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January 21, 2003
More dishonesty from Democrats on taxes
The Democrats have howled that the latest proposed Bush tax cut is a "tax cut for the rich"--this before many of them even saw the plan. Notably, very few Democrats have come out in support of cutting taxes in general, but claim that their beef is with the way the tax cut is distributed. But where's the beef? Democrats have been using specious and dishonest tactics to win political favor. Turns out that the Bush tax cut, as with his first one, INCREASES the progressivity of the tax code. That is to say that the rich will end up paying a BIGGER share of the taxes in this country (even when you include the payroll tax), not a smaller one. So the chief Democratic objection--that the distribution of the tax cut is unfair--is simply untrue.
Well actually it is true, but in the opposite sense. It is a bad idea to have a system that is so steeply progressive as it bifurcates our society. But no Democrat will ever address this issue. Instead they choose to try and fool Americans that this is a tax cut for the rich, ignoring the fact that when the top 5% of income earners pay well over 50% of the taxes, and the top 24% pay well over 80%, while the bottom 50% pay less than 5%, with many paying nothing at all or evening getting credits, there is no other possible choice when cutting taxes that the wealthy will get a bigger tax cut on an absolute dollars basis--they are the ones paying the taxes! (For more on this see this editorial in the WSJ. Excerpt:
Even the barest of glances at tax data reveal a system that is steeply progressive. Tax revenue has been increasingly squeezed out of top earners. According to the most recent data, from 1999, the richest -- with income above half a million dollars -- constituted 0.5% of taxpayers but accounted for 28% of total tax revenue. Simply put, a tiny group of people (553,380) were responsible for more than one-quarter of the income tax take of $877 billion.It's one thing to oppose a tax cut because you have been seduced by Rubinomics (the disproven idea that deficits leads to higher interest rates) or you believe the federal government just isn't big enough, but to those who are preaching that this is a tax cut for the rich, get the facts straight.Well, maybe you're saying -- so what? They can afford it. Then take a look at those who aren't Richie Rich. The most recent data from the IRS, in 2000, show that the top 5% coughed up more than half of total tax revenue. Specifically, we are talking about folks with adjusted gross incomes of $128,336 and higher being responsible for 56% of the tax take. Eyebrows raised? There's more. The top 50% of taxpayers accounted for almost all income tax revenue -- 96% of the total take.
These numbers are more arresting when compared with the situation 14 years earlier. In 1986, the top 1% paid 26% of revenue, the top 5% was responsible for 42% and the top half contributed 93%. And what about the bottom half of taxpayers? They accounted for 7% of the total in 1986 but only 4% in 2000.
One such preacher, Tom Daschle, was confronted with this fact on Fox News this weekend, and after stammering a bit ultimately chose to simply deny the truth, saying his "inclination" was to disagree with the facts.
The truth is that the Democrats have demagogued this issue so effectively that our tax system is becoming ever the more dysfunctional. Regardless of how progressive the tax system is, it seems to be a third rail to suggest that it should be less progressive in any way. This will therefore continue until it reaches a point of absurdity. For more information, read this WSJ editorial:
Lucky Duckies AgainAs you may have noticed, the critics of President Bush's new tax cut package claim it is a sop to the rich. This charge makes us wonder if they've even read the plan. The truth is that the Bush proposals would make the tax code more progressive, not less. And this isn't altogether a good thing.
