Tax Burden Falls on the Wealthy

WASHINGTON (AP) - As a group, Americans whose incomes are in the top 5 percent are footing an increasing share of the national income tax burden. People in the bottom half, on the other hand, are paying only a fraction of the total take.

President Bush (news - web sites)'s big tax cut will prevent the wealthy from paying an even greater share in coming years. Some crucial provisions, however, such as the gradual doubling of the child tax credit, will reduce or eliminate income taxes for many middle-income people, while the rich won't qualify.

"This trend is not going to reverse," said Scott Hodge, executive director of the Tax Foundation, a nonpartisan tax education and research group. "This will be the demographic for the 21st-century taxpayer."

The income tax deadline for most of the country is midnight April 15, next Monday.

For 1999, the most recent year for which complete Internal Revenue Service (news - web sites) statistics were available, 6.3 million taxpayers whose incomes were in the top 5 percent paid more than 55 percent of all income taxes. They had adjusted gross incomes above $120,846 a year, meaning spouses could earn a bit over $60,000 each and be considered among the nation's richest.

The wealthiest 1 percent — those earning $293,415 and up — paid more than a third of the taxes, while their share of the nation's taxable income was 19 percent. They pay income taxes at the top rate, now 38.6 percent, compared with a maximum rate of 15 percent for most lower-earning taxpayers.

Taxpayers in the bottom half paid only 4 percent of income taxes in 1999, according to the IRS. These 63 million taxpayers earned, on average, less than $26,415 a year.

Going back to 1989, the top 5 percent income group paid about 44 percent of income taxes, the bottom almost 6 percent. Then, the top tax rate paid by high earners was 31 percent.

Looking ahead, the 10-year, $1.35 trillion tax cut enacted last year reduces income taxes in three steps, with the final step coming in 2006. In that year, according to the congressional Joint Committee on Taxation, taxpayers earning over $100,000 a year will pay almost 59 percent of all income taxes.

Those with annual incomes of less than $30,000 a year will pay about 4.4 percent in 2006, roughly the same as they do today.

In Congress, this disparity in the tax burden causes perennial political trouble for Republican tax-cutters, because any across-the-board reduction meets with Democratic criticism that it would benefit mainly the wealthy while siphoning away money from government programs.

For that reason, many tax breaks contain income cutoff points that leave out the top income earners.

A prime example is the child tax credit, which is $600 for tax returns due April 15 and gradually will rise to $1,000. This year, that credit begins to phase out for married couples filing jointly who earn more than $110,000 a year.

The IRS says the rising child credit, which is $100 higher than last year, is a major factor in the 12 percent increase in average tax refunds this year. Many lower-earning taxpayers who claim the credit get refunds even if it effectively eliminates their tax liability.

Another program for lower-income Americans is the earned income tax credit, intended to offset the burden of Social Security (news - web sites) payroll taxes. In 1999, about 13 million taxpayers claimed about $21 billion in credits, which also can trigger a refund for those without tax liability.

At the higher end of the income spectrum, the IRS now receives more than 24 million individual income tax returns from certain kinds of corporations and partnerships that don't pay corporate income taxes. Those frequently pay at the highest personal tax rate.

Perhaps the biggest reason the rich are paying a higher share is that they continue to get richer, said Joel Slemrod, economics professor at the University of Michigan. Between 1980 and 1999, the share of taxable U.S. income earned by the top 5 percent rose from 21 percent to 34 percent.

A flat tax is far better than a graduated tax -- but as government gets bigger, it has a similar effect.

The alternative exists to end the entire shell game.

Thomas Hobbes from Leviathan

It is fairer to tax people on what they extract from the economy, as roughly measured by their consumption, than to tax them on what they produce for the economy, as roughly measured by their income

When every one participates in the tax system proportionately, the built in constituency for spending decreases.

One of the largest problems with any income tax Flat or otherwise, it maintains a constituency believing in a free lunch and the government toothfairy In it's capacity to hide or disguise the real burdens from large sectors of the electorate:

As a consequence, 70% of the voting public clamors for more from government looking for the top 40% of income earners/producers to foot the bill. That perception continues to grow ever stronger by eliminating even more participants from the Federal Individual Income Tax rolls as proposed in the tax reduction proposals & Flat Tax reforms, through changes in personal exemption limits and other mechanisms such as the EITC.

A thought for those who oppose ever growing federal government.

Walter Williams, World Net Daily, 10-25-2000

If you're among those who pay little or no federal income taxes, what do you care about tax cuts? Moreover, if you think tax cuts pose a threat to government handout programs, you might be openly hostile and support Al Gore's silly "risky scheme" talk. So many Americans paying little or no federal taxes makes for a natural spending constituency. It's like me in the restaurant: What do I care about extravagance if you're footing the bill?

hell, even the Russians have a more equitable tax system (flat tax).

