Posted on 01/01/2008 11:17:41 AM PST by K-oneTexas
From the November/December 2007 Issue
1. Are income taxes fair?
That depends on who is offering the opinion. Democratic candidates for president certainly dont think so. John Edwards has said, Its time to restore fairness to a tax code that has been driven badly out of whack. Hillary Clinton laments that middle-class and working families are paying a much higher percentage of their income [in taxes]. Over the past seven years, however, Americans in general think taxes have become more fair, not less. The Gallup Organization found in an April poll that 60 percent of respondents believe the income taxes that they themselves pay are fair, compared with 37 percent who believe the taxes they pay are unfair. In 1997, the figures were 51 percent fair and 43 percent unfair.
2. What income group pays the most federal income taxes today?
The latest data show that a big portion of the federal income tax burden is shouldered by a small group of the very richest Americans. The wealthiest 1 percent of the population earn 19 percent of the income but pay 37 percent of the income tax. The top 10 percent pay 68 percent of the tab. Meanwhile, the bottom 50 percentthose below the median income levelnow earn 13 percent of the income but pay just 3 percent of the taxes. These are proportions of the income tax alone and dont include payroll taxes for Social Security and Medicare.
3. But didnt the Bush tax cuts favor the rich?
The New York Times reported recently that the average family in America with an income of $10 million or more received a half-million-dollar tax cut, while the middle class got crumbs (less than $100 shaved off their tax bill). If we examine the taxes paid in a static worldthat is, if we assume that there was no change in behavior and economic performance as a result of the tax codethen these numbers are meaningful. Most of the tax cuts went to the super wealthy.
But Americans did respond to the tax cuts. There was more investment, more hiring by businesses, and a stronger stock market. When we compare the taxes paid under the old system with those paid after the Bush tax cuts, the rich are now actually paying a higher proportion of income taxes. The latest IRS data show an increase of more than $100 billion in tax payments from the wealthy by 2005 alone. The number of tax filers who claimed taxable income of more than $1 million increased from approximately 180,000 in 2003 to over 300,000 in 2005. The total taxes paid by these millionaire households rose by about 80 percent in two years, from $132 billion to $236 billion.
4. But havent the tax cuts put more of the burden on the backs of the middle class and the poor?
No. I examined the Treasury Department analysis of how much the rich would have paid without the Bush tax cuts and how much they actually did pay. The rich are now paying more than they would have paid, not less, after the Bush investment tax cuts. For example, the Treasurys estimate was that the top 1 percent of earners would pay 31 percent of taxes if the Bush cuts did not go into effect; with the cuts, they actually paid 37 percent. Similarly, the share of the top 10 percent of earners was estimated at 63 percent without the cuts; they actually paid 68 percent.
5. What has happened to tax rates in America over the last several decades?
Theyve fallen. In the early 1960s, the highest marginal income tax rate was a stunning 91 percent. That top rate fell to 70 percent after the Kennedy-Johnson tax cuts and remained there until 1981. Then Ronald Reagan slashed it to 50 percent and ultimately to 28 percent after the 1986 Tax Reform Act. Although the federal tax rate fell by more than half, total tax receipts in the 1980s doubled from $517 billion in 1981 to $1,030 billion in 1990. The top tax rate rose slightly under George H. W. Bush and then moved to 39.6 percent under Bill Clinton. But under George W. Bush it fell again to 35 percent. So whats striking is that, even as tax rates have fallen by half over the past quarter-century, taxes paid by the wealthy have increased. Lower tax rates have made the tax system more progressive, not less so. In 1980, for example, the top 5 percent of income earners paid only 37 percent of all income taxes. Today, the top 1 percent pay that proportion, and the top 5 percent pay a whopping 57 percent.
