Happy Tax Day!

Let me tell you how it will be
There's one for you, nineteen for me
- Taxman lyrics by the Beatles

Today, April 15, is the deadline for the payment of US taxes. The National Bureau of Economic Research has concluded that the combined federal, state, and local government average marginal tax rate for most workers to be about 40% of income. This means that if you have fixed expenses of $60K per year, you need to earn $100K in order to afford the taxes. Another way to look at this is that all the money you make from January thru most of May goes to the government. You get to keep your earnings of June through December.

One reaction to this (currently seen in Washington) is to complain that it’s the fault of the rich for not paying their fair share of taxes. No one ever blames the government for spending too much. But the truth is that while the top 1% of US earners makes 19% of the money, they also pay 28% of all US taxes. The rich already pay a penalty. Consider the Beatles who were in the 95% British tax bracket. (“One for you, nineteen for me.”) They learned the hard way that in order to spend $100,000 pounds (a modest amount for rock stars), they had to earn 2 million pounds to cover the taxes. Outrageous tax levels discourage success and encourage the wealthy to flee the county. John Lennon moved to America.

Bottom Line

Punishing the wealthy is never a good idea. Consider the new US tax laws targeting executives who earn $250,000 or more per year. There are doctors and lawyers near that limit who say they will respond by working less. They will cut back on staff, reduce services, layoff workers, whatever it takes to keep their wages just below that limit. That is not the path to economic recovery. This is the opposite of stimulus.