This is equitable? Be careful you might get what you ask for.

RUSSIA: PART TWO OF THE RUSSIAN FEDERATION TAX CODE

It's a 13% "Flat Tax" allright, fully implemented as a European VAT on steriods. You should look beyond the label. The devil is always in the details.

Very similar to what is proposed by Armey/Shelby/Forbes and others:

That so-called Flat tax is an individual income tax with VAT plus SS/Mediscare wage tax, requires an IRS, and still taxes business passing on such taxes in higher prices to consumers, lower wages to employees, and lower returns to investors/retirees.

None other than the father of the flat tax, Robert Hall of Stanford University (along with Alvin Rabushka), in his 1995 Ways and Means Committee testimony said, "The Hall-Rabushka flat tax is a value-added tax."

Which was pointed out again in additional hearings in April of 2000:

http://waysandmeans.house.gov/fullcomm/106cong/4-11-00/4-11kotl.htm

"Robert Hall, one of the originators of the proposal(Flat Tax), who describes his Flat Tax as, effectively, a Value Added Tax. A value added tax taxes output less investment (because firms get to deduct their investment.)"
"The Flat Tax differs from a VAT in only two respects. First, it asks workers, rather than firm managers, to mail in the check for the tax payment on that portion of output paid to them as wages. Second, it provides a subsidy to workers with low wages."

The Flat Tax; Chapter 3, by Robert Hall and Alvin Rabushka

In our system, all income is classified as either business income or wages (including salaries and retirement benefits). The system is airtight. Taxes on both types of income are equal. The wage tax has features to make the overall system progressive. Both taxes have postcard forms. The low tax rate of 19 percent is enough to match the revenue of the federal tax system as it existed in 1993, the last full year of data available as we write.

Here is the logic of our system, stripped to basics: We want to tax consumption. The public does one of two things with its income—spends it or invests it. We can measure consumption as income minus investment. A really simple tax would just have each firm pay tax on the total amount of income generated by the firm less that firm’s investment in plant and equipment. The value-added tax works just that way. But a value-added tax is unfair because it is not progressive. That’s why we break the tax in two. The firm pays tax on all the income generated at the firm except the income paid to its workers. The workers pay tax on what they earn, and the tax they pay is progressive.

To measure the total amount of income generated at a business, the best approach is to take the total receipts of the firm over the year and subtract the payments the firm has made to its workers and suppliers. This approach guarantees a comprehensive tax base. The successful value-added taxes in Europe work this way. The base for the business tax is the following:

Total revenue from sales of goods and services

less

purchases of inputs from other firms

less

wages, salaries, and pensions paid to workers

less

purchases of plant and equipment

The other piece is the wage tax. Each family pays 19 percent of its wage, salary, and pension income over a family allowance (the allowance makes the system progressive). The base for the compensation tax is total wages, salaries, and retirement benefits less the total amount of family allowances.

TAX PROPOSALS; 1996 Deloitte & Touche LLP

One concern associated with the flat tax is whether the low advertised rates will produce the same amounts of revenue as the current income tax. A June 7, 1995, Treasury Department analysis of a flat-tax plan similar to the Armey proposal, concluded that a rate of at least 22.9 percent would be needed to make the plan revenue neutral, that is, it would allow the government to raise as much revenue as is currently raised. Although the proposal is designed to raise less revenue than present law, the extent of the shortfall will concern policymakers.

The Armey bill, H.R. 2060, would replace the current corporate income tax with a tax on business activities equal to 20 percent (17 percent after 1997) of business taxable income. The tax would apply to every person engaged in a business activity, whether an individual, partnership, corporation, or otherwise. Taxable business income would be gross active income (that is, income other than investment income) reduced by an array of business deductions.

This business activity tax resembles a VAT computed by subtracting the costs of inputs from gross receipts, except that H.R. 2060 allows a deduction for cash wage expenses. Note that, under the bill, cash wages are subject to tax at the individual level at the same flat rate applicable to business profits. Thus, the combination of the business activities tax and the individual tax is roughly equivalent to a VAT. In addition, taxing wages at the individual level allows a generous personal exemption that makes the personal tax more progressive. To ensure that compensation is taxed once, tax-exempt entities that pay compensation other than as cash or retirement plan contributions would be subject to an excise tax.

The Flat Tax is a VAT even as the current income/payroll tax structure now in place is a subtraction method VAT, in that it is a levy imposed on businesses at all levels of production, it is passed on to the consumer hidden in the price of goods and services.

As long as government is able to play a shell game with hiding taxes from the Voter(i.e. individual) it can rely on the old maxim:

A government which robs Peter to pay Paul can always depend on the support of Paul.
-George Bernard Shaw

and keep right on growing without bound.

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