Taxation, the future and fair shares Posted by: McQ
on Tuesday, November 20, 2007
Walter Williams takes a look at the reality of our tax policy as it exists and what ramifications it brings. First the numbers:
In 2005, the top 5 percent of income earners — those with an adjusted gross income of $145,000 and higher — paid 60 percent of all federal taxes; in 1999, it was 55 percent. The top 10 percent, earning income more than $103,000, paid 70 percent. The top 25 percent, with income of more than $62,000, paid 86 percent, and the top 50 percent, earning $31,000 and higher, paid 97 percent of all federal taxes.
And that's the way it has been for a few decades. Given those numbers it is certainly difficult - although it happens everyday - to argue that taxes have been shifted to the poor. The fact that the top tier of earners is on the hook for the bulk of taxes creates a particular cultural problem which is the antithesis of the basis for which this country is believed to have been founded:
That there are so many American earners who have little or no financial stake in our country poses a serious political problem. The Tax Foundation estimates 41 percent of whites, 56 percent of blacks, 59 percent of American Indian and Aleut Eskimo and 40 percent Asian and Pacific Islanders had no 2004 federal income tax liability. The study concluded, "When all of the dependents of these income-producing households are counted, there are roughly 122 million Americans — 44 percent of the U.S. population — who are outside of the federal income tax system." These people represent a natural constituency for big-spending politicians. In other words, if you have little or no financial stake in America, what do you care about the cost of massive federal spending programs?
Of course you don't. When you directly benefit from those programs, there is little if any incentive to change the model that makes that so. Given that fact, you can always count on their support, especially at the ballot box.
Williams further points out:
Similarly, what do you care about tax cuts if you' pay little or no taxes? In fact, you might be openly hostile toward tax cuts out of fear they might lead to reductions in handout programs from which you benefit. Survey polls have confirmed this. According to The Harris Poll taken in June 2003, 51 percent of Democrats thought the tax cuts enacted by Congress were a bad thing while 16 percent of Republicans thought so. Among Democrats, 67 percent thought the tax cuts were unfair while 32 percent of Republicans thought so. When asked whether the $350 billion tax cut package will help your family finances, 59 percent of those surveyed said no and 35 percent said yes.
Again, tax cuts mean less money available for redistribution, and less money means fewer programs. Obviously tax cuts mean nothing to a non-taxpayer since they're not paying taxes anyway. So resistance to tax cuts by that group, given the possibility of expanding the welfare state which benefits them, is only natural.
Which brings us to the next point - what you can expect in the near future should Democrats take the White House. You can expect some version of the Charlie Rangel tax plan. As Kevin Hassett points out:
Since Rangel's tax hikes are focused on the rich, and the AMT is scheduled to draw ever more revenue from the middle class in federal budget estimates, the rate increases necessary to maintain current revenue levels are enormous. Rangel adds a 4.6 percent "surtax" on adjusted gross incomes above $500,000 in the first year of the law. This gives voters the impression that we are simply lifting the current top rate of 35 percent to the good old Clinton rate of 39.6 percent. But in 2011, when the Bush tax cuts expire, the surtax sticks, lifting the federal rate to 44.2 percent. Rangel also grabs revenue from the rich by phasing out exemptions and deductions. Add in the Medicare tax, and average state and local taxes, and the combined marginal income tax rate goes to 52 percent. As the accompanying chart illustrates, that would make our top marginal rate the second highest among the ten largest OECD economies, right below France.
And the Hassett chart makes probably the most persuasive argument about why what Rangel and the Democrats are talking about is not what we want for our economic future:
Given France's economic performance in the past, is that a model we want to emulate? Does a nation which believes in freedom, to include economic freedom, want to have a tax system which punishes the success of high earners?
And while you're pondering that, consider this concerning the Rangle plan:
This tax "reform" is revenue-neutral, which means that there is no money left over to fund, say, the universal health-care coverage so many of the Democratic candidates favor. If we lift the top rates to fund that too, then our rate would be far higher than that of any other major country, and begin to approach the 70 percent top rate of the 1970s.
