The rich are taxed too much? It depends on whom you ask

Economist Bob McIntyre has a sarcastic streak. The director of Citizens for Tax Justice headlines a new study: "White House Reveals Nation's Biggest Problems: The Very Rich Don't Have Enough Money & Workers Don't Pay Enough in Taxes."

Of course, the Bush administration would deny that characterization of its policy. But the arguments put forward by R. Glenn Hubbard, chairman of the president's Council of Economic Advisers, and Larry Lindsey, the sacked head of the National Economic Council, suggest that at least some White House officials believe the really affluent are taxed too much and that more of the tax burden must be shifted to the middle class and the poor.

"The increasing reliance on taxing higher-income households and targeted social preferences at lower incomes stands in the way of moving to a simpler, flatter tax system," Mr. Hubbard told an American Enterprise Institute conference in Washington.

A "flatter tax system" is economist's lingo for reducing the present progressivity of taxes where the well-to-do pay a higher percentage of their income in taxes than do the poor on the grounds that the rich can afford it.

In a recent Washington Times opinion article, Treasury official, J. T. Young, argued that higher earners cannot produce enough tax revenues to pay for "increasingly costly" spending programs sought by liberals. So if this spending is not controlled, "the tax burden will have to begin extending backward down the income ladder."

There is probably no more explosive an issue in tax politics than the impact of tax changes on different income levels. "Class warfare," Republicans charged when liberal analysts like Mr. McIntyre noted the 2001 Bush cuts gave most of the benefits to those with higher incomes.

Mr. Hubbard's case rests on looking at the personal income tax alone. In 1970, he noted, the top 1 percent of taxpayers accounted for roughly 17 percent of all individual income-tax receipts. The top 50 percent were the source of 83 percent.

By 2000, the top 1 percent were the source of 37 percent of all these receipts, and the top one-half of taxpayers 96 percent.

One reason well-to-do taxpayers are paying a bigger share of individual income taxes is that they are getting a bigger and historically high share of total income, notes Joel Friedman, an economist at the Center on Budget and Policy Priorities.

Internal Revenue Service data show that 21 percent of the nation's before-tax income flowed to the top 1 percent of the income spectrum in 2000. That's up from 14 percent a decade ago. The average income of that richest 1 out of 100 households exceeds $1 million.

If the top 1 percent took in, say, 90 percent of all income, they would pay almost all of the individual income tax - and complain louder.

McIntyre makes another point. "The overall federal tax system is only modestly progressive," he notes.

If payroll taxes, excise taxes, estate taxes and other federal taxes are included as well as the income tax, the burden shifts down dramatically.

McIntyre's numbers show that in 2001, the richest 1 percent earned 18 percent of total pretax income and paid 25.1 percent of all federal taxes - a proportion he doesn't consider excessive. "Poor guys," he jokes. "They are practically poor paying so much more taxes."

By McIntyre's calculation, the lowest 20 percent of households (average $9,400 annual pretax income) paid, on average, 7 percent of their pretax income in total federal taxes in 2001. The next 20 percent ($20,700) paid 13 percent, and the middle 20 percent ($34,300) paid 17 percent. The fourth 20 percent ($56,100) paid 21 percent. The next 15 percent ($796,200) paid 21 percent, and the top 1 percent ($1,028,000) paid 26 percent - maybe less, suspects McIntyre.

If Social Security taxes aren't included, the tax burden of the wealthy looks more severe, making tax cuts for them seem more justifiable. So Mr. Lindsey held that these payroll taxes could just as well be "deposits" held by the government on behalf of workers to cover pensions and other benefits paid back in later life.

But even conservative economists have trouble with that view. A tax is a tax, most economists figure.

"It sounds like a transparent cover for giving rich people all the money they can get," says Jeffrey Frankel, a Harvard University economist who served President Clinton.

If an individual paid taxes according to the benefits received, then the rich should pay more for US defense and other security measures since they have more property to protect.

If personal income tax rates were flattened for all to about 13 percent to replace only income tax revenues, then in 2010, the top 1 percent would get a tax reduction of $159,501 and those making less than $100,000 would pay an extra $3,089 each, McIntyre says.

I read this on another post, but do not know the author:

Let's put tax cuts in terms that everyone can understand!

