Paul L. Caron
Dean



Monday, July 21, 2008

WSJ: Their Fair Share

Editorial in today's Wall Street Journal:  Their Fair Share:

Wsj_fair_share_page_1Washington is teeing up "the rich" for a big tax hike next year, as a way to make them "pay their fair share." Well, the latest IRS data have arrived on who paid what share of income taxes in 2006, and it's going to be hard for the rich to pay any more than they already do. The data show that the 2003 Bush tax cuts caused what may be the biggest increase in tax payments by the rich in American history.

The nearby chart shows that the top 1% of taxpayers, those who earn above $388,806, paid 40% of all income taxes in 2006, the highest share in at least 40 years. ...

Aha, we are told: The rich paid more taxes because they made a greater share of the money. That is true. The top 1% earned 22% of all reported income. But they also paid a share of taxes not far from double their share of income. In other words, the tax code is already steeply progressive. ...

If Mr. Obama does succeed in raising tax rates on the rich, we'd also wager that the rich share of tax payments would fall. The last time tax rates were as high as the Senator wants them -- the Carter years -- the rich paid only 19% of all income taxes, half of the 40% share they pay today. Why? Because they either worked less, earned less, or they found ways to shelter income from taxes so it was never reported to the IRS as income.

The way to soak the rich is with low tax rates, and last week's IRS data provide more powerful validation of that proposition.

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Comments

Warren Buffet and some of the other riches people believe that they should pay even more. I saw it on a 20/20 interview.

Posted by: A, Wayne | Jul 21, 2008 12:53:07 PM

Of course, as has been noted time and time again, while the income tax may be mildly progressive, other parts of the U.S. tax system are generally regressive. Taken as a whole, the system is fairly flat.

Thus, the progressivity of the mildly progressive personal income tax, representing 45.5% of total federal receipts is significantly offset by the regressive contributions for social insurance, mainly Social Security and Medicare (39.9% of total federal receipts). And, of course, the states and localities rely on regressive sales and property taxes.

Posted by: Stuart Levine | Jul 21, 2008 7:27:00 PM

Nice strawman Stuart ...
The "other parts of the tax system" are proportional not regressive. Nice try to show a balancing but just plain false. Taken in total personal taxes, including income, SS and FICA are still very progressive. But it was a good try to "justify" very progressive income taxes.

Posted by: Jeff | Jul 22, 2008 4:28:01 AM

Prof ... let's get something straight: Your chart is rigged, and you know it.

Your chart says: "Income taxes paid in the US."

But, we all know that the really rich don't earn income. They earn money. But they don't earn IRS "income." And the smart ones make sure they don't earn anything "in the US." In fact, the first $80,000 of income earned overseas isn't even taxed at all.

Also, your chart does not account for state income taxes, only federal. And your chart doesn't account for all taxes, only income taxes.

The rich don't pay their fair share when it comes to ALL taxes. Only Federal Income taxes on US "income" as defined by the IRS (which doesn't mean all income.)

And that's why you never see a chart showing the percentages of ALL taxes paid.

Posted by: fixednumbers | Jul 22, 2008 4:40:41 AM

Ah yes, Mr Buffet well knows there is nothing preventing him from paying more money to the general fund if he feels under-taxed. No way would his opinion by influenced by his devout support of the Democratic Party right? Or perhaps because he knows that he and his investors would not really be paying those higher taxes as he would find available shelters or investments elsewhere.

As to the description of income tax being "mildly progressive"--heh. Ummm. No. State, slaes and property taxes are not "regressive"--they are flat, not regressive and tax consumption. It's about as "fair" a tax you can get--you're taxed on what you actually consume and own. You also left out another huge chunk of the social programs. Health and Human Services exceeds every other part of the Federal budget. Also, Social Security is NOT part of the Federal Budget general fund, but is separately funded--kind of a key point to leave out don't you think? By the way, Health and Human Services even exceeds Social Secuirty in terms of costs.

Posted by: Faith+1 | Jul 22, 2008 4:59:28 AM

> while the income tax may be mildly progressive...

"Mildly progressive?" Nice spin. Did you actually read the article?

> Thus, the progressivity of the mildly progressive personal income tax, representing 45.5% of total federal receipts is significantly offset by the regressive contributions for social insurance, mainly Social Security and Medicare.

In case you've been in a coma for the last year, Obama plans to make SSI/Mcare taxes just as progressive as the rest of the system.

And of course you conveniently ignore the historical fact that those taxes were regressive because the benefits were regressive as well... if the taxes had NOT been regressive, then it would have been a income-redistribution plan... which is the very definition of progressive taxation.

Dishonest. But expectedly so.

Posted by: Ryan Waxx | Jul 22, 2008 5:02:18 AM

A, Wayne: If Mr. Buffet feels he's not paying enough in taxes he's free to write a check to the IRS or any other governmental entity for an amount large enough to assuage his guilt. It's very easy to be generous with other people's money.

Mr. Levine: I'm sorry but I can't see how the top 5% of income earners paying 60% of the Federal income tax burden is only "mildly" progressive. Especially considering the bottom 50% of income earners only contribute about 4% of the tax revenue.