6. What is the economic logic behind these lower tax rates?
As legend has it, the famous Laffer Curve was first drawn by economist Arthur Laffer in 1974 on a cocktail napkin at a small dinner meeting attended by the late Wall Street Journal editor Robert Bartley and such high-powered policymakers as Richard Cheney and Donald Rumsfeld. Laffer showed how two different ratesone high and one lowcould produce the same revenues, since the higher rate would discourage work and investment. The Laffer Curve helped launch Reaganomics here at home and ignited a frenzy of tax cutting around the globe that continues to this day. Its also one of the simplest concepts in economics: lowering the tax rate on production, work, investment, and risk-taking will spur more of these activities and will often produce more tax revenue rather than less. Since the Reagan tax cuts, the United States has created some 40 million new jobsmore than all of Europe and Japan combined.
7. Are lower tax rates responsible for the big budget deficits of recent decades?
There is no correlation between tax rates and deficits in recent U.S. history. The spike in the federal deficit in the 1980s was caused by massive spending increases.
The Congressional Budget Office reports that, since the 2003 tax cuts, federal revenues have grown by $745 billionthe largest real increase in history over such a short time period. Individual and corporate income tax receipts have jumped by 30 percent in the two years since the tax cuts.
8. Do the rich pay more taxes because they are earning more of the income in America?
Yes. Theres no doubt that the share of total income earned by the wealthy has increased steadily over the past 25 years. Since 1980, the share of income earned by the richest 1 percent has more than doubled, from 9 percent to 19 percent. The share of the income going to the poorest income quintile has declined. Income disparities, in absolute dollars, have grown substantially.
What is significant is that for the top 5 percent and 10 percent of earners, the ratio of taxes paid compared with income earned has risen. For example, in 1980, the top 10 percent earned 32 percent of the income and paid 44 percent of the taxesa ratio of 1.4. In 2004, this group earned more of the income (44 percent) but paid a lot more of the taxes (68 percent)a ratio of 1.6. In other words, progressivityin terms of share of total taxes paidhas risen. On the other hand, for the top 1 percent of earners, progressivity has declined from a ratio of 2.2 in 1980 to 1.9 in 2004.
9. Have gains by the rich come at the expense of a declining living standard for the middle class?
No. If Bill Gates suddenly took his tens of billions of dollars and moved to France, income distribution in America would temporarily appear more equitable, even though no one would be better off. Median family income in America between 1980 and 2004 grew by 17 percent. The middle class (defined as those between the 40th and the 60th percentiles of income) isnt falling behind or disappearing. It is getting richer. The lower income bound for the middle class has risen by about $12,000 (after inflation) since 1967. The upper income bound for the middle class is now roughly $68,000some $23,000 higher than in 1967. Thus, a family in the 60th percentile has 50 percent more buying power than 30 years ago. To paraphrase John F. Kennedy, this has been a rising tide expansion, with most (though not all) boats lifted.
10. Does the tax distribution look a lot different if we factor in other federal taxes, such as the payroll tax?
Its true that the distribution of taxes is somewhat more equally divided when payroll taxes are accounted forbut the change is surprisingly small. Payroll taxes of 15 percent are charged on the first dollar of income earned by a worker, and most of the tax is capped at an income of just below $100,000. The Tax Policy Center, run by the Urban Institute and the Brookings Institution, recently studied payroll and income taxes paid by each income group. The richest 1 percent pay 27.5 percent of the combined burden, the top 20 percent pay 72 percent, and the bottom 20 percent pay just 0.4 percent. One reason that the disparity in tax shares is so large is that Americans in the bottom quintile who have jobs get reimbursed for some or all of their 15 percent payroll tax through the earned-income tax credit (EITC), a fairly efficient poverty-abatement program.
11. How do tax rates in the United States compare with tax rates abroad?
Overall, taxes are between 10 percent and 20 percent lower in the United States than they are in most other industrial nations. This gives America a competitive edge in world markets. But Americas lead in low tax rates is shrinking. For example, the United States now has the second-highest corporate income tax in the developed world, after Japan. Our personal income tax rate is still low by historical standards. But in recent years many European and Pacific Rim nations have been slashing income taxesthere are now ten Eastern European nations with flat-tax rates between 12 percent and 25 percentwhile the political pressure in Washington, D.C., is to raise them.
12. Do tax cuts on investment income, such as George W. Bushs reductions in tax rates on capital gains and dividends, primarily benefit wealthy stockowners?
