we have now, lots of companies sitting on billions and billions in cash, rather than investing it. It’s not because they are evil, it’s because Government incentivizes them to do that. (It is somehwhat contradictory to accuse rich people of being greedy, but also assume that they won’t try to make even more money if they can – and it is simply naive to assume that they CAN make more money by not creating jobs/income for others.)

    You have absolutely no idea at all why these 1470 people paid no income taxes. None. It might well be because they otherwise paid society by investing in Government bonds. It might be because they were able to carry forward huge losses (arguably caused by our bad Government policies, and in any case NOT a good thing), it could be lots of things. But the one thing it is NOT is a simple case of not paying taxes. And the last thing you want right now is investors not taking advantage of the tax breaks that are necessary to keep the wheel of society turning. (It is almost a surety that the money/good generated by these investors topped the money gained by simply taxing it from the start.)

    1. As is so often the case, more context might well lead to more enlightenment. There are some times, however, when just a distant glance at a forest tells us something of value, and I think this is one of them. Unless the increase in zero-tax millionaires is entirely about real losses — as opposed to losses acquired for tax purposes — I think it’s pretty safe to say that the number of very rich people not paying a penny of their fair share has nearly doubled. And I don’t much care why that is (again, barring real losses).

      There comes a point where you are earning so much that you should not be able to escape your financial obligation to the commonweal, and I personally don’t care whether your passive income is from municipal bonds or squeezing Bob Cratchit.

      And by the way, if we believe markets clear, the interest rate on tax-free municipals ought to be commensurate with the market rate on similarly risky taxable bonds net of taxes. If the tax-free bond is a better deal, all the more reason to tax them; if they are a worse deal, why would anyone hold them? And if they are the same, modulo taxes, then we don’t owe the holders anything for buying them — rather the tax exemption is properly understood as a subsidy to the issuing municipality, who can save money by offering a lower coupon rate. All this is elementary economics.

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