Taxing Questions

Greg Mankiw links this report based on Congressional Budget Office data. Here are my own charts created from the data:

 

The 2005 total effective federal tax rate as a percentage of the 1979 rate:

• Top Quintile = 92.7%
• Fourth Quintile = 82.1%
• Middle Quintile = 76.3%
• Second Quintile = 69.2%
• Bottom Quintile = 53.8%

The effects of the Bush Tax Cuts? The 2005 total effective federal tax rate as a percentage of the 2000 rate.

• Top Quintile = 91.1%
• Fourth Quintile = 84.9%
• Middle Quintile = 85.5%
• Second Quintile = 76.2%
• Bottom Quintile = 67.2%

As repeatedly noted, the cuts cut a greater percentage for the bottom quintile than for the top. (32.8% vs. 8.9%) Even more interesting is the total effective federal tax rate for households with children:

 

 

The 2005 total effective federal tax rate as a percentage of the 1979 rate:

• Top Quintile = 101.2%
• Fourth Quintile = 85.0%
• Middle Quintile = 76.8%
• Second Quintile = 60.1%
• Bottom Quintile = 14.3%

As I showed in a post last month, the top 1% of taxpayers pay 40% of federal income taxes. The top 25% of taxpayers pay 86% of income taxes.

Finally, keep in mind the New York Times article two weeks ago that pointed out that while the bottom quintile has $9,974 in income per household a year, it spends $18,153. That means non-cash assistance (as well as draws on savings in the case of retired or unemployed payers) nearly doubles the actual income of the bottom quintile.

Rather than populist outcry over "tax cuts for the wealthy," maybe we need to look at the whole package of consequences of tax policy. Is the final objective really to have all taxes paid by the top 1% of society?

Comments

[Keith Schooley]

I find statistics like, "The top 1% of taxpayers pay 40% of federal income taxes," incredibly misleading. It's a comparison of percentage of population with percentage of contribution, with the hidden assumption that everyone is more or less able to contribute.

The real comparison is proportion of contribution with proportion of assets controlled by a particular segment of the population. The top 1% control far more than 1% of assets.

With regard to your final question, when US income taxes were first implemented, the top 1% did in fact pay all income taxes collected.

[Michael W. Kruse]

It is true that taxes were originally paid by the top 1% when the government was far smaller. Isn’t it better for most folks to have some financial stake in the political policies and programs the support?

These stats are incomplete but I don’t find these stats misleading at all. You’re right that tax rates for the highest quintile, while far higher are than the lowest quintile, constitute a smaller portion of their assets. But as the NYT article I linked shows the middle quintile consumes on 29% more in a year than the lowest quintile on a per capita basis; the top quintile consumes only double what the lowest quintile consumes.

Where does most of the excess income in the higher quintiles go? It is placed on deposit at financial institutions, invested in stocks and small businesses, invested in appreciating assets, or given in philanthropy. It creates jobs and fuels economic growth. High taxes at the highest levels of income is, de facto, a policy that penalizes risk taking, and transfers billions of dollars from productive uses into pure consumption.

During the 1930s, the top marginal tax rate was 90%. The theory was to take from the rich and give to the poor. The spending by the poor would stimulate business. However, if you can only earn a fixed amount of income before you are allowed to keep only a dime on the dollar, you have no incentive to invest beyond that point. Factory owners run obsolete equipment well past its productive use life. They do little research and development and they fail to expand capacity. What would be the financial rationale for doing otherwise? World War II saved the day with the demand for updated and expanded production capacity. Tax policy was driving the economy into the ground. High top marginal tax rates are like killing the proverbial golden goose to get the eggs.

On another note, keep in mind that movement in and out of quintiles is quite fluid. Sell a house or receive an inheritance and you will suddenly find you self bumped up a quintile or two. You can be quite wealthy in retirement, living comfortably by cashing in CD’s every few months, and be in the bottom quintile. Instead of thinking of a few hundred CEO’s of major corporations or of Tiger Woods when we think of the top quintile, think of millions of small business owners, risking there assets to provide goods and services, and thereby creating employment for others. Think of your parents or grandparents selling their home as they move into retirement. Something like 80% of millionares live in homes near the median value of homes, drive cars that are four or more years old, and lead frugal lives. They are people who were good stewards with financial resources and invested them in ways that benefit countless others in society. These are the folks we are saying it is unfair for them to keep the assets they have amassed.

[Mike L.]

I think you've misrepresented the whole point of a progressive tax rate structure. The point is to have people who BENEFIT the most from our government pay the most back to fund our system. It is that simple.

Our government provides many systems that allow a certain section of the population to accumulate more wealth based on their connections, status, genetics, etc. Those people have an obligation to pay back a share in proportion to what the system pushes in their direction.

Our current tax system has become not only more flat, but thanks to Bush it is growing more regressive. One of the big reasons is the low capital gains tax. The wealthiest people in our nation have a "real" tax rate very close to 15% because all of their income is on capital gains while most middle class people pay a rate higher than that despite the fact that they don't benefit as much from our systems of finance, education, and justice.

