Tax Statistics: In Focus-Myth and Reality

The following Article is a very useful reference as we frame the context in which we discuss our tax regime, for good and bad: (with thanks to the NY Times)

October 31, 2007

Economic Scene

Plain Truth About Taxes and Cuts

You’re going to hear a lot about taxes over the next two years. Some of the things you hear will be true. Others will be less true. The goal here today is distinguish between the two.

Last week, Charles B. Rangel, the Democrat who heads the House Ways and Means Committee, introduced a bill to overhaul the tax code. Above all, it would raise taxes on the affluent to pay for the elimination of the alternative minimum tax, which is hitting more and more upper-middle-class families. The bill has no chance of becoming law anytime soon.

Yet Republicans immediately and gleefully seized on the proposal as a preview of what a Democratic president would do. Vice President Dick Cheney called it “a bad proposal” filled with “terrible ideas” that would do “an awful lot of damage” to the economy. Most Democrats are less eager to talk about the Rangel proposal, but it’s clear that they also think a fight over taxes can work to their advantage in 2008 and beyond. Tax policy, as they see it, is one way to soothe the middle class’s economic anxiety.

There are big philosophical questions about taxes that facts alone can’t answer. How important is it to let people keep the money that they earn? Will higher tax rates cause more cheating? How important is it to ensure that take-home pay is rising for every group of Americans?

But there are also some basic facts that ideology can’t change.

If you keep these five in mind, you will have an easier time keeping up with the debate:

As a group, the rich pay a greater share of taxes than in the past.

The top 1 percent of taxpayers — those with adjusted gross income of at least $267,000 in 2004 — paid more than 25 percent of all federal taxes that year, according to the Congressional Budget Office. That was up from 15 percent in 1979.

People sometimes pick nits with these statistics, and the numbers are indeed imperfect. They don’t include state and local taxes, which hit the middle class and the poor harder than federal taxes. On the other hand, the numbers ignore money that the government sends back to taxpayers, like Social Security, which mostly goes to the poor and middle class.

But don’t get bogged down in all this. The big picture is clear enough. The main reason for the trend is also clear.

The affluent are paying more of the taxes because they’re making so much more money.

Tax cut advocates like to argue that taxes on the affluent have entered the realm of Robin Hood. This year, Ari Fleischer, Mr. Bush’s former press secretary, wrote an op-ed piece for The Wall Street Journal suggesting that a small slice of taxpayers was being asked to foot almost the entire bill for the federal government. “The problem is that there is a tipping point after which piling taxes onto the rich will leave the government unable to meet its obligations,” Mr. Fleischer wrote.

Reading that, you would probably assume that the tax rates on high-income families have soared over the last generation. But they haven’t.

A family in that top 1 percent of earners paid a total federal tax rate — including everything from payroll taxes to income taxes to capital gains taxes — of 30 percent in 2004. That was down from 41 percent a decade before. Since the 1950s, tax rates on high-income families have generally been falling.

The top earners pay a bigger share of the government tab than in the past because their incomes have risen so sharply — even more sharply than their tax bills. (Mr. Fleischer was able to claim the opposite by looking only at income taxes.)

The affluent, in short, are paying less in taxes on every dollar they earn but earning many more dollars.

Corporates taxes have dropped significantly in recent decades.

There are two strange facts about corporate taxes. Everyone from Mr. Rangel on the left to Fred Thompson on the right is saying that high corporate taxes are hurting American companies. But the effective corporate tax rate isn’t any higher than it has been on average over the last 25 years, and it’s far lower than it was in the 1960s and ’70s.

“A dirty little secret is that the corporate income tax used to raise a fair amount of revenue,” says Richard Clarida, a Columbia University economist and former Treasury Department official under Mr. Bush.

What’s going on here? This country really does have a high corporate tax rate, but it also has so many loopholes that companies can often avoid paying the tax. A much smarter policy, economists say, would include a lower rate with fewer loopholes. “Both the incentive and the ability to avoid the tax would then be smaller,” says Leonard Burman, director of the Tax Policy Center in Washington.

The nation’s total tax bill hasn’t changed much over the years.

Put it all together — less corporate tax collection and lower individual tax rates, combined with more income for the people who face the highest tax rates — and the trends mostly cancel each other out. The taxes that the federal government took in last year equaled 18.4 percent of the gross domestic product, almost exactly the average since 1980. The overall tax burden rose in the 1990s, fell during Mr. Bush’s first term and has drifted up in the last few years as corporate profits and upper-end incomes surged.

The obvious conclusion is that moderate shifts in taxes don’t dictate economic growth. Mr. Bush’s father and Bill Clinton raised taxes — and the economy grew for almost the entire decade of the 1990s. The current administration has cut taxes — and the economy has grown for almost all of this decade.

So if short-term economic growth were the only thing to worry about, you could make a good argument either for cutting taxes or for raising them. Unfortunately, there is another problem out there.

The budget deficit is worse than either party says it is.

Mr. Bush has predicted that the deficit will disappear by 2012. But that prediction depends on the fiction that the alternative minimum tax will be allowed to grow ever larger in coming years. The Democratic presidential candidates, meanwhile, are promising to pay for their new programs in part by getting rid of some of Mr. Bush’s tax cuts. But those tax cuts are already scheduled to expire under current law. The official budget numbers have already taken their demise into account.

White House officials are absolutely correct when they note that the current budget deficit isn’t especially large. But it will soar in coming years, as baby boomers stop working (and stop paying very much in taxes) and instead move onto the Social Security and Medicare rolls If nothing changes over the next couple of decades, the United States will build up a debt burden to resemble Argentina’s, as Mr. Burman points out.

There are several ways to prevent that. Taxes could be raised across the board, or they could be raised on the affluent. Or the Medicare budget — a much bigger problem than Social Security — could be held in check if the government figured out how to say no to some expensive medical procedures. Or all of the above could happen. But something has to give. No amount of clever argument can pay the bills.

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