The New York Times reported that Americas millionaires raked in 43 percent of the investment tax cut benefits in 2003. Its true that lower tax rates have been a huge boon to shareholdersbut most of them are not rich. The latest polls show that 52 percent of Americans own stock and thus benefit directly from lower capital gains and dividend taxes. Reduced tax rates on dividends also triggered a huge jump in the number of companies paying out dividends. As the National Bureau of Economic Research put it, The surge in regular dividend payments after the 2003 reform is unprecedented in recent years. Dividend income is up nearly 50 percent since the 2003 tax cut.
The same phenomenon occurred with the capital gains tax, which is essentially a voluntary tax because asset owners can avoid it by simply holding onto their stock, home, or business. This lock-in effect, as it is called, can be economically inefficient, since owners have a tax incentive to keep poor investments, rather than drawing out the cash and putting it into assets that are more productive. When the capital gains tax is cut, people unlock their assets and reinvest in other enterprises.
The 1997 tax reform, passed under President Clinton, reduced the capital gains tax rate from 28 percent to 20 percent, and taxable capital gains nearly doubled over the next three years. The 2003 reform brought the rate down to 15 percent, and between 2002 and 2005 there was a 154 percent increase in capital gains reported as income.
This explosion in realized gains cannot be explained only by the rise in the stock market, which averaged just 13 percent annually between 2003 and 2005. Capital gains tax receipts also far outpaced the revenues that the governments static models predicted. Between 2003 and 2007, actual tax receipts exceeded expectations by $207 billion.
Stephen Moore is senior economics writer for the Wall Street Journal editorial board and a contributor to CNBC TV. He was the founder of the Club for Growth and has served as a fiscal policy analyst at the Cato Institute and the Heritage Foundation. His latest book is Bullish on Bush: How George Bushs Ownership Society Will Make America Stronger (Madison Books).
Image credit: chart illustrations by MacNeill & MacIntosh.
Figure out a way to persuade the rich to defend their own interest and pay fewer taxes so the rest of us would not be burdened with so much big Goobermint.
Best regards,
There is a couple of things you don’t see here.
Most of the rich are not employees, but own businesses. If you own a business, you treat a tax as just another expense and build it into your prices. The final consumer, not the business, pays.
Also, the taxation of high incomes has the effect of accelerating the circulation of money and increasing gross demand. The rich pay taxes, and the money is immediately given out to the poor and spent - at the businesses owned by the rich.
These effects work best if you are already rich. This is why many billionaires don’t mind supporting Democrats.
bookmark for later...
tax the rich ping
bump
I give it about an hour before the fairtaxers take over the thread..
Great article.
And we must remember this:
Sen. Clinton said, “Many of you are well enough off that ... the tax cuts may have helped you. We’re saying that for America to get back on track, we’re probably going to cut that short and not give it to you. We’re going to take things away from you on behalf of the common good.”
Best regards
This is one of those canards that repeatedly show up in the news especially by Rush Limbaugh, Steve Forbes, and the like. They conveniently leave out the fact they are talking only about income taxes. They don't tell you that FICA cutoff means the middleclass provides the bult of social security taxes which are used to fund disability welfare. The middleclass in the private sector can't escape these taxes. What little is left over goes to meager pensions and medicare. Health insurance is now a tax for all practical purposes. It rivals Social security but is hidden as a working benefit. Try being self employed and see for yourself. This again is funded by the working middleclass. The rich may need their botaux shots, but the middleclass funds the bulk of the life saving medical care. The wealthy like Kerry, Kennedy, and most other elitists put their riches tax free bonds or they get to invest in high yield investments that elude the middleclass. The rich are not victims. They in fact leverage their wealth at the working stiff's expense.
Buffett said he makes $46 million a year in income and is only taxed at a 17.7 percent rate on his federal income taxes. By contrast, those who work for him, and make considerably less, pay on average about 32.9 percent in taxes - with the highest rate being 39.7 percent. To emphasize his point, Buffett offered $1 million to the audience member who could show that one of the nation's wealthiest individuals pays a higher tax rate than one of their subordinates. "I'm willing to bet anyone in this room $1 million that those rates are less than the secretary has to pay," said Buffett.