Also, your claim about other taxes being regressive are based on false comparisons. For example, a sales tax is based on the amount spent. If two people each spend $100 dollars in a store they'll pay the same amount in sales tax. The fact that one person earns $20K a year while the other earns $200K a year is immaterial. The tax rate is the same for all. This same comparison applies to property taxes as well. The amount you're taxed is base upon the value of the property, not how much you earn.

Progressives love to keep "soaking the rich" but fail to realize that once the "rich" get tired of having their wallets drained they'll have no incentive to keep earning in a manner sufficient to provide for the massive social spending with which Progressives are in love.

Posted by: Ralph Gizzip | Jul 22, 2008 5:08:24 AM

Mildly progresive? The top fifty percent of income earners pay somethign like 97% of all income taxes and that is MILDLY progressive? Whats extreme? Those under fifty percent pay nothing and get a bunch of goodies?

Posted by: Ryan | Jul 22, 2008 5:29:56 AM

Just for clarification, are these "income" taxes or "all" taxes including "capital gains"? What if you factor in all taxes? Including their share of sales, state, excise and duty? It will demonstrably be higher by an order of magnitude. Plus the differential in percentage of high income earners only reinforces the American Dream and Exceptionalism. I would love to see a similar analysis of other G-8 countries. The richest 1% grew 50% between 1990 and 2005 and the richest 5% grew 33% for the same years.

Posted by: Jack is Back! | Jul 22, 2008 5:37:37 AM

Although it is often claimed that Social Security is regressive, that is only true for the tax component of Social Security. The payout component of Social Security so heavily favors the lower income brackets that, when viewed in its entirety, Social Security is very much a progressive system.

I haven't seen figures for Medicare, but since it is paid for by a flat tax on wages and salaries for workers and by progressive premiums for the retired, but pays out based on medical need, it may well also be quite progressive in its net effect.

Posted by: J. Eggert | Jul 22, 2008 5:40:38 AM

While I agree that the social security and medicare taxes have to be taken into account in thinking about the taxes the ordinary person pays, I do not agree that they are "regressive."

Medicare taxes no longer have a cap, and can be regarded as regressive only to the extent that they are not imposed on income other than wages. As for SS taxes, while they are applied only to wages and capped, they still retain some link to benefits, and the benefits are likewise capped.

It seems to me that a tax imposed on a specific subset of income cannot be properly characterized as regressive merely because of that limitation.

But that is not the point.

From the point of view of the payor, these definitions are meaningless. The failure of conservatives to understand that, and incorporate it into their discussion of tax rates, essentially abandons the field to liberals, who know that definitions have nothing much to do with what a person understands as "taxes."

Overall, taking into account all taxes the ordinary voter pays, including sales taxes, the American tax system is not progressive. Further, it is felt and understood by people in general as regressive. And from a practical point of view, it probably is.

Posted by: punditius | Jul 22, 2008 5:59:14 AM

Most states are progressive in their taxes as well.

The regressive FICA tax is really proportional with a limit. That is fitting because the benefits are also capped.

Posted by: Paul | Jul 22, 2008 6:06:05 AM

I have a problem with references to Social Security and Medicare fees as taxes. They are mandatory premiums for mandatory insurance programs. And while these fees might appear to be regressive, this is more than offset by the fact that the benefits they buy are progressive.

The OASDI formula returns 90% of the indexed average of covered wages of a very low paid person, 32% above this amount for those with averages that exceed the lowest bracket and 15% for the final bracket. Thus lower paid people might receive a retirement benefit of over 40% of their average covered wages and higher paid people, paying the same premium rates, 25%.

Someone earning ten times more than another will pay ten times as much in premiums for the exact same medicare benefits.

In an insurance system, it is a mistake to divorce premiums from benefits.

And while Warren Buffet might say he wants to pay more in taxes, he recently set up tax exempt trusts to shelter much of his wealth from death taxes. He receives a salary of about $100K and pays his FICA premiums based on that amount. The rest of his earnings are investment earning.

If you want to "soak" the rich, I suggest lowering the corporate tax rate while treating dividends as ordinary income. After all, profitable corporations do not pay taxes, their customers do. And the wealthy do not live on their salaries.

Ireland lower its corporate rate to 12.5% and now collects many times the revenue it received under the higher rate. Lowering the rate would also mean that corporations would have less incentive to buy our politicians.

Posted by: Laurence | Jul 22, 2008 6:11:26 AM

While I agree that the social security and medicare taxes have to be taken into account in thinking about the taxes the ordinary person pays, I do not agree that they are "regressive."

Medicare taxes no longer have a cap, and can be regarded as regressive only to the extent that they are not imposed on income other than wages. As for SS taxes, while they are applied only to wages and capped, they still retain some link to benefits, and the benefits are likewise capped.

It seems to me that a tax imposed on a specific subset of income cannot be properly characterized as regressive merely because of that limitation.

But that is not the point.

