It has become increasingly fashionable to argue that since the very wealthy pay an increasing percentage of the total tax burden, the system is becoming more “progressive” and unfair to those who pay so much in tax. Consider some recent arguments.
In a March 8, 1999 editorial titled “The Rich Deserve a Tax Break, Too”, Business Week argued, “So people making $100,000 or more will shoulder 62% of the income tax burden in 1999”. They then argue, “People in the $20,000-$30,000 income bracket will pay 2.4% of all income taxes. Those making $30,000 to $40,000 will pay 4.3% and those in the $40,000 to $50,000 will pay 5.9%.” And finally, “If conservatives want a 10% across-the-board income tax cut, they should simply say the rich deserve one because they pay most of the income taxes.”
In a January 22, 2002 editorial, the Wall Street Journal argued, “Start with the richest of the rich, the top 1% of all earners. In 1999 they earned 19.5% of all adjusted gross income reported to the IRS. Yet they paid 36.2% of all federal income taxes that year. About 20 years ago they paid only 19% of all federal income taxes. By 1991…that share had climbed to 24.8%, and by 1999 it was above 36%. The story is the same for the merely filthy rich, the top 5% of filers, who paid 43.4% of all taxes in 1991, but by 1999 paid 55.5%.” They then argue, “There’s a word for this kind of tax system. It’s called progressive, not to mention confiscatory….And it is getting more confiscatory all the time. From 1989 to 1999, the share of total taxes paid by the entire top 50% was largely unchanged. But the share paid by the top 10% of filers jumped by 19%, the share paid by the top 5% leapt by 26%, and the share paid by the top 1% soared by more than 43%.”
And finally, in a July 26, 2011 USA Today article titled, “Punishing the rich: Impractical, unethical” Michael Medved says, “Conservatives also cite the latest IRS figures showing top earners already paying more than their fair share: The top 5% earn 35% of adjusted gross income but pay 59% of all income taxes. What’s more, the share of the overall burden shouldered by this group has risen sharply, not declined, since controversial Bush tax cuts of 2001-03.” He then adds, “It makes no sense to penalize successful people with higher tax rates. Their effort and imagination add jobs and growth while subtracting nothing from society at large.”
There is a difference between arguments that the rich pay an increasing share of total taxes paid, and that such an increase in share is also an increase in the progressivity of the tax, or that it imposes an unfair burden. While we can conclude that the richest Americans paid more income tax and also paid a larger percentage share of taxes after the Reagan marginal rate cuts beginning in 1981, we cannot conclude that the system was therefore made more progressive. The mythical increasing tax burden of the wealthy is now the primary argument for reducing their taxes by a larger percentage than that of the poor or middle-classes.
Ronald Reagan was correct when he argued that his 1980s cuts would lead to the rich paying a larger share of income taxes, but he was incorrect in arguing that this would also increase the progressivity of the tax system. The same argument was used by George W. Bush in 2001 when he proposed a $1.6 billion cut that bestowed a large share of the total benefits on the wealthiest Americans. Increasing taxes paid have resulted entirely from income growth and not from rate increases, or an increase in relative tax burdens.
A tax is progressive if the percentage of income paid in tax increases as income increases, i.e., the rich pay a higher percentage of their income in tax than do the poor. Taxes paid are the product of the tax rate times the tax base, so the percentage burden is a function of both the rate and the base. If taxes paid increase faster than income, the percentage paid will also increase. But if the rate falls, the only way for the burden to increase is for the base to decrease even faster. In a period like the 80s when rates were falling and the base rising, the percentage burden may increase or decrease. But if the base (income) for the rich is rising faster than that of the poor, their burden will fall faster and the tax will become less, not more, progressive. If their tax rate is also falling faster than that for the poor, tax progressivity will decline even faster.
Republicans want more than is possible to deliver. They want rate cuts that favor the rich, base decreases that also favor the rich, and still argue that progressivity in the tax system is increasing. They do so by distorting the definition of progressivity. The fact that the rich pay a larger percentage of total income taxes collected is far different than arguing they pay an increasing percentage of their incomes in tax. Consider the following example:
Assume we have three taxpayers: "A" has an income of $10,000 and a marginal tax rate of 10%; "B" has an income of $30,000 and a marginal tax rate of 25%; "C" has income of $100,000 and a tax rate of 50%. If all marginal rates are cut by 50%, they become 5%, 12.5%, and 25%, and everyone enjoys an "equal" tax cut since their marginal taxes are cut in half. But put another way, "A" enjoys an increase in take–home pay of 5.5%, "B" 16.7%, and "C" 50%.