Universal health care (which the Democrats are going to attempt in some form or fashion) coupled with this level of taxation would combine to cripple our economy. Those paying the freight aren't going to stand by mutely while up to 70% of their income is taken to be redistributed to others.
Will Atlas shrug at that point? I have no idea. But my guess is Atlas may take up residence in Ireland or Mexico or some other nation which isn't going to push confiscatory taxation on them all in the name of "paying their fair share". Where will that leave those not paying any taxes now?
That’s the dirty little secret about heavily "progressive" tax systems. In a recession, its the top wage earners who suffer the brunt of the downturn. If they’re the only ones paying taxes, it is deep doo-doo.
"Atlas may take up residence in Ireland or Mexico or some other nation..."
I am expecting a few new island principalities to start popping up following the model of Sealand. You think the Bahamas might be willing to cede one of their tinier islands for adequate remuneration?
I’ve seriously considered working long-term expat, and half of that consideration is the tax benefit to doing so (the other half is the sheer fun of the experience).
I have been cautious for years about any tax system that depends on so few to pay so much. The "law of unintended consequences" ditates that anything this big will foul up things worse than any problem it may solve.
This story sounds like the goose that laid the golden egg. Kill the goose with taxes why don’t you and find out just what you get. My guess is the next "Great Depression".
Frankly, I think Rangel’s plan is a "trojan horse" meant to seemingly up the anty, but then back down. Unfortunately, with the sub-prime mess and all, it will only take one minor miscalculation to put Rangel in American history next to Smoot and Hawley.
We are rapidly approaching the point where the number of people who don’t share the pain when the government goes off into the weeds exceeds the number that do. With a numerical majority of people who are not contributing to the Treasury, what do the taxpaying class have as a weapon with which to defend themselves? Money.
This is what makes campaign finance reform dangerous, I think. Publicly funded campaigns remove one of the few remaining levers that the bourgeois have to avoid getting flattened when the Next Big Idea to Make Everything Fair comes along.
I do think in general taxation should be progressive, but I find it hard to argue against McQ on this one. We’ve become over taxed and bloated. I’m not sure how to remedy that, but one reason I can’t identify with the Democrats is this issue.
Isn’t Rangel the same guy that said we should have a draft so that all of America is sacrificing in the war(i.e. everyone would have a stake in it’s outcome)? When it comes to political irony, man, you can’t make this stuff up.
And that’s the way it has been for a few decades. Given those numbers it is certainly difficult - although it happens everyday - to argue that taxes have been shifted to the poor.
Uh yeah. Since WWII in fact. Before that the bottom 95% of people didn’t pay income taxes at all. When the modern income tax started in 1916 only the top 1% of earners paid.
The fact that the top tier of earners is on the hook for the bulk of taxes creates a particular cultural problem which is the antithesis of the basis for which this country is believed to have been founded
"...believed to have been founded" what kind of weasling is that? Anyway, the taxes the Founders paid were tarrifs, luxury taxes, sin taxes, and property taxes. Certainly top tier earners were on the hook for luxury taxes (like on carriages) and property taxes, at the least. Indeed, not even the Founding Fathers managed to get the bulk of their tax revenues from people who didn’t have any money.
I don’t disagree with the premise of the post, but do think it should be recognized that the social security system is (in financial reality, if not rhetoric) tightly integrated with the general fund. Given that the general fund will ultimately make up the shortfalls in social security payments, viewing the income and payroll taxes together makes sense.
Doing so materially reduces the progressiveness of the total tax scheme. In essence our income taxes are far more progressive than most would deem fair, but our payroll taxes are significantly less progressive than most would deem fair. We haven’t had a tax revolt yet. I would like to see a post demonstrating that even considering income and payroll taxes together, the total personal tax system is too progressive.
That is a sentiment I agree with, but it is a far harder case to make.
This is the share by quintile for all federal tax liabilities including both income and payroll taxes.