Suppose that every day, ten men go out for dinner. The bill for all ten comes to $100. If they paid their bill the way we pay our taxes, it would go something like this:
• the first four men, the poorest, would pay nothing;
• the fifth would pay $1;
• the sixth would pay $3;
• the seventh $7;
• the eighth $12;
• the ninth $18;
• and the tenth man, the richest, would pay $59.

That's what they decided to do. The ten men ate dinner in the restaurant every day and seemed quite happy with the arrangement, until one day the restaurant owner threw them a curve.

"Since you are all such good customers," he said, "I'm going to reduce the cost of your daily meal by $20." So now dinner for the ten will only cost $80. The group still wanted to pay their bill the way we pay our taxes.

So the first four men were unaffected. They would still eat for free, but what about the other six, the paying customers? How could they divvy up the $20 windfall so that everyone would get his "fair share?" The six men realized that $20 divided by six is $3.33. But if they subtracted that from everybody's share, then the fifth man and the sixth man would each end up being "paid" to eat their meal.

So the restaurant owner suggested that it would be fair to reduce each man's bill by roughly the same amount, and he proceeded to work out the amounts each should pay. This is the result:
• the first four continued to pay nothing;
• the fifth man now would pay nothing;
• the sixth pitched in $2;
• the seventh paid $5;
• the eighth paid $9;
• the ninth paid $12;
• the tenth man paid $52, instead of his prior $59.

Each of the six was better off than before, but once outside the restaurant, the men began to compare their savings.

"I only got a dollar out of the $20," declared the sixth man. He pointed to the tenth man, "But he got $7!"

"Yeah, that's right," exclaimed the fifth man. "I only saved a dollar, too. It's unfair that he got seven times more than me!"

"That's true!" shouted the seventh man. "Why should he get $7 back when I got only $2? The wealthy get all the breaks!"

"Wait a minute," yelled the first four men in unison. "We didn't get anything at all. The system exploits the poor!"

The nine men surrounded the tenth and beat him up. The next night he didn't show up for dinner, so the nine sat down and ate without him. But when it came time to pay the bill, they discovered something important. They were $52 short!

And that, boys and girls, journalists and college instructors, is how the tax system works. The people who pay the highest taxes get the most benefit from a tax reduction. Tax them too much, attack them for being wealthy, and they just may not show up at the table anymore.

There are lots of good restaurants in Europe, the Caribbean, and many other places in this world where enjoyable meals can be purchased without being beat up!

Notice that although McIntyre uses the recently released IRS data for 2000, he had to twist them to make it look like the wealthy are making more and paying only a fair amount. For example, he points out that:

"Internal Revenue Service data show that 21 percent of the nation's before-tax income flowed to the top 1 percent of the income spectrum in 2000."

But he completely ignored Hubbard's point from the same data set, that the wealthiest 1 percent of taxpayers pay over 37 percent of the taxes collected. Of course he would ignore that, since it points out that the wealthy pay almost twice their fair share of the tax load (37.42% / 20.81% = 180%), completely blowing his theory out of the water.

But, that wasn't enough for the liberal McIntyre. In the same paragraph as the above quote, he truthfully, though misleadingly states that:

"The average income of that richest 1 out of 100 households exceeds $1 million."

True, the "average" income of the top 1 percent of income earners is about $1.04 million. But, when you read the raw IRS data, that number is not in there anywhere. He had to calculate it, so he could use a misleading number. Hubbard chose to use the average income for the group, since the average is heavily skewed by a handful of taxpayers like Bill Gates and Warren Buffet. On the other hand, the more significant number that the IRS does publish, is the income floor for each income group. In fact, to be in the top earning 1 percent of income earners in 2000, you (husband and wife together if you file jointly) would only have to make $313,469. But again, a liberal wouldn't want to admit to a number like that since it points out that you don't really have to make a tremendous amount to be in that category.

But then, to make matters worse, he throws in some wildly hypothetical numbers that he hopes the reader will confuse for fact:

"If the top 1 percent took in, say, 90 percent of all income, they would pay almost all of the individual income tax - and complain louder."

He wants to leave the reader with that hypothetical 90 percent number, rather than the factual 21 percent number that he quoted in the previous paragraph. Sly devils, these liberals.

