Wednesday, January 21, 2009

Tax rates on the rich?

As the NYT points out, tax rates on the rich are much lower than they used to be, both at the federal and state level:

Over the last 30 years, the trend has been to pare back income tax rates on the rich, federally and in the state. Since the mid-1970s, the state has cut its top tax rate from 15.375 percent to 6.85 percent. The top income tax rate in New Jersey is 8.97 percent, and in Connecticut it is 5 percent, according to data from the Fiscal Policy Institute, a liberal research group.

The same New York Times article then goes on to point out an apparent paradox:

That said, the richest 1 percent of New Yorkers paid more than 40 percent of the income tax in 2007, up from about 30 percent in 1996, according to state data, though that figure is declining as the financial crisis makes the rich less so.

You might wonder how the percentage of tax revenues paid by the rich could be increasing if the top tax rates have been decreasing? The answer to the paradox: at least up until very recently, the rich have been getting richer so much faster than the rest of the population that their tax payments increased as a share of the total, despite the decline in the tax rates they faced.

Of course, as the New York Time also points out, the incomes of many of those at the top have plummeted during the financial crisis, so even if rates are raised on the richest taxpayers, the share of tax revenue coming from the rich may decrease.

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