Share of Total Federal Tax Liabilities 2007 estimate: Lowest Quintile 1.1% Second Quintile 5.2% Middle Quintile 10.4% Fourth Quintile 19.1% Highest Quintile 64.0% Top 10 Percent 48.5% Top 5 Percent 37.0% Top 1 Percent 21.1%
These numbers are taken from the 2004 "Effective Federal Tax Rates and Shares Under Current Tax Law, Based on 2001 Incomes, by Income Category, 2001 to 2014" http://www.cbo.gov/ftpdoc.cfm?index=5746&type=0&sequence=1
Since it is a couple years old and based on 2001 incomes the numbers if corrected will probably vary slightly with the estimates but the overall picture should hold.
but our payroll taxes are significantly less progressive than most would deem fair.
It’s true that payroll taxes are regressive - except what comes with payroll taxes are scheduled (some would say promised, but that assumes too much) benefits, which are extremely progressive. When looked at holistically, combining payroll taxes and scheduled benefits, the FICA programs are slightly progressive.
Given that the general fund will ultimately make up the shortfalls in social security payments, viewing the income and payroll taxes together makes sense.
Doing so materially reduces the progressiveness of the total tax scheme. In essence our income taxes are far more progressive than most would deem fair,
What Daedalus was saying far too politely here, Q, is that this analysis is bullsh*t. You’ve taken one subsection of tax policy - the most progressive aspect of it - and misrepresented it as being equivalent to "how people in this country are taxed" - and then gone on to weave a whole bunch of pop-psych baloney based on it.
The first problem with the analysis is that it ignores payroll taxes that earning over 90K are completely exempt from. The second problem is that it ignores consumption-based sales taxes. And if you really want to get into the weeds of total federal burden, you have to look at who pays fees and penalties. All of this would make your numbers no longer recognizable.
But it’s even worse than that - the dishonest individual who wrote this blurb is using percentages of total dollars paid to paint a picture of people having "no stake in the system" - and it’s cr*p. The bottom 50 percent of indivduals pay 3% of total revenue - but they sure as heck don’t pay 3 percent of their own income - which is what this article leads you to think and how you’ve played it to this audience.
Go to the chart. As is spelled out clear as day, the total tax burden on families ranges from 19% to 32%. So the bottom quintile are giving up 20% of their income to taxes and the top 1% are giving up 32%.
You owe your audience an apology for blindly presenting this kind of wildly misleading hooey. Ignorance is no excuse. You should start checking with Jon before you post on economics.
Oh, and anonymous:
Share of Total Federal Tax Liabilities 2007 estimate: Lowest Quintile 1.1% Second Quintile 5.2% Middle Quintile 10.4% Fourth Quintile 19.1% Highest Quintile 64.0% Top 10 Percent 48.5% Top 5 Percent 37.0% Top 1 Percent 21.1%
No one’s over 28% - and that’s federal only. When you add state and local, you get the 20 - 30% range from my link. And none of this includes revenue burden from fees and penalties.
Given that the chart you referenced includes all federal, state and local taxes, you have no ground to make accusations about misrepresentations. However I suspect that all your histrionics are cover for your lack of desire to have an honest discussion.
I think McQ blogged about this paper by the Tax Foundation earlier this year, In one of the charts presented they broke down the share of taxes paid by each quintile by type of tax including federal, state and local, as well as totals, for 2004.
The first percentage given in each line is for the bottom quintile, on up to the top quintile.
The link is here: http://www.taxfoundation.org/files/wp1.pdf
If you want to see them lined up nice and neat, the table is on page 44.