Taxes rates have nothing to do with "capability" to pay them. They are about paying based on benefit. When you benefit more from our systems you should pay more to fund them.

[Michael W. Kruse]

I also forgot to add that by cutting a higher percentage at lower brackets and raising the threshold at which taxes are owed, the net impact of the Bush tax cuts is to shift a greater percentage of the tax burden on the wealthy.

So if the issue is about the wealthy paying a greater share of the taxes, why are the Bush tax cuts vilified instead of praised?

[Michael W. Kruse]

Hey, Mike L. I think we cross posted there. The comment above touches on the issues you raised.

The "Tax Shares" table is for federal income tax alone, and so you are correct that capital gains is not included there. However, the two charts I created and the attached data is the federal effective tax rate with includes capital gains taxes.

Again, taxes are down for everyone but to a much more significant degree the lower down the economic ladder you go. Therefore, it has not become more regressive but rather progressive. The wealthy are paying a greater share of the total tax burden due to the Bush tax cuts.

When it comes to benefit, is there any benefit received from the larger population of people putting their wealth at risk to run businesses, create goods and services, and create employment, and give philanthropically? Is there any benefit from people being good stewards with their money, and living within their means while saving and investing responsibly? Don’t these people benefit us by not being drain on the social safety net as well as by amassing capital that can be used in the productive ways I mentioned above. There is some considerable reciprocal benefit here, not a one way street of benefit only for the wealthy.

When does fairness according to benefit cross over into envious appropriation of others hard earned and well managed resources?

[Mike L.]

There is a good way to spot envy. Just look for the people being stingy. Look at the people asking to contribute less. There is only one reason for these tax cuts. It is because the people who have the most to benefit from tax cutst that lobby congress to cut taxes.

To make matters worse, your charts don't include the 6% of social security that is not collected on the majority of the nations income (capital gains and income over 90k). You charts should add that 6% on the bottom and middle rates which makes the over all chart much less progressive.

Also, your charts do nothing to compare benefits to the contributions. You simply attempt to minimize the effect of the tax cuts as a percentage of former rates.

I'm asking for my taxes to be INCREASED. I'm wealthy. I don't need a bigger break. I need to contribute more because I benefit more. A patriot should not be asking to contribute less.

[Keith Schooley]

"Something like 80% of millionares live in homes near the median value of homes, drive cars that are four or more years old, and lead frugal lives. They are people who were good stewards with financial resources and invested them in ways that benefit countless others in society."

Ah. The wealthy are more virtuous argument.

As for the rest of the argument, I believe David Stockman had a term for it.

[Michael W. Kruse]

Mike L. and Keith, here is a quiz. Who said the following to the American public in advocacy of his proposed tax cut?

"It will include an across the board top to bottom cut in both corporate and personal income taxes. It will include long needed tax reform, that logic and equity demand.... The billions of dollars this bill will place in the hands of the consumer and our businessmen will have both immediate and permanent benefits to our economy. Every dollar released from taxation that is spent or invested will help create a new job and a new salary, and these new jobs and new salaries can create other jobs and other salaries, and more customers and more growth for an expanding American economy."

Those are the words of Jack Kennedy in his August 13, 1962, address. Check out my post from a few days ago Tax Cuts? Senators Obama and Clinton, You're no Jack Kennedy. See the YouTube clip of JFK.

Mike L. wrote: "There is only one reason for these tax cuts. It is because the people who have the most to benefit from tax cutst that lobby congress to cut taxes."

Was JFK just a puppet for lobbyist for the rich? Was this JFK’s motive? Why do you ascribe in the most recent rounds when unlike Kennedy’s cut, this actually shifted the tax burden toward the wealthy.

Mike L. wrote “…don't include the 6% of social security…” If you look in the parentheses under the title, you will see that it says “Income, payroll, and excise taxes.” Payroll includes Social Security and Medicare withholding. The CBO attempts to capture all federal taxes paid in calculating this number. I think you are right that this does not capture benefits like pre-tax employee health insurance. No measure is perfect. But neither does this measure pick up the non-cash and unreported income of the bottom quintile which is half of their income.

Mike L. wrote: “You simply attempt to minimize the effect of the tax cuts as a percentage of former rates.”

You have missed my point entirely. My point is that the tax rates for the lower quintiles (especially Q1) have decreased much more precipitously than for the top quintile. That means that the top quintile is paying a greater proportion of all federal taxes.

Mike L. wrote “I need to contribute more because I benefit more.” Then by all means give! I believe that we need to be giving at a minimum, 10% of our pre-tax income. We need to be fostering a culture of compassion and benevolence. Taxes are not a contribution. Why is the default way to help the poor federal taxation, instead of creating families, communities and local institutions that support each other?

