High-Income Households ... some additional SCF data, relevant to Obama's SS tax options

A Note: What is the Appropriate Tax-Base for President-Elect Obama's High-Income Household Tax? by David P. Bernstein.

Here's the abstract for a paper recently posted to SSRN at http://ssrn.com/abstract=1296188

President-elect Obama has proposed taxing high-income individuals and using the funds to improve the solvency of the Social Security and Medicare Trust funds. Existing taxes used to fund Social Security and Medicare have only been applied to wages. Current proposals have been vague about what type of tax base might be used in the new tax. This note utilizes data from the Survey of Consumer Finances to compare potential advantages and disadvantages of a wages-only tax base proposal to a broader tax base proposal. Four different tax base options,

• broad income over $250,000,
  
• wages over $250,000,
  
• broad income over $500,000 and
  
• wages over $500,000
  

are considered. The results presented here indicate the tax base (taxable income) on broadly defined household income over $500,000 could be 28 times larger than the tax base on wages over $500,000. ($737 billion compared to $26 billion.) The tax base on broadly defined household income over $250,000 is $1,134 billion compared to a tax base of $460 billion for household wages over $250,000. The broad income tax base allows for lower marginal tax rates, lower reductions in labor force participation among two-income households, and less substitution between wages and other forms of compensation than the wage-only tax base.

Let me lay that out.

• Aggregate household wage income over $250,000 of households with wages over $250,000 is $460 billion.  That is the total of wages if we exempt the first $250,000 of wages.  That's 2.5% of the population
• Aggregate household income wage income over $500,000 of households with wages over $500,000 is $26 billion. That is the total of wages if we exempt the first $500,000 of wages.
• Aggregate broadly defined household income over $250,000 of households with income over $250,000 is $1,134 billion. That is the total of income if we exempt the first $250,000 of income of any kind.
• Aggregate broadly defined household income of households with income over $500,000 is $737 billion. That is the total of income if we exempt the first $500,000 of income of any kind.  That's 0.8% of the population

In other words:

• households with income over $500,000 per year have income of $737 billion over and above that first $500,000 each. They represent 0.81% of us.
• households with income between $250,000 and $500,000 have income of $397 billion, over and above that first $250,000 each.  They represent 1.73% of us.

The study does not tell us what proportion of total income that is.

The study says:

Four different tax base definitions based on different income concepts and eligibility thresholds are considered. The four different tax base concepts are:

• Tax base number one: Tax is based on broad income defined by the eight income sources listed in Table One. All broad income over $250,000 is subject to the tax.
• Tax base number two: Tax is based on wages. All wages over $250,000 is subject to the tax.
• Tax base number three: The tax is based on broad income defined by the eight sources listed in Table One. All broad income over $500,000 per year is subject to the tax.
• Tax base number four: The tax is based on wages. All wages over $500,000 is subject to the tax.

These results are revealing. A tax applied to broadly defined income for households making more than $500,000 per year would apply to only 0.8% of the population. A comparable tax applied to households making wages more than $250,000 per year will affect 2.5% of the population. The broadly defined tax targeting the highest earning 0.8% of all households will realize substantially more tax revenue than a tax based exclusively on wages targeting the 2.5% of households with the highest wages.

The article is based on a special tabulation of 2004 SCF data, and provides some interesting factoids about our income sources.

• Households with income under $250,000 receive 78.2% of their income in wages
• Households with income over $250,000 receive 52.0% of their income in wages
• Households with income over $500,000 receive 47.2% of their income in wages
• For all households, 71.7% is income is in wages
• For all households, 10.1% of income comes from retirement income;
• For households with income under $250,000, 12.6% is in retirement income
• For all households, 5.7% of income is from trusts, rents and royalties
• For households with income over $250,000, 17.4% is from trusts, rents and royalties
• For households with income over $500,000, 21.9% is from trusts, rents and royalties.
• Capital gains represent 3.2% of aggregate income, but 11.0% for households with income over $250,000 and 13.6% for households within income over $500,000.
• Dividends represent 1.4% of aggregate income, but 3.4% for both of the higher income categories
• Business income represents 5.7% of aggregate income, but only 4.4% for those under $250,000, 9.5% for those over $250,000, and, interestingly, less -- 8.0% -- for those with incomes over $500,000. [source: Table 1]
• 2.54% of us have total household incomes over $250,000; of these, 39.1% have dual earners
• 1.24% of us have total household wages over 250,000; of these, 42.5% have dual earners
• 0.81% of us have total household incomes over $500,000; of these, 28.7% have dual earners
• 0.35% of us have total household wages over $500,000; of these, 25.8% have dual earners [source: Table 2]
• 58.4% of us get more than 90% of our income from wages
• 59.0% of those with income under $250,000 get more than 90% of our income from wages.  (Keep in mind that 12.6% receive retirement income (source: Table 1)
• 34.6% of those with income over $250,000 get more than 90% of their income from wages
• 31.3% of those with income over $500,000 get more than 90% of their income from wages

I am, however, puzzled by one figure in Table 3: the final cell, it seems to me, should be $550,000, rather than $2,050,000; I've written to the author to find out what I'm misunderstanding.

When you hear talk about Obama's plans to "tax the income of the rich" -- or the loyal opposition's opposition to the concept (usually predicated on "trickle-down" rather than justice arguments) -- I encourage you to look at this study, and to recall the income concentration data that Piketty and Saez provide:

• The top 1% of us received in 2006 22.90% of income including capital gains
• The top 10% of us in 2006 received 49.69% of income including capital gains
• The bottom 90% of us in 2006 received 50.34% of income including capital gains.

and that looking just at wages,

• the top 1% of wage-earners received 12.00% of wages
• the top 10% of wage-earners received 35.82% of wages
• the bottom 90% of wage-earners received 64.18% of wages.

When we tax only the first $100,000 or so of wages we leave a disproportional amount to people who are earning very high wages.

I'm puzzled a bit that income between the current SS ceiling of $100,000 per earner and either $250,000 or $500,000 per household would not be taxed to support the Social Security system.

Just to be clear: I am generally opposed to taxes on wages, and regard fiddling with them as something akin to rearranging deck chairs for a better view and sound experience ... but at the same time, think we need to call attention to the extreme concentration of income and wealth which our current form of capitalism and privilege has created.  I am in favor of preserving Social Security, but long-term want to promote that which permit all of us to prosper.  I think we ought to be placing heavy taxes on that which the classical economists called RENT, and only tax wages and other kinds of income for as long as rent is insufficient to meet our needs for public revenue.