Using a percentage distribution system, "A" continues to pay 1.7% of the total tax burden, "B" pays 12.8%, and "C" pays 85.5%. That is, the percentage shares are the same before and after the tax cut as long as the percentage cut in rates is uniform. The same is true if all three taxpayers experience an equal percentage increase in their incomes. If all incomes rise by 20%, the percentage distribution of the tax burden will remain constant. The only way for the percentage share of the richest taxpayer to rise is for his income to increase at a faster percentage (or to have a smaller percentage tax decrease).
Consider another example which shows that even a proportional system (where every taxpayer pays the same percentage of income as tax) results in the rich paying most of the taxes collected. Assume we have 10 taxpayers with income and taxes as follows:
Taxpayers Income Tax Rate Total Tax Paid % of Tax Paid
1 $10,000 20% $2,000 2.2%2 $20,000 20% $8,000 8.9
4 $40.000 20% $32,000 35.6
2 $70,000 20% $28,000 31.1
1 $100,000 20% $20,000 22.2
10 $450,000 20% $90,000 100.0%
Under a proportional system where every taxpayer pays a flat 20% of income, those with the highest incomes obviously pay the highest percentage of the total taxes collected. Now assume that these taxpayers experience income increases as follows:
Taxpayers Income Tax Rate Total Tax Paid % of Tax Paid
1 $10,500 20% $2,100 1.4%2 $22,000 20% $8,800 6,1
4 $44,000 20% $35,200 24.2
2 $98,000 20% $39,200 27.0
1 $300,000 20% $60,000 41.3
10 $726,500 20% $145,300 100.0%
In this table the poorest taxpayers experienced an increase in income of 5%, those in the middle two levels received a 10% increase, those in the fourth level received 40%, and the richest had an increase in income of 200%. Even with a proportional tax system, the burden of the rich, as measured in percent of the total taxes paid increases substantially, while the relative burden in all other brackets declines. But the system has not become more progressive, since all continue to pay the same 20% of income as tax. To argue that the increasing burden makes a case for a tax cut for the richest taxpayer would be to argue for a regressive tax system, where the rich would pay a lower percentage than the poor. The increasing burden is totally a result of incomes increasing at different percentages.
The existence of a progressive rate system, which increases the marginal tax rate as incomes increase, will cause the percentage paid by the wealthy to increase even faster, but it does not indicate the progressivity of the system is also increasing. In fact, given the growth in incomes in the highest tax brackets, tax progressivity is likely to fall. The only way to keep the percentage of total taxes paid by the rich from increasing as their incomes grow faster than average is to move in the direction of a regressive system.
But are the assumptions concerning income growth given in the above table representative of actual income increases over the past twenty years. The table below begins to examine this issue. Over the past thirty years the percentage of total incomes going to the top 20 percent of the population has increased from 41.5% to 53%, an increase of 27%, while the percent of income received by the poorest 20 percent fell from 5.1% to 4%, a drop of 21%. Relative percentages of income received fell in all quintiles except the highest, indicating a long-term trend giving the highest group a substantial increase in incomes relative to the rest of society.
PERCENT OF INCOME RECEIVED
BY INCOME CLASS
INCOME QUINTILE 1980 1988 1999 2007
LOWEST 5.1 4.6 3.6 4
SECOND 11.8 10.7 8.9 9
THIRD 17.5 16.7 14.9 14
FOURTH 24.2 24.0 23.2 20
HIGHEST 41.5 44.0 49.4 53
Source: U.S. Census Bureau & Congressional Budget Office
In addition, about 48% of all stocks are owned by the wealthiest 1% of Americans, while the bottom 80% owns only 4%. That is, the richest 1 million people own 10 times as much stock as the bottom 200 million. And while these ownership percentages are about the same as they were 20 years ago, the market value of stocks is now over five times as great as in 1990.
Republicans would have us believe that the rich are being treated unfairly when they pay an increasing share of total taxes. But if that increasing share is the result of the rich receiving an increasing share of a growing pie, why is it unfair? The fact is that the rich now pay the lowest overall tax burdens they have paid in the past 60 years. The top marginal tax rates have decreased from 91 percent in the early 1960s, to 70 percent under the Kennedy tax cut of 1964, to 50 percent under Reagan, and to 35 percent under Bush. The increase in taxes paid has resulted entirely from rapidly rising incomes, not increasing tax burdens.
Republicans also believe that since the rich do most of the saving and investing, and are therefore the “job creators” they need to be rewarded with lower tax rates. But the evidence of the past thirty years is that the rich use their new income to increase their economic power and political influence. It is clear that rising percentage shares of taxes paid do not show increasing progressivity or increasing tax burdens, but only a redistribution of income upward, with the rich claiming a larger and larger share of the total income available.
No comments:
Post a Comment