The New Republic

"Pretending that income taxes account for all federal taxes is a classic trick of right-wingers who want to mislead their readers into believing that the tax code is more regressive than it really is." Don't you mean more *progressive*, not regressive? I thought the right wants us to think that the tax code already 'soaks the rich', which would mean a progressive tax code. Showing it's more regressive I would think would prove the less well off do pay more than their fair share and the rich don't.

- tnmats

February 22, 2010 at 11:02am

But Jonathan, income taxes are the only types of taxes that are really taxes. The so-called "payroll taxes" are really just contributions toward a retirement pension system and toward retiree health care. Everyone pays them equally because everyone gets an equal share back from the system when they retire! They are just government-administered pension and health plans, which is generally a bad thing but one might as well take advantage of it if it is part of the law. Now, I'm being sarcastic about this point of view because there are many, many gaps between such views and the truth about how Social Security and Medicare actually work (not to mention Medicaid, whose Federal component is basically just a transfer of money from working taxpayers to the indigent). But it's a view that is pretty widespread among the elderly or near-elderly, who are the Republican Party's biggest and most influential constituency these days. You can slam conservatives who play a shell game with their characterizations of the income tax all you want, but your time and money are better spent explaining to the public why payroll taxes are taxes and why they are regressive.

- wildboy

February 22, 2010 at 11:20am

There's a further trick that Republicans have mastered at the state level: Pretending that regressive forms of taxation are not taxes at all. So if a Republican legislature reduces income taxes by $100 million, and then raises fees like auto registration and whatnot sufficient to replace the $100 million in lost tax revenue, Republicans will speak and act as if they have just made $100 million in taxation cease to exist. In most cases, of course, this results in extracting more money from the poor and the middle class. But apparently Republicans believe that we're better off paying $50 per year in fees than $3 per month in taxes.

- rhubarbs

February 22, 2010 at 1:06pm

Jonathan, as tnmats points out, you really should correct that reference to "regressive" to read "progressive." I think your chart, wherever it came from, understates the regressivity. In round numbers, the lower half of earners has about 8% of net national income. That means they pay something more than 8% of payroll taxes which are not only flat but capped in the case of FICA so that the zero bracket if for the higher earners. Let's guess 10%. Payroll tax revenues are about 2/3 of income tax revenues, and the bottom half pays 3% of income taxes. That is going to give them about a 6% share of tax revenues which would make the light blue about 3/4 of the dark blue. I am sure that, at the very least, whoever produced this chart is excluding from the tax burden on wage-earners the nominally employer's share of payroll taxes. They are probably also working from adjusted gross income which does not include corporate income more than $2 trillion that disappears, vanishes as if it were not income, in the definition of AGI. AGI, corporate profits, and employer share of payroll taxes are less than $11 trillion out of $13 trillion of net national product. The chart would be more meaningful to the eye if each quintile had one column for gross income split with the portion of taxes in light blue at the top of the column. As drawn, it makes it look as though taxes are comparable in size to income. Also, done my way you would immediately see the extreme difference between the after-tax income share of the rich and everyone else. You could even slot in there how much additional tax the rich would have to pay to balance the budget. It would be apparent that we could balance the budget very comfortably if we had a progressive tax system rather than what we have now. As you point out, it is barely progressive, if at all. I am coming to believe that if one took account of all taxes, including state sales taxes, the system actually is regressive on balance. This is why the latest defense of the tax privileges of the wealthy is to claim that the rich are "tapped out" and that balancing the budget has to be done on the backs of the middle class. It is not true, but it immediately produces intense resistance because the middle class feels over-taxed and it is. I am pretty sure that the the middle class is more heavily taxed than the rich because it pays both payroll taxes and income taxes, and there are few ways to exclude wages and salaries from taxable income. The poor have very little income tax; the rich have very little payroll tax. The middle class gets hit with both, and regressive sales taxes to boot.

- roidubouloi

February 22, 2010 at 1:37pm

With $13 trillion of net national product, there is no reason, other than a tax system in tatters, why we cannot support government -- currently inflated to $3.5 billion of expenditures because of the fiscal stimulus -- without running structural deficits.

- roidubouloi

February 22, 2010 at 1:41pm

The Times chart you link to showing shares of income and share of taxes looks rather different from what you have published. In the Times chart, that appears to deal with payroll taxes correctly, there is barely any difference between income shares and tax shares -- basically that we are flat-taxed. But if the author of that chart is using income tax definitions of income rather than reconciling to the NIPA account for total net national product, the income shares of the wealthy would be understated. In that were the case, the tax system would in fact be regressive with the wealthy paying a lower share of income in taxes than the middle class. Per rhubarbs comment, one also wonders how government "fees" are accounted for.

- roidubouloi

February 22, 2010 at 1:50pm

Ugh. I cannot help pointing out that there is something grotesque about a billionaire who pays $230 million of taxes complaining, or having the Republicans complain on his behalf, while a guy who makes $20,000 pays $2,000 and has $18,000 to live on. What a world.

