From the excellent (and far smarter than me) folks over at TPMCafe.com:
Tax Day Silliness
By Jared Bernstein | bioI took part in a rousing debate last night on Larry Kudlow’s show last about fairness and tax policy.
While I fear such debates generate more heat than light, the argument really breaks down very simply: if you want to make our tax system sound unfair, you do two things. First, you talk only about income taxes, ignoring payroll and other sources, and second, you talk about the share of taxes paid by each income class.
Note that last one. You don’t talk about the share of their income that families pay in taxes, a much more intuitive measure of fairness. You talk about the share of total tax receipts paid by different groups. Then you can say stuff like, “the top 1% pays for 25% of the total tax bill.”
Now, as I’ll stress in a minute, those points have little to do with fairness.
It’s true that most households in the bottom 40% pay no federal income tax. Thanks to the various credits, deductions, and the Earned Income Tax Credit—a wage subsidy for low-wage workers—many get money back from the IRS (and while Kudlow inveighed against the EITC, conservatives should remember that it was Reagan’s favorite anti-poverty program).
But lower income families pay a much larger share of their income in payroll taxes than do richer families. Remember, payrolls are taxed at a flat rate, and there’s a salary cap of $97,500 for taxes that support Social Security. That makes for a regressive tax: low- and middle-income families pay about 9% of their income on payroll taxes compared to 2% for those in top 1%. And let’s not forget that almost every state has a regressive tax system.
But it’s the second point that really gets the crocodile tears flowing. Kudlow and his friends practically staged a tragic opera bemoaning the outsized share of federal taxes paid by rich people.
But I was not moved, and you shouldn’t be either.
The reason the well-heeled are footing the lion’s share is because a) we still have a progressive tax system (though less so, thanks to the Bush cuts), and b) they’ve been raking the stuff in, hand over fist. Profits as share of income stand at a fifty year high, and the share of pretax income flowing upstream to the top 1% is the highest it’s been since 1929 (hmmm…that didn’t exactly end well).
Given these realities, the fact that the rich account for a larger share of the IRS’s take tells you nothing about fairness. Try this thought experiment: imagine that over a given year of the economic growth, every penny of it, went to those in the highest reaches of the income scale. Of course their share of taxes paid would rise, and who would view that as unfair? They were the only ones who got ahead. Oh, and by the way, that’s exactly what happened in the most recent year for which we have such income data.
The best measure of fairness is really simple: it’s your tax liability over your income, called your effective tax rate. If effective rates fall faster for those at the top relative to the rest of the pack, you can legitimately cry foul, even if their share of total taxes paid goes up.
CBO data through 2004 show that the effective federal tax rate of the top 1% most recently peaked at 36.1% in the mid-1990s, falling to 31.1% in 2004. Other income groups’ rates fell too, but not as much as the top rate. The Bush cuts are at play here: analysis by the group Citizens for Tax Justice shows that the Bush cuts lowered the effective rate of the top 1% by three percentage points, the middle group by two, and the bottom group by less than one. That translates into tax cuts of about $50,000 for the top, $700 for the middle, and less than $100 for the bottom.
If this all sounds class warfare-ish, it’s not meant as an attack on the wealthy. But they are the ones who have benefited by far the most from the economy of the last few years. Many will presumably pay their fair share this week without squawking (some will pay a lot to other rich people to exploit loopholes for them, but that’s another story).
But don’t be misled: our federal tax system has become less progressive.