But, McIntyre isn't through twisting the facts yet. Without ever even alluding to how much more the wealthy actually pay, he states:

"The overall federal tax system is only modestly progressive,"

In fact, as pointed out above, the wealthiest 1 percent of income earners pay taxes at a rate almost double their share of income. Furthermore, the wealthiest 5 percent of income earners pay 60 percent more than their share of income, while the top 10 percent pay 46% more than their share of income. Incidentally, to be in the top 5 percent of income earners, you (husband and wife together if you file jointly) only had to make $128,336 in 2000 and only $92,144 to be in the top 10 percent.

The liberals think that these moderately successful citizens should have to pay these disproportionately high tax rates of 146 to 180 percent of their share of income, as punishment for their success, so those less successful taxpayers in the bottom 50 percent can be rewarded for their lack of success, by paying only 30 percent of their share of income. And they have the audacity to call that 30 percent to 180 percent gap "moderately progressive!!!" What's wrong with that picture?

McIntyre then goes on to use his own numbers, which looking back over the actual IRS data for recent years, doesn't even bear a resemblance to reality. He would have us think that the top 1 percent of income earners earned 18 percent of total income and only paid 25.1 percent of all federal taxes in 2001. By claiming that the top earning 1 percent of taxpayers only paid 25.2 percent of all federal taxes in 2001, he loses all credibility. To begin with, the IRS data for 2001 will not be released for another 11 months. Furthermore, the IRS historical data shows that the last time the the top 1 percent of income earners paid only 25 percent of the tax was in 1991, when they paid 24.82 percent and it has been rising steadily ever since.

But, having completely blown any credibility that he might have had, he dives even deeper into incredulity, claiming that, according to his numbers again, the bottom 20 percent of taxpayers paid and incredible 7 percent of their pretax income in federal taxes in 2001. Forget the fact that in 2000, the IRS collection data clearly shows that the bottom 50 percent (not bottom 20 percent) only paid an average 4.6 percent tax rate and the last time that the bottom 50 percent of taxpayers paid 7 percent was so long ago that it isn't even on the charts any more.

McIntyre's case goes down hill quite rapidly, from this point on. Needless to say, the rest of his numbers are at least as incredulous as the previous examples. But, he closes with a totally absurd statement that I must comment on:

"If an individual paid taxes according to the benefits received, then the rich should pay more for US defense and other security measures since they have more property to protect."

Hello? Doesn't this strike anyone as even slightly absurd?

McIntyre would have you believe that the rich would not pay much more than the poor, under a flat income tax. In fact, even with a flat income tax, which still leaves a lot to be desired, the wealthy would continue to pay much more than everyone else. Under a flat income tax, the top 10 percent of income earners would pay almost half of all federal taxes, based on year 2000 data, since that is their percentage of total income. The bottom 50 percent of income earners would only pay about 13 percent of taxes, since that is their share of total income. No matter what the tax system, the wealthy will always pay much more taxes than the poor. The difference is that, under the current progressive tax system, the successful are being punished for their success and the poor are being rewarded for their lack of success.

Is it any wonder that roughly 100,000 mostly wealthy Americans are now choosing to take their money and move their citizenship to more wealth friendly offshore jurisdictions every year? When you consider that, according to IRS data, the top 1 percent of income earners is only about 1.28 million taxpayers, that 100,000 expatriates a year suddenly becomes significant. We aren't just losing our wealthiest and brightest. We are losing the people who pay the lions share of the taxes. For more on this phenomena, see the article "Tick-Tick-Tick - The Economy Bomb" (it still has last years data, but it points out a definite ominous trend).

Like McIntyre, I am certainly no fan of the flat income tax. But, my concern has little to do with tax rates or the fairness of the flat income tax, as compared with the progressive income tax. My concern is that the flat income tax is still a tax on income and as such, functions as a drag on the economy. We can play with tax rates all you want, even flattening them and the income tax will still be a tax on productivity, which will still create a drag on the economy. It also does not take the government out of the business of prying into the private financial affairs of citizens.

We need to abolish all forms of income tax (progressive or flat) and replace it with a National Retail Sales Tax, that does not tax productivity and gets the government out of the private affairs of citizens. Only then will we have a truly fair and equitable tax system in the United States.

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