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Wednesday, December 07, 2005

Taxation part I

Fill in the blank: "Tax cuts for the ______."

This is posed by Steve Conover...
Like Pavlov's dog, we've been successfully trained by our politicians how to fill in that blank. It requires no thought; it's a reflex. It fits on a bumper sticker, it evokes powerful emotions…

“Tax cuts for the rich” is the politically correct answer. It's part of our culture. For example, it only takes Google a scant two tenths of a second to find 307,000 instances of that phrase on the web.

However, I am personally far more interested in the economically correct answer, as opposed to the politically correct one. I’ve learned through experience to check the facts, instead of taking our politicians’ rhetoric at face value—

The top one percent of the tax returns yield 35 percent of the IIT revenue, up from 23 percent in 1985. The bottom fifty percent of returns yield 4 percent of the IIT revenue, down from 7 percent in 1985.

At this point, it was starting to look to me as if the rich, especially the super-rich, are shouldering more and more of the income tax burden—and that the bottom 50% of taxpayers are shouldering less and less. [That’s good, isn’t it?]

The super-rich paid 25% of their adjusted gross income to the government. Every other group paid less than 17%. The bottom 50% of taxpayers paid 3% of their AGI. [Is that good, too? Seems to me the hierarchy is just what you’d expect in a progressive taxation system.]

Lastly, it’s obvious that everybody got a tax cut, not just the rich. The bottom 50% paid about half of the portion they were paying before the “tax cuts,” and the top 1% are paying about 90% of the portion they paid before—but every taxpayer, every single taxpayer, got a tax cut. Notice how every line on the chart starts dropping in 2001.

Try asking people how much of the tax burden the top 1% or 5% should pay, ask how much they think these individuals pay - see what kind of answers you get...
Bruce Bartlett covers the related matter here...
A few weeks ago, the Internal Revenue Service released data on tax year 2003. They show that the top 1 percent of taxpayers, ranked by adjusted gross income, paid 34.3 percent of all federal income taxes that year. The top 5 percent paid 54.4 percent, the top 10 percent paid 65.8 percent, and the top quarter of taxpayers paid 83.9 percent.

Not only are these data interesting on their own, but looking at them over time shows that the share of total income taxes paid by the wealthy has risen even as statutory tax rates have fallen sharply. A growing body of international data shows the same trend.

Of course, it would be a mistake to conclude that tax increases will not raise the wealthy's tax share or that tax rate cuts always will. Nevertheless, it is remarkable that the percentage of federal income taxes paid by the top 1 percent of taxpayers almost doubled during a time when the top income tax rate fell by half.

A common liberal retort to these data is that they exclude payroll taxes, which are assumed to be largely paid by the poor. However, it turns out that when one includes payroll taxes in the calculations, it has far less impact on the distribution of the tax burden than most people would assume, because the wealthy also pay a lot of those taxes, too.

At some point, those on the left must decide what really matters to them -- the appearance of soaking the rich by imposing high statutory tax rates that may cause actual tax payments by the wealthy to fall, or lower rates that may bring in more revenue that can pay for government programs to aid the poor? Sadly, the left nearly always votes for appearances over reality, favoring high rates that bring in little revenue even when lower rates would bring in more.

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