Mike L. “A patriot should not be asking to contribute less.” When Republicans questioned the patriotism of the Democrats who “supported the troops but opposed the war,” a cry went up that resembled a chorus of scorched cats. But raise legitimate factual questions about taxation and the progressive response is? ;)

[Michael W. Kruse]

Keith

“Ah. The wealthy are more virtuous argument.”

I said nothing of the sort. There are many virtuous people who are hopeless with money. There are some rascals who very good with money. Most who amass capital come by it through honest careful stewardship over time. The question is what kind of behavior do we want to create incentives or disincentives for. From an economic standpoint, are you telling me this is behavior we don’t want to incentivize but rather we should be penalizing people who are gifted and disciplined with financial resources? The top 25% are paying 86% of taxes. How much is a fair share?

[Keith Schooley]

And I'm back to the misleading nature of that type of argument. What would be a fair share of the top 25% is directly related to the share of assets they control. "The top 25% are paying 86% of taxes." Sounds unfair. But what if the top 25% control 90% of the assets? Then it's suddenly not so unfair. It's all related to what proportion of wealth they control.

I have no problem with people amassing capital through honest careful stewardship over time. But the top taxpayers are not workers with carefully invested 401Ks and IRAs. They are people whose hard work the market has deemed hundreds of times more valuable than the hard work of other people. So if we're going to talk about "fair share," lets pull the income side into the equation.

I've heard all these arguments during my years of subscribing to National Review and listening to Rush. I don't buy them anymore. They say a conservative is a liberal who has been mugged by reality. What do they call a conservative who has been mugged by reality?

[Keith Schooley]

Let's put it this way: the percentage of population - percentage of contribution comparison suggests that there should be a 1:1 ratio between the two. So therefore, for example, the top 5% of income earners should pay 5% of the total tax burden, and the bottom 5% should also pay 5% of the total tax burden.

Is that an argument you really want to make?

[Mike L.]

Your quotes from Kennedy are out of context and the two different types of tax cuts are not comparable. It is one thing to cut taxes accross the board in a time of surplus. It is completely a different position of complete irresponsibility to cut taxes when we are already deeep in dept while increasing the white collar welfare payments to Halliburton and Dick Cheney to new levels of corruption.

http://www.slate.com/id/2093947/

You tell me how the Bush tax cuts lowered tax rates for the middle class (75k - 200k). Their rates were NOT cut in any significant way. Are you talking about the rebate that he gave all those with kids? Are you somehow suggesting those people have vast wealth taxed at the capital gains tax?

When you use these numbers that compare totals on given sections of the population, you are missing the point. Your numbers are skewed by the total amount of income that shifted from middle to upper incomes. The growing divide between rich and poor means more wealth is going to the rich. Even as their rates have been cut, THE WHOLE GROUP does pay more as a percentage of the total bill, BUT they pay less as a percentage of their own income.

Here are some better graphs:

http://www.visualizingeconomics.com/2007/11/03/nytimes-historical-tax-rates-by-income-group/

http://www.visualizingeconomics.com/2007/03/24/us-income-of-top-01-percent-vs-marginal-tax-rate/

[Michael W. Kruse]

Well, to start with, I’m not Rush Limbaugh or National Review, nor would I consider them to necessarily be good sources for solid theological reflection on economic justice. But similarly, to adopt positions because they are contra-Rush or contra-National Review is to allow your self to be defined by those sources as well. I’ve presented factual data and asked legitimate questions.

“It's all related to what proportion of wealth they control.”

Why is this the measure?

Take two American families. The Stevens and Taylors make similar salaries over a twenty year period. They live in similar neighborhoods with similar sized houses. The Stevens have never saved a dime. They rarely give of their resources. They travel to resorts and gamble every chance they get. They buy the best high end consumer products and dress in the best clothes they can buy. They have no resources to send their two kids to college or to take care of emergencies. The only asset of substance they have is their home, which they have taken out loans against to finance their lifestyle, and because of that and credit card debt, have a negative net worth.

The Taylors live within their means. They save and invest 10% of their income every year and give another 10% to charitable causes. They buy only practical used cars. They buy their clothes when they are on sale at the end of the fashion season. They buy modest consumer products and use them as long as they can make them last. Eating out is a treat. Travel is an infrequent luxury. By making extra payments each year they have just paid off their thirty year mortgage in twenty years. Through careful saving and investment they have amassed a net worth (including their house) of $800,000, and its growing. They have resources to help their kids with college and are on their way to providing for their retirement.

If taxation is to be based purely on assets controlled, then the Stevens should pay zero taxes and people like the Taylors should be obligated to pay the overwhelming share of taxes in society, part of which will go to provide subsidized loans and grants to the Stevens’ kids for college and take care of the Stevens’ in their retirement. I can’t think of a more perverse taxation method. (Again, this not to say that everyone in need was irresponsible or that everyone who has wealth is virtuous.)