From the point of view of the payor, these definitions are meaningless. The failure of conservatives to understand that, and incorporate it into their discussion of tax rates, essentially abandons the field to liberals, who know that definitions have nothing much to do with what a person understands as "taxes."

Overall, taking into account all taxes the ordinary voter pays, including sales taxes, the American tax system is not progressive. Further, it is felt and understood by people in general as regressive. And from a practical point of view, it probably is.

Posted by: punditius | Jul 22, 2008 6:24:25 AM

The WSJ article states "The data show that the 2003 Bush tax cuts caused what may be the biggest increase in tax payments by the rich in American history.", but then provides a chart that shows only _proportion_ of total tax receipts.

Could someone provide information on the _amounts_ of tax payments made by the top 1% (with appropriate corrections for inflation and their actual income, that is, by discussing both their overall tax rate and the total yield in inflation corrected dollars that that yield produced) that would sustain the claim that the Bush tax cuts led to an "increase" in tax payments by the rich. After all, a bigger piece of a smaller pie may still be smaller than a smaller piece of a bigger pie, and the Bush tax cuts lowered taxes on almost all taxpayers -- and, naturally enough, more on wealthy ones than on poor ones.

Without evidence on _amounts_ paid, the WSJ chart proves nothing like the claim made in their text, and I will remain skeptical that that a reduction in marginal tax rates led to an increase in tax payments.

Posted by: PQuincy | Jul 22, 2008 7:02:44 AM

punditius,
I missed the part where you actually show the (entire) tax system is either not progressive or regressive, especially since you understand that two of the big ones are not regressive. It mostly leaves sales tax. As a proportion of income, rich people probably do not spend as much on taxable items as poorer people. An important point (though not conclusive) is that these are local taxes, not national taxes, so your broad brush covers those few states who do not even have a sales tax. You also have a better chance of changing a policy in a state than you are across the nation, so I think people are more responsible for the affairs of their state than of the nation..
I also wonder how the distribution of poor people is in relation to the sales taxes. I do know the more famous examples of high sales tax, usually big cities with add-on taxes, also have large populations of poorer people..

Posted by: anomdebus | Jul 22, 2008 10:10:10 AM

> As a proportion of income, rich people probably do not spend as much on taxable items as poorer people.

Huh? Some examples would be nice.

Most jurisdictions claim that they design their sales taxes so the poor pay less. They exempt food, but not restaurant food. Some even exempt certain clothing, thought to be essential for poor people.

Poor people do pay a greater percentage of their income to sin taxes (tobacco, alcohol, gas, etc) but you get to argue that one with the folks who push for such taxes to discourage certain behaviors.

One difference is that poor people don't buy a lot of stock (directly). Given that that's not consumable, I don't see why it's relevant.

Posted by: Andy Freeman | Jul 22, 2008 11:28:46 AM

The important question is how much wealth the top 1% owns. Those in the top 1% own municipal bonds, dividends and have capital gains that get taxed at lower rates than earnings from salaried employees.

Let's see how much wealth the top 1% and 5% own compared to the taxes they pay and you get a true apples to apples comparison instead of what we have here.

Posted by: Tom in Nyc | Jul 22, 2008 12:37:17 PM

Andy,
I did hedge with "probably", though I was expecting to be attacked from the other side for doubting that the rich could possibly be spending on taxable items at the level of poorer people.

Perhaps the confusion is that I was not speaking of absolute amounts, but percentage of income spent on items that are taxed?

I am not saying that poorer people must buy taxable items that make their taxable portion larger than richer people, but that they do.

Posted by: anomdebus | Jul 22, 2008 12:50:29 PM

Well yes, the chart applies only to income taxes. It says so. It's true that the very rich generally don't pay income taxes, and yes that is an important point, but this discussion is about federal income taxes. It's federal income taxes that the Bush Administration cut, and it's federal income taxes that the Democrats want to raise.

Posted by: CJ | Jul 22, 2008 2:45:38 PM

PQuincey: Google is your friend; it took seconds to dredge this up: http://stopbarackobama.net/files/budgetchartbook.ppt

They obviously have an agenda, but the numbers look reasonable.

Tom in NYC: Green isn't a good color on you. Are you proposing an ASSET tax? An income cap? What's "fair" to you?

Posted by: mrsizer | Jul 22, 2008 5:40:02 PM

The IRS statistics are based on income reported. Because income for a person can fluctuate, only some of the people who have high income one year, are also in the top income bracket the following year. As far as I know, there are no recent studies tracking people as they move between income groups each year. My point is that not all the people who are in the top 1% or 5% one year are also in the top 1% or 5% the next year. Some get replaced by new people. For example, if a business owner sells his company for $200 million, he will be in the top 1%. The next year his earnings will be a fraction of that so he will not be in the top 1%. So these IRS statistics are inconclusive as to whether the rich are getting richer. The actual people in the rich group probably changes over time. In my business owner example, he most likely started out with very little, then got wealthy as his business achieved more and more success. So that would be a case of a poor or middle class person becoming richer.

Posted by: Caleb Standafer | Jul 23, 2008 8:20:16 AM