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You’re right. Many commentators take a simplistic view of taxation. The incomprehensible tax code leaves them defining “rich” effectively as “having the greatest taxable income” and for some reason exclude payroll tax, a parallel income-tax system levied against certain classes of income under a different name.
Health insurance isn’t a tax, but it is a valuable benefit and an important part of many compensation packages. You generally should include health-insurance benefits as income. Our bizarre income tax system usually considers health insurance intangible non-income for employees who receive it as an employment benefit unless they’re self-employed. This tax treatment of health benefits in addition to the ridiculous complexity of the tax system creates enormous barriers to entrepreneurship.
But defining the “rich” as those with great taxable income includes many Americans who aren’t rich at all because they incurred taxable income while suffering a foreclosure or repossession, depleting a retirement account to pay for food and medical care necessary for basic survival, or fell into another nasty tax trap. This definition of “rich” also excludes the extremely wealthy who easily flaunt various loopholes in the tax code to increase their wealth enormously without incurring taxable income or while incurring relatively much less taxable income. Certain offshore bank accounts, tax-free municipal bonds, and other investments fall into these categories.
These extremely wealthy people also often hire lobbyists and donate money to political campaigns; Distinguished Members of Congress then insert special obscure provisions in the tax code to exclude certain specific activities from taxation. The extremely wealthy benefactors and close relatives of Congressmen then receive an enormous payback in the form of reduced taxes or subsidies disguised as taxes, often hundreds or thousands of times what they spent on lobbying and political contributions. Ordinary Americans might consider such activity a form of bribery and corruption, but Congressmen view these activities as instruments of good public policy from which ordinary people will reap even more enormous benefits through some economic theory or some such.
A national retail sales tax sounds like a great idea but unfortunately will fall victim to such corrupt bargaining in very short order if enacted. We need ethical Congressmen, without that phrase representing the quintessential oxymoron. Or in default of that, we need some movement toward lower spending. Or in default of that, we need some automatic tie between spending and taxation. Whenever Congress decides to increase spending or creates a new tax loophole for a few rich donors or borrows/prints more money than the Treasury has, then he general decree expropriation rate should rise automatically to supply the lost revenue.
It was far more frustrating years ago, when the MSM had a lock on the main organs of propag.. er, news dissemination from the “big 3” news channels.
Conservatives had the Wall Street Journal, and Bill Buckley, that was about it. At least now it is possible to get facts inserted into the debates to some degree. Modern day “liberals” aren’t interested in facts, of course, the only qualification it seems is good intentions, and how people “feel” about things. Because rational humans will not vote for their policies if they are fully informed, all of their tactics tend towards secrecy, deceit, clever manipulation, usurping democracy and the legislative process, stacking the courts through judicial fiat, education, it’s just ridiculous.
Cool, time to give the 75 per cent who pay 15 per cent of the taxes a 100 per cent income tax cut.
bump
In theory, yes. I had my eyes opened during a recent hospital stay. My roommate was a construction worker who took has wages under the table. In official records he was an indigent. In actuality, he earned at least if not more than me as he kept all his earnings. So who payed for his medical care? His medical care was mandated by the state. He filled out paperwork for the state to pay (me). I won't be surprised if we someday learn that hospitals bury a portion of their overhead expenses into costs paid by insurance companies. The cost of my health insurance is so high, I suspect that it goes to pay for others. The really extraordinary thing about this episode is the construction worker made no attempt to hide this from me. He was confident that the authorities did not care. To me, his free care and my health insurance premium ($23K a year for a family of four) leads me to claim this is now a privately collected tax mandated in part by free healthcare for the indigent.
It looks like Mr. Moore addressed this in point #10 of the article:
The Tax Policy Center, run by the Urban Institute and the Brookings Institution, recently studied payroll and income taxes paid by each income group. The richest 1 percent pay 27.5 percent of the combined burden, the top 20 percent pay 72 percent, and the bottom 20 percent pay just 0.4 percent.
Thoughts?
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