You mention top CEO salaries. In studying CEO salaries, Xavier Gabaix found that:

“The sixfold increase of CEO pay between 1980 and 2003 can be fully attributed to the six-fold increase in market capitalization of large US companies during that period.” (See">http://krusekronicle.typepad.com/kruse_kronicle/2007/10/gabaix-on-ceo-p.html">See my post.)

In other words, they are being compensated directly proportional to the size of assets they are managing, the same logic you are using to for taxation. Why does it not cut both ways? (For the record, I think there are problems with CEO compensation at these top levels but that goes beyond this topic.)

Furthermore, there were 300,000 CEOs in the US in 2006, according to the Bureau of Labor Statistics. Fortune 500 CEOs make up 0.17% of CEOs. Average salary for all CEOs was $144,000 and amounted to 4.9 times the amount of the average hourly production worker ($29,544).

As to “the percentage of population - percentage of contribution comparison,” that has not been my argument, nor have I argued against some form of progressive taxation. I have pointed out that indeed the current taxation system is progressive and the Bush tax cuts made it more progressive. I’m asking on what basis should it be made even more progressive. All we get is the endless demonization of “tax cuts for the rich!” Where is the just level?

[Michael W. Kruse]

Mike L., I wanted you to know I saw your comment but I'll be away from the computer for about four hours. I be back in the afternoon.

[Charlie (Colorado)]

I'm asking for my taxes to be INCREASED. I'm wealthy. I don't need a bigger break. I need to contribute more because I benefit more. A patriot should not be asking to contribute less.

Mike L., I assume you know that the Treasury will happily accept checks from you. How much additional have you paid this year?

[Mike L.]

Charlie,

I'm aware, and I do give as well as refuse to take certain unfair deductions that are not available for all. I will also give back or donate to charity this irresponsible tax rebate currently planed to "stimulate the economy". The stimulus package should have been more targeted. I think lower taxes for middle and low incomes is good, but it should be paid for. It is irresponsible to borrow that money to mask our financial problems.

However, I can make little progress on my own. I need some help. I'm suggesting that we all give according to our level of benefit.

[Mike L.]

Michael,

You've still not addressing the problems with your charts. The Bush tax cuts have NOT in any way increased the effective tax rates of individual taxpayers in the top brackets.

Find me one person (or even pose a hypothetical scenario) who was in the top bracket and now pays a higher individual effective tax rate after the Bush tax cuts than before. It is mathematically impossible outside of a major shift in how they earned their income.

Your comparison of the "Stevens" and the "Taylors" above is really missing the larger point. The disparity we've addresses of taxes is not between any of these middle class families. It is between both those middle class families and the large wealth holders that did not earn their wealth from saving pennies out of their paychecks, but from massive government subsidies and biased infrastrure. People like George W. Bush who made $17 million soley from a tax INCREASE funneled into a subsidy for his baseball team in Texas. Insurance companies, HMO privitization, banks, oil companies, and large corporate retailers all get massive hand-outs that allow them to benefit disproportionally. Another example is people with massive homes who buy them simply to get the disproportional mortgage interest tax break.

Those values are not included in your chart. The charts are based on "taxable income". Huge mortgages, business deduction, corportate expense accounts, before tax retirement savings, etc. are all ways to exclude income from taxes. I know. I own a business, commercial real estate, and have a corporate expense account. My "real" taxable income would not show on your charts and it skews the effective rates. I'm not nearly as wealthy as many in that top bracket and it gets more ellusive and more obscene the higher up you go.

[Michael W. Kruse]

Mike L.

“The Bush tax cuts have NOT in any way increased the effective tax rates of individual taxpayers in the top brackets.”

I have in no way claimed they have. I don’t think you’ve captured my point here, so let me be clear hear what I’m not saying and what I am saying here.

I’m not saying:

I’m not saying that the wealthiest tax payers are paying a higher percentage of their income in taxes than they did five years earlier. The percentage of their income that goes to taxes has declined slightly. They are paying a slightly lower percentage of their income in taxes.

I am saying:

I am saying the wealthiest taxpayers (probably at least the top quintile) are paying more in taxes in an absolute dollar amount than they were five years earlier. They are a paying a slightly lower percentage on a larger income. That means more taxes collected.

I am saying that he wealthiest taxpayers are paying a greater proportion of the total national tax burden. If you drew up a pie chart of the percentage of tax revenues that came from each quintile in the 2000 and 2005, you would see that the top quintiles proportions of the total amount has grown. While everyone’s tax rates have been cut, the bottom quintiles have been cut more significantly so a smaller amount of total annual tax revenues are coming from the bottom quintiles. That is to say, that despite having received a modest cut in their tax rates, the wealthy shoulder a greater proportion of the total tax revenue. Taxes have become more progressive.

More coming…

[Michael W. Kruse]

Mike L.