- roidubouloi

February 22, 2010 at 1:53pm

As a proponent of eliminating income taxes and replacing them with a progressive consumption tax, let me add my two cents. 1) I don't think the public has a very good understanding of the exact percentage of the distribution of income and taxes. 2) You need to distinguish between a flat rate and a flat amount. A flat rate is still very progressive. 3) Regardless of what the opinion polls says, in the polls that count (elections) you don't see many politicians getting elected on promises to raise taxes. 4) Despite your wish to have higher taxes, a lot of people don't agree because a) they believe that higher taxes reduce growth, b) they don't think the government spends money wisely, and c) they realize that if 80% of the voters can expropriate the property of the other 20% that equally 49% can take the property of 51%.

- dtohmatsu

February 23, 2010 at 1:40am

Add to dtohmatsu's excellent points the fact that high taxes, especially then those taxes are progressive, have a negative effect on the propensity to work, to save, and to invest. Why work hard or risk your money in investments when a good bit of the reward is going to be confiscated by the government? Why work to move up the economic ladder when you can just vote for politicians who promise to give you money taken from other people?

- bulbman1066

February 23, 2010 at 11:38am

Bulbman, do you actually personally know anyone who thinks like that? As in, "I would really like to get off the couch and get a job but the government would just take more of my earnings than it does now so I won't"?

- wildboy

February 23, 2010 at 4:01pm

Dtoh, Barack Obama won the poll for President quite handily by promising to raise taxes on those who earn more than $250,000 in taxable income. Where do I get my pony?

- wildboy

February 23, 2010 at 4:03pm

Something is terribly wrong about the graph Jonathan attributes to the CBO from 2006. It seems to show that the upper quintile pays about 55% of its income to the feds. This is clearly incorrect. In fact, the Citizens or Tax Justice analysis for 2008 - the one Jonathan links to - shows that the upper 1% pays on average just 30.9% of its income for all taxes - federal and state.

- jkodak

February 24, 2010 at 3:06pm

jkodak, I read that as saying that the top 20% earn 55% of all income. But they pay about 70% of all taxes. Roid and I are debating how much the top really pays in another thread, and the CTJ data has come up. The data congress uses to answer this question is prepared by the CBO and is located here: http://cbo.gov/ftpdocs/98xx/doc9884/12-23-EffectiveTaxRates_Letter.pdf The CBO figures the top 1% pay around 30% Federal, and we could probably add around 8.5% for State and Local (CTJ figures), bringing the top 1% tax rate to about 39% of gross income. Roid takes issue with the CBO figures, and believes the top 1% pay around 30% all up (fed, state, local) on gross. PS. From the CBO data, you can see the top 1% earn 9% of the income but they pay about 13.6% of all taxes.

- seattleeng

February 24, 2010 at 10:16pm

The particular CBO report that Seattle refers to is, with a modification or two, allocating both taxes and the defined tax base to equitable owners. For example, it attributes the taxable income and taxes of C corporations to its shareholders. It is explicit that it is defining income as primarily "cash receipts, consistent with income reported on tax returns." It also explicitly excludes non-taxable income received by intermediaries such as insurance companies and pension funds. Somewhat perversely, it does add to income non-taxable cash receipts, that flow primarily to low income households (apparently because it is adhering to the "cash basis" bias of the tax code), even while it excludes the non-cash, non-taxable income of high earners. The result is that the CBO definition of income overstates the relative income shares of low-earners and understates the relative income shares of high-earners if you define those shares on the basis of net national product, the nation's annual output or income for the year. The latter is the best available measure of current income. Actually, in economics, current output is current income. The report of the CBO is also explicit that it excludes unrealized capital gains. Just as non-taxed, non-cash income is almost entirely the privilege of high-earners who have significant assets, so too the deferral of unrealized capital gains. If one were looking for additional tax revenues, the first places to look would be: 1) eliminating the rate preference for capital gains, 2) eliminating the deferral of taxes on unrealized gains on marketable securities, 3) eliminating depreciation on real estate, 4) including deferred gains via insurance, pension funds, etc. in the alternative minimum tax (AMT) base so that high earners don't get the high current income and the tax deferrals too. These changes would go a fair distance toward taxing the top earners on their real income rather than on their income as defined now by the tax laws. Despite the endless rightwing handwringing over high taxes, the tax code is heavily tilted toward the rich because they get to exclude various forms of income from the tax base. Wage earners and the salaried, who get all their income in cash, enjoy very few similar benefits. The deferral of gains on marketable assets is particularly egregious. It is an obsolete relic of a time when accounting for gains and losses on a mark-to-market basis was simply too cumbersome. This change would also eliminate the possibilities for cheating that goes on in the stated basis (purchase price that is a deduction from selling price to compute gain) of sales of long-term assets. There is pretty much no way for the IRS to confirm what is claimed on a tax return as the basis when the asset was purchased much beyond the current period. The total effective tax rate on the highest income classes, including all taxes at the federal, state, and local levels, is about 32% as shown in the tables linked here by Mr. Chait. The rate for the lowest earners is about 19%, not very progressive at all. An increase of the effective rate on the top 10% (who have half of total national income) to just under 40% would suffice to eliminate the non-cyclical (i.e. structural or not recession related) Federal deficit. Until Bush lowered tax rates on the upper end, we were running surpluses. The claims that putting the rates back up would stifle the economy are plainly nonsense. We had a boom under Clinton along with the surpluses. The excess liquidity for the high-earners under Bush served only to produce and asset bubble and a bust that isn't over yet.