The soak-the-rich facts, if any journalists cared to look, are contained in the income distribution tables on the plan compiled by the Treasury Department. Looking at the impact for 2003, Treasury finds that the average reduction in income taxes is a touch more than 12%. But for those who make less than $30,000 the average reduction is about 17%, while for those who earn more than $100,000 it is 11.4% or less. (See the nearby table.)
| Income | Percentage reduction |
| 0-$30,000 | 17.0% |
| 30-40,000 | 20.1 |
| 40-50,000 | 14.5 |
| 50-75,000 | 11.4 |
| 75-100,000 | 13 |
| 100-200,000 | 11.4 |
| 200,000-plus | 11.2 |
| Total | 12.3 |
There's even better news for modern Robin Hoods. Because the percentage reduction for families with incomes under $50,000 is greater under the Bush plan, those families would pay a smaller share of the total income tax than they do under current law.Families with incomes over $100,000 would end up paying a larger share of the total income tax. These families would pay 73% of all federal income taxes. Not to put too fine a point on this income redistribution, but taxpayers with incomes over $200,000 could expect on average to pay about $99,000 in taxes under Mr. Bush's plan.
How could this happen? Mr. Bush would relieve 3.8 million lower-income taxpayers from paying any income taxes. The chief tax remover comes from his proposal to accelerate the increase in the child credit to $1,000 from $600, bumping a touch more than three million taxpayers right off the rolls.
No doubt the Bush team proposed this tilt toward lower income taxpayers to mute the class-warrior critics, not that we've noticed any lower decibel level. But one certain consequence is that the plan exacerbates the growing problem of a bifurcated tax system.
We raised this issue several weeks ago, pointing out that the unceasing addition of exemptions, deductions and credits to the tax code was shrinking the tax-paying base. And, as more lower-income people saw tax liabilities fall to zero, more upper-income people shouldered a larger part of the tax burden. We did not, by the way, suggest that lower income people should pay higher taxes. We even went out of our way to flog our favorite horse that everybody should pay less in taxes.
We are merely pointing out the (apparently heretical) truth that the current tax system is very skewed against upper-income Americans. According to IRS data from 2000, the top 5% of tax filers paid more than 50% of total income tax revenue, and the top half of tax filers were responsible for almost all revenue -- 96% of the total take. This burden on the upper-income holds even when the payroll tax is included in overall distribution tables. (The payroll tax includes the regressive Social Security levy and the 1.45% Medicare tax that applies to every dollar of income.)
The Congressional Budget Office has looked at the distributive impact of various taxes for 1997. The income-tax share of the lowest-income family quintile (the bottom 20%) was negative 1.2% and the share of the highest family quintile was 73.3%. The difference in payroll-tax share was somewhat less dramatic at 3.9% for the lowest quintile and 40.6% for the highest. But when all federal taxes were thrown together, the share of the lowest quintile was 1.6%, while the share of the highest quintile was 60.2%. Karl Marx, call your office.
This super-progressivity comes from two sources: the system of higher marginal-rate brackets for higher income households, and the exclusion of lower income households from any income-tax liability. In 2000, of 129.4 million tax returns filed, about 32 million paid no taxes. Most of these lucky duckies, as we have called them1 (to some amusing consternation), benefit from tax exemptions, deductions and credits that violate the concept of horizontal tax equity -- the notion that people with identical incomes should pay the same amount in taxes.
For instance, the folks at the Tax Foundation have looked at how two single moms -- each earning $30,000 a year -- would fare under the Bush plan. In 2003, the single mom with one child would pay income tax of $1,028; the mom with two children would not only pay no taxes, she'd also receive a check from the federal government, under the earned income tax credit, for $680. Compared to the single mom who must pay taxes, the single mom who does not is, well, a lucky ducky.
The broader point is that whatever Mr. Bush's tax proposal does for economic growth (and we think it'd do a lot), it gives more proportional benefit to lower-income households. The class warriors should be thrilled.
URL for this article:
http://online.wsj.com/article/0,,SB1043014678185458224,00.html
Hyperlinks in this Article:
(1) http://online.wsj.com/article/0,,SB1037748678534174748,00.htmlUpdated January 20, 2003
Amen again. Although ludicrous to some, I still dream of the flat tax. The progressive tax system is built on the false premise of "fairness." Reading the statistics again about the proportionality of the tax burden only reinforces in my mind the ineffeciency and folly of it all. Oh that we had the courage of the Russians whose flat tax scheme is working wonders from what I understand.