Thanks for the link to the slate article about Kennedy tax cuts. Some good background. My observation is that Kennedy saw the cuts as a demand-side impact while Regan and Bush saw them as supply-side. My personal assessment is that cuts likely have an impact on supply and demand. That is a question that would have to be to a professional economist to get some useful data. The commonality is that presidents saw cutting taxes including those of the rich as a way to stimulate the economy.

Kennedy (as I recall) cut all rates by a similar percentages across the board. Bush cut rates by a smaller percentage for the wealthy and a larger percentage for the least wealthy. He raised the threshold at which taxes are owed. Both cuts were around 2% of national income while as a percentage of the nation of the federal budget the Kennedy cuts were 8.8% and Bush 8.1%.

Concerning budget surplus or deficit at the time of the cuts, we have to keep in mind that Bush’s cuts came in three phases. Here is how the National">http://www.taxfoundation.org/news/show/323.html">National Tax Foundation reports the surplus (“-“ equals deficit) at the time of each cut.

Kennedy (1964) = -1.0%
Bush Phase 1 (2001) = +1.5%
Bush Phase 2 (2002) = -1.7%
Bush Phase 3 (2003) = -3.2%

I don’t see there being a significant difference here.

But I want to come back to the point that got all this going. The outcry is about “tax cuts for the wealthy,” not “Bush cut taxes when we had a deficit.” These are two unrelated issues. There is nothing sinister in cutting taxes for the wealthy particular when it is included in larger package of cuts that results in a more progressive system.

[Mike L.]

Michael,

Nobody argues against the fact that more tax revenue comes in from the top brackets. The problem is that you've used the wrong chart to make an arugment about a completely different subject. These charts in no way support your assertion that the Bush tax cuts raised the burden on people in the top 1-2%. It simply points to the fact that these people have more and more money to pay tax against.

The numbers you presented are completely irrelevant and designed to send a false message of equality that simply doesn't exist. Your entire line of argument is silly and designed by people who are not being honest about the facts.

Some one like Warren Buffet pays more total taxes than his secretary, but the problem is that his secretary pays a higher percentage of his/her income in taxes than Mr. Buffet despite the fact that Buffet is a Billionaire. How is that a fair tax system? I know this because I've heard Buffet himself suggest it is unfair and that he doesn't "need" and didn't ask for the unfair Bush tax break. The obscenity of the break is increased when you realize this particular cut was made completely with borrowed money. When Kennedy suggested a tax decrease the top marginal rates were more than double what they have been since we started this cut and borrow mentality (started in the 80's). Also, there was an anticipated budget surplus which is why Kennedy even considered it.

I've been a conservative all my life until recently when I compared my conservative fiscal principles with the clear messages in the Bible and realized I had been duped by false teachers in the church and I was lying to myself about my own responsibilities.

[Michael W. Kruse]

Mike L.

Concerning non-taxable income, that is always going to be a tricky piece to deal with. But there is potential for significant unintended consequences by making substantial increases on the wealthy. The higher the tax rates go, the greater is incentive to find more tax shelters and ways of getting non-taxable income. It also incentivizes the wealthy to partner with politicians to create loopholes that help them avoid the taxes. This fosters a wedding of corporate and political interests. Instead, a tax that is widely seen a reasonable will simply be paid and done with.

The “visualizing economics” chart you linked shows lower percentages of income going to the top 1% when the tax rates are high and the higher percentages when taxes are low. As you note, the wealthy have ways of generating many non-taxable income forms of income. Is it possible that when taxes are high that the wealthy are not truly making all that much less but have simply found ways to move their earnings into to non-taxable income sources? Do lower tax rates bring more income into the taxable stream because the effort to shield income is no longer worth the trouble relative to just paying the taxes? That is hard to measure but I think it is a critical question.

[Michael W. Kruse]

Mike L.

“The numbers you presented are completely irrelevant and designed to send a false message of equality that simply doesn't exist. Your entire line of argument is silly and designed by people who are not being honest about the facts.”
On the contrary the charts demonstrate precisely what I have claimed and are true to the facts presented here. Additional facts (as opposed to assertions) might shine a new light. I’m open to those and I’ve tried to respectfully but forthrightly engage with you on this. For my efforts I’m now labeled not only unpatriotic but now silly and dishonest.

The charts show that the overall proportion of total taxes being paid into the government coming from the highest earners is increasing, despite a slight drop in the tax rate for these earners. That is by definition an increasingly progressive system. Unless the CBOs facts are in error how can you come to any other conclusion.

None of this changes the fact the someone who made a $1,000,000 last year and paid 25% in taxes has $750,000 left over verses some who made $50,000 and paid a lower percentage of about 15% in the middle quintile has $42,500 left over. Is that fair? I don’t know. It is a progressive tax structure. How progressive should it be?

“Some one like Warren Buffet pays more total taxes than his secretary, but the problem is that his secretary pays a higher percentage of his/her income in taxes than Mr. Buffet despite the fact that Buffet is a Billionaire. How is that a fair tax system?”