- roidubouloi

February 25, 2010 at 8:36am

Roid, even Sweden, Finland, Canada, UK and just about every other country in the world tax cap gains well below the rate for personal income. It's because they recognize that the more you tax capital gains, the more inclined people are to NOT invest their money. When you see from the various graphs above that the top 1%, top 10% and top 25% are paying more than their fair share, why on earth would you be so inclined to add so many more taxes to the very people that create the jobs?

- seattleeng

February 25, 2010 at 11:40am

Roid, you think unrealized capital gains are the exclusive province of the rich? They are available to everyone that has any money to invest, including 401K and IRA. And this benefits every pension fund owner in the country by allowing them to maximize returns for their members (teachers, state workers, auto workers, etc). You are grabbing at straws criticizing the CBO data. I'm sure you are a very good citizen economist, but, bro, this is the CBO we're talking about here. The C freakin' BO. They are about as good as it gets, and their intentions are always fair and just. Based on your desire to hammer the living crap out of the top 10%, I'm not sure we can say the same about your motivations. Ergo....

- seattleeng

February 25, 2010 at 11:53am

Seattle, The CBO knows what it is talking about. It is just that you don't understand what the CBO is talking about. The CBO study is not a study of the effective rate relative to economic income. If you know how to read what they say, that is explicit. What the CBO is doing is summing up the direct and indirect Federal taxes people pay and, with some slight modifications, the stated taxable income or tax base on which the taxes are levied. All it is really telling you is something very similar to what you can find on the IRS tables of average rates. Right on one of those tables you can read that the average rate for people in the 35% bracket is 28%. By including other Federal taxes those people pay, including indirect, that rises to about 32%. BUT IT IS STILL THE TAX RATE AS APPLIED TO EITHER AGI OR CORPORATE PROFITS. Thus, the CBO report is more or less the some information you get from the IRS on average rates, just a bit more thorough because it consolidates corporate and personal. It is not the effective tax rate applied to economic income, including the portions of income that are. The all-in effective tax rate, including all levels of government, on economic income for the highest bracket is still under 32% no matter how many times you pound the CBO report on the table. That is not "being hammered," as you characterize it. Nor do the American people think that that is more than their fair share, particularly when the earners at the bottom have an effective tax rate of 19%. A guy who makes $30,000 keeps $24,300. A guy who makes $1 million, all in, keeps $680,000. Cry me a river why don't you. 401(k)s and IRAs don't care about capital gains rates because they are tax deferred in any case. The business about people not investing their money unless they have a preferred tax rate is standard monetarist/right-wing ideology. It is unsupported. You can just as easily, and with equal justification, claim that people won't work if they don't get a preferred tax rate. What are the rich going to do with the money they don't spend? Eat it? They have no choice but to invest it, directly or indirectly. The average annual growth rate for the US economy over the last 80 years is 3.3%. During that time, tax rates have been all over the place, including 90% marginal rates. There is no correlation between low marginal rates and higher growth. Indeed, for the decade ending with 2000, the average rate was 3.4%. For the following decade, supposedly benefiting from the Bush tax cuts, the rate was 1.9%. Oops. Not fair you say because of the Bush recession (as if that had nothing to do with his tax and fiscal policy). But okay, let's back out the recession caused by too much capital chasing too few goods as a direct result of Bush's tax and fiscal policies. That means taking the period from 2000 to 2007. That growth rate is 2.4%. I guess that proves that lowering taxes on the rich inhibits growth, right? The difference between 2.4% and 3.3% for a decade is more than a 9% difference in current output. That would be about $1.2 trillion per year. The fact is that the ideological hide-bound right just keeps repeating its claims about the relationship between taxes and growth even though the evidence is mostly to the contrary. You believe it because you believe it because you want to believe it or because your ideologically-dominated economic view says that low taxes SHOULD lead to high growth and you are not going to let reality stand in the way. I am charmed that you should question my motivation. Personally, I am well into the top 1% of earners (maybe about the top 0.2% or so). My motivation is that I love my country, and I am sick to death of right-wing ideologues trashing it with their wacko policy ideas that are completely impervious to, i.e. non-falsifiable by, reality. Capitalists don't create jobs. Effective demand creates jobs. Just ask the Chinese.

- roidubouloi

February 25, 2010 at 1:25pm

Para 1: "including the portions of income that are excluded from the tax base"

- roidubouloi

February 25, 2010 at 1:26pm