Table 18. Tax Shares by Type of Tax, Calendar Year 2004 Quintiles of Household Cash Money Income, Calendar Year 2004
Total Tax Burden 4.3% 9.6% 14.8% 22.4% 48.8%
Federal Taxes Income 0.6% 4.4% 9.9% 19.2% 65.9% Payroll 3.5% 11.2% 18.0% 25.8% 41.6% Corporate Income 3.4% 10.0% 15.1% 22.8% 48.7% Gasoline 8.7% 13.9% 17.8% 22.8% 36.8% Alcoholic Beverages 12.3% 15.0% 18.9% 23.3% 30.4% Tobacco 21.6% 23.1% 21.8% 18.5% 15.0% Diesel Fuel 3.4% 10.0% 15.1% 22.8% 48.7% Air Transport 5.4% 10.4% 14.3% 23.3% 46.5% Other Excise 12.5% 15.5% 18.3% 23.0% 30.7% Customs, Duties, etc. 12.5% 15.5% 18.3% 23.0% 30.7% Estate & Gift 0.0% 0.0% 0.0% 0.0% 100.0% Total Federal Taxes 2.6% 8.3% 14.1% 22.2% 52.8%
State and Local Taxes Income 1.0% 6.3% 12.7% 22.2% 57.7% Corporate Income 3.4% 10.0% 15.1% 22.8% 48.7% Personal Property 8.6% 15.6% 18.3% 23.4% 34.1% Motor Vehicle License 14.7% 19.1% 21.0% 22.1% 23.2% Other Personal Taxes 5.7% 11.6% 16.5% 22.5% 43.7% General Sales 10.2% 14.5% 18.3% 24.3% 32.7% Gasoline 8.7% 13.9% 17.8% 22.8% 36.8% Alcoholic Beverages 12.3% 15.0% 18.9% 23.3% 30.4% Tobacco 21.6% 23.1% 21.8% 18.5% 15.0% Public Utilities 17.2% 18.9% 19.6% 20.9% 23.4% Insurance Receipts 13.7% 17.7% 19.1% 22.0% 27.6% Other Selective Sales 12.5% 15.5% 18.3% 23.0% 30.7% Motor Vehicle (Business) 3.4% 10.0% 15.1% 22.8% 48.7% Severance 9.7% 14.3% 17.5% 22.2% 36.4% Property 8.9% 13.2% 16.6% 22.4% 38.9% Special Assessments 8.9% 13.2% 16.6% 22.4% 38.9% Other Production Taxes 3.4% 10.0% 15.1% 22.8% 48.7% Estate & Gift 0.0% 0.0% 0.0% 0.0% 100.0% State and Local Total 7.5% 12.2% 16.3% 22.7% 41.4%
Working overseas, or living overseas will not eliminate your US tax burden. The United States taxes your global income and you have to pay taxes no matter where you live. Currently there is an exclusion of around 80k. After that you still have to pay taxes, and they’ve changed the rules so you pay at higher tax brackets, too.
Meanwhile you still have to pay your local taxes as well. You can write those off on your US taxes, though. I live in Taiwan which only taxes domestic income, so I can avoid a lot of those, but Taiwan is also moving towards taxing global income as have Canada, etc.
Every few years Congress decides they should get rid of the 80k exemption, but then saner heads usually prevail as double taxation would really hurt US citizens who are employed abroad.
That said, the 80k exemption is pretty nice.
Oh, and you have to be outside the US for 11 months out of the year.
"That’s the dirty little secret about heavily "progressive" tax systems. In a recession, its the top wage earners who suffer the brunt of the downturn. If they’re the only ones paying taxes, it is deep doo-doo."
Yeah, the people running the show get to take their chances. You want reward you gotta take the risk.
Honestly you people atre unbelievable. First you cheer as wealth and income are shifted to ever fewer individuals, and then you squeal when that leads to them paying more of the tax bill !! You guys want the owning class to have everything and pay for nothing ! Did you guys do sums at school ?.....
The poor, the near-poor, and the lower middle class do pay a lower effective federal tax rate. The bottom 20 percent, for instance, pay 7.9 percent - basically just payroll taxes for Social Security and Medicare.
When less progressive state and local taxes are added, the nation’s tax system becomes even flatter. CTJ’s analysis finds the top 1 percent were paying at a 32.8 percent rate, with the bottom 20 percent paying at a 19.7 percent rate.
And guess what all the following paragraphs criticize? Yep — Bush. I guess the federal government has some sort of secret control over state and local taxes.