Yet I’ve shown you stats from the Office of Management and Budget that show the Effective Federal Tax Rate (inclusive of all federal taxes) is at 25.5% for the highest quintile (which includes the highest 1%). Lower quintiles pay less. Are you saying the top 1% is paying less of a percentage than the remainder of the top cohort? Give me some facts.

My charts have shown how progressive the tax structure is, which is more progressive than I think most people realize. That was the central focus of the post. The charts also show the Bush tax cuts increased the progressive nature of the tax system.

I do this blog because I enjoy engaging with people on a variety of topics, not flaming wars. I think you’ve made clear your evaluation of my motives and character. I don’t think there is much point in continuing the dialog further. So I’ll just say peace to you and your’s.

[pgl]

Why this post really misses the point is explained here:

angrybear.blogspot.com/2008/03/everyone-cut-tax-cut.html

State and local taxes? The deferred tax obligations from those Federal deficits? I trust Greg Mankiw knows about both - do you?

[Mike L.]

Michael,

Thanks for the information and the discussion. It has been very helpful. The divisive rhetoric commonly used in political discussions make these conversations difficult. I appreciate your willingness to clarify your position. It seems your heart is in the right place.

[Michael W. Kruse]

PGL, I don't think anyone is suggesting we ignore the impact of state and local taxes when thinking about economic justice but A) these taxes vary widely from locale to locale and B) they are not under the control of federal tax policy. I don't see what these taxes have to do with whether or not the federal tax policy is just.

The impression being suggested by the cry of "tax cuts for the wealthy" is that these cuts have made the tax code less progresive and absolved the wealthy of obligations. What these numbers demonstrate is that the tax code is progressive and that the Bush cuts made them more progressive.

Now we can argue all sorts of reasons why these cuts were not appropriate. Maybe they set all the rates to low. Maybe they didn't go far enough in their progressiveness. Maybe they shouldn't have been made in the fiscal climate in which they were made. But I don't see that any of these are warrant for the outrage of "tax cuts for the wealthy." The wealthy come out of the process shouldering a greater proportion of the total federal tax burden. I would think that Democrats would at least want to celebrate this aspect. State and local taxes are not within the control of federal authorities.

[tbrosz]

Mike L.: I think you've misrepresented the whole point of a progressive tax rate structure. The point is to have people who BENEFIT the most from our government pay the most back to fund our system. It is that simple.

Our government provides many systems that allow a certain section of the population to accumulate more wealth based on their connections, status, genetics, etc. Those people have an obligation to pay back a share in proportion to what the system pushes in their direction.

I've heard this argument more times than I can count. We're talking cash here. There is no benefit that the government pays for that accrues specifically to the wealthy. The military doesn't defend them any harder. They don't have their own special fire departments or police. They don't get special lanes on the roads, their own "rich only" libraries or public buildings. They don't have their own national parks. Financial regulatory systems and courts rack up little more overhead to deal with them than with anyone else. If they use more water, electricity, or utilities, they pay more for it right up front. Their high property taxes pay far more out than what cities ever spend on them.

Nobody making this claim has ever shown a cash flow from the government that specifically benefits only the rich. In fact, the flow goes quite thoroughly in the other direction. The wealthy pay taxes far in excess of anything at all they get from the government.

The "system" doesn't "push" wealth in anybody's direction. Most wealth in this country is earned by hard work and skill, often in spite of the government, not because of it.

If the government "allows" people to accumulate wealth, it's only by taking less of it away than they otherwise might.

Face it, the tax system in this country is raw wealth redistribution. We tax the hell out of the wealthy for the same reason Willie Sutton robbed banks: That's where the money is. Trying to come up with some moral sanction for it doesn't really work.

[Ken Mitchell]

Mike L. writes: "Some one like Warren Buffet pays more total taxes than his secretary, but the problem is that his secretary pays a higher percentage of his/her income in taxes than Mr. Buffet despite the fact that Buffet is a Billionaire. How is that a fair tax system? I know this because I've heard Buffet himself suggest it is unfair and that he doesn't "need" and didn't ask for the unfair Bush tax break."

And yet Buffett himself has engaged in the most extreme version of tax avoidance; instead of letting his children inherit his wealth (and pay a substantial portion of his billions in estate taxes) he's going to give it to the Gates Foundation, and CHEAT the American taxpayers out of their rightful and fair share of his money!

Let's see now; How many people on Buffett's payrolls? How many on his secretary's?

[Wildmonk]

Mike L. makes an assertion that I find astonishingly naive (or worse):

"I think you've misrepresented the whole point of a progressive tax rate structure. The point is to have people who BENEFIT the most from our government pay the most back to fund our system. It is that simple."

May I respectfully submit that you don't have a clue what you are talking about? As a business owner, the idea that my success is due to "connections, status or genetics" is screamingly offensive. The idea that the income I've generated is just a "BENEFIT from the government" makes me want to wretch.

Excuse me, pal, but I've worked hours and put in effort that I doubt you could even comprehend. I've taken risks that you would obviously be unwilling to take. I've suffered lawsuits, downturns and disasters. I started out with ZERO in savings and paid my own way through school. I've done manageably well for only one reason: I've always understood that if you want to ask someone for their hard-earned money, you have to build something of value.

And now you just want define all of this out of existence? You want to say that my success, limited as it is, is just due to connections or some such garbage? It sounds to me like a pathetic rationalization that you've spun so that you can live in your own little fairy tale where people like me are merely being taxed according to the "benefits" that we've been "given" by society.

I don't mean to offer "divisive rhetoric" but I'll be damned if I'll let you denigrate the sacrifices that I and others like me have made so that you can spin fantasies to justify the thievery that you advocate.

You know what? I haven't TAKEN from this society - I have GIVEN to this society. And, in return, the prevailing wisdom seems to be that I have MORE responsibility to pay into the collective pot than most other people. And not even just as a total dollar figure...I could live with an equal percentage load and a higher dollar contribution. But YOU are arguing that even paying nearly twice as much as the average and 5-10 times as much as many on a PERCENTAGE basis is STILL not good enough? And I haven't even BEGUN to count the taxes I generate by employing people, or that I pay via "employer" taxes, or that I pay by generating sales tax receipts.

You'll excuse me if I find you naive and even a bit thuggish!

[Mark]

Mike L. is wealthy and wants to pay more taxes. I suggest he calculates his earned income for 2007 and puts 98% of (minus any state and property taxes) into a brown envelope and send it off to the IRS. If he objects then it means he is "stingy" because he wants to pay less, which according to him means we have the moral authority to force him to pay it.

Keith thinks that the wealthy aren't more virtuous, and Michael Kruse won't take the bait. I will: Since virtue is ultimately tied to what one contributes to society, how many high earning crack heads populate our prisons at 100k a year? How many individuals in the top quintile are on Welfare? How many wealthy are uninsured and ring up large emergency room bills they can't pay? Tell us about all those uber-wealthy welfare queens that consume so many social services.

Speaking of which, what are all these services that Mike L. thinks the wealthy benefit from? Police protection from the "virtuous" poor? The service of keeping what one made? The service of being penalized for other's financial failings? (Global warming boogeyman story in 3, 2, 1...)

The state doesn't own you, slave. How delusional do you have to be to want more beatings from your "benign" master? Pursue your own self destruction if you wish, but don't try to impose your slavish mentality on others.

[BC]

The point is to have people who BENEFIT the most from our government pay the most back to fund our system.

The idea that the wealthy benefit the most from government is an article of faith among proponents of the progressive tax system, but it doesn't appear to have much in the way of empirical support unless you proceed from the suspect premise that, for example, government protection of egg ownership is more beneficial to the guy with two eggs than it is to the guy with one egg.

Having more to lose if government stops protecting you is not the same as benefiting more from government protections.

[TallDave]

But what if the top 25% control 90% of the assets?

You're asking the wrong question. The relevant question is: how did they acquire such large percentages of assets?

Let's say you invented a cure for cancer, and became very very rich as a result. Would that be wrong? Or would everybody be better off?

In a million little ways, the rich have gotten that way by providing services people want, and are willing to trade money for. Sam Walton created a low-price store for people. Jeff Bezos created Amazon.com. Oil companies let you drive your car and heat your home.

In a free society, the rich are those who best serve their fellow man.

[responsiblelib]

Lumping everyone in the top 20% of income earners together into one category is definitely "fuzzy math." There is a huge difference between the 80th and 90th and 95th and 99th percentiles.

[pgl]

"I don't think anyone is suggesting we ignore the impact of state and local taxes when thinking about economic justice but A) these taxes vary widely from locale to locale and B) they are not under the control of federal tax policy. I don't see what these taxes have to do with whether or not the federal tax policy is just."

(1) This does not address the deferred taxes from Federal deficits.

(2) If you wish to focus on Federal taxation - say "Federal tax burden" rather than "all taxes".

(3) Federal policy imposes certain mandates (no child left behind for example) without coughing up Federal tax revenues to compensate.

Sorry Michael - but this was a weak rejoinder.

[Kirk]

Wow. What a lot of nonsense. So let me add my own $0.02. I am no wealthy blue blood, or someone who has some special talents that are freely rewarded by our capitalist pig society. I own my own small business, which I started with nothing four years ago and have managed to build into a successful company with 5 full time employees plus a new partner. Last year was the first year in my life I put anything near $200k on a tax return.

I got this not because it was handed to me because of my amazing talents and good looks. I work a lot. Most of the 168 hours in a week in fact. I have risked more than money and still do. The work I do can be dangerous...crawling beneath structures, through pipes and culverts, entering confined spaces of all sorts.

I feel I give plenty in taxes, and in charity for that matter. I have also been generous with my men. None have left since I hired them. None. In addition, I am carrying two on the payroll right now.

I cannot tell you how infuriating it is to read the comments of someone who feels the government should simply reach into my hip pocket and take more. I have worked damned hard for every penny I have. Now, I have no objections to reaching out to help people who cannot help themselves. That is an obligation. But many people who will benefit from the great wealth transfer have no less talent or capability thna me. They just work a lot less, and incur less financial and physical risk. You want to take money from me after my 80 plus hour week, and put it into the pocket of someone who may simply be unwilling to sacrifice the time or potential for disaster that I do?

Again, I cannot tell you how infuriating that is. To simply give to people who need it is generous. To have the government make me do it is tyranny. It is armed robbery, and I will fight this with the same determination I have used to build this business.

[Jeff]

I make a good income ... if you were a socialist you could say I have benefited more than many from the goods and services provided by my taxes. Or you could say I have taken better advantage of those goods and services than others. Cops and firemen are paid to proctect everyone, equally. The NYC Subway still costs we $2 everytime I use it. Socialists always want equal outcomes while Americans want equal opportunities. Higher taxes on higher income earners is neither fair nor is it justified.

Oh, and if you want to raise my SS taxes (the cap) I will happily to to court to ensure my ultimate benifits goes up equally.

You want to pay more tax ? Get a better job ...

[Lewin Wickes]

Countries with flat tax systems have observed four things: Compliance goes up. Tax revenues go up. Wages go up. Poverty goes down. Here in the US the states responded in various ways to "the end of welfare as we know it" during the Clinton administration. Some states raised taxes. Some states lowered taxes. Poverty rates increased in the states that increased taxes. Poverty rates fell in states that decreased taxes. The correlation is 100%. When the government takes money from people, they get poorer.

[newscaper]

for Mickael K and Mike L:

A huge part of the problem, WRT argument, is the rhetorical bait and switch that even those who favor the economic stimulus of lower rates have fallen for, underlying this comment...

"The point is to have people who BENEFIT the most from our government pay the most back to fund our system. It is that simple."

The situation is exacerbated by the apparently weak grasp of mathematics that tends to confuse percentages and absolute dollars.

Here's a somewhat artificially simplified example.

Mr. Jones makes $20k/yr.
Ms. Smith makes $200k/yr.

Given a *flat* tax rate of 10% (again keeping it simple), their tax liabilities are:
Mr. Jones = 10% of 20k = $2,000
Ms. SMith = 10% of 200k = $20,000

Under this allegedly "regressive" system she pays TEN times as much taxes!

Even though the roads past both their houses probably cost similar amounts to maintain, there is some merit to the argument that those who benefit the most [NOT directly from government as such but] from maintenance of an orderly society.

That said, TEN TIMES is not enough of a differential? Why?

In reality, Ms. Smith pays an effective rate approx. 3 times higher than he does, pushing her tax burden in absolute dollars to THIRTY TIMES HIGHER.

This is rank injustice how?

FWIW, the "but she has more at stake" in the game argument is never followed through to its logical conclusion -- shouldn't she therefore have more of a say in how the game is played, IOW have more votes, shareholder style?

[newscaper]

BTW, regarding "stinginess" and "greed" (not used in this instance bu the typical charge:

Why is someone who wants to keep more of what they legitimately earned considered "greedy", while those who want to confiscate his earnings to spend as they see fit, who want something for nothing, *not* "greedy'?

[njoriole]

I think Mike L. gives the game away by constantly talking about how taxes on the wealthy have not increased ("The Bush tax cuts have NOT in any way increased the effective tax rates of individual taxpayers in the top brackets.") The obvious rejoinder to that is "So what?" By constantly calling for the wealthy (however THAT term is defined in liberal circles - and we all know it basically means anyone making more than me) to pay more and more, Mike L., et al. enagage in the never-ending class envy argument, which is to say, no argument at all. It is an indisputable fact that tax COLLECTIONS have risen dramatically under the Bush tax cuts, as they did under Reagan as well. What the government ends up doing with all that largesse, well that's another matter.

[John]

Michael K.,

I have to say, I enjoyed your post, and it has been educational and entertaining to read your "back-and-forth" with Mike L. It has amazed me how your point has been missed by nearly all the commenters. I agree with your assertion that the cry of "tax cuts for the wealthy" is a misleading charge. But as evidenced by this discussion it sure works on the base when it is repeated loud and often. Thank you for the effort in putting your case together. It was informative and enlightening.

[jimmy]

When you have a minority of voters paying the majority of taxes there's no popular political check on size and growth of government.

The politicians turn from sound reasonable policy to the act of buying votes with money they've done nothing themselves to earn. It's political check-mate. It's basically stealing and that ranks on the top ten list right up there with murder, adultry and idol worship.

[Michael W. Kruse]

Thanks for the respectful engagement of the topic, everyone. Here is some additional data:

* In 2005, the tax rate for the top 1% is 84.3% of the rate in 1979. (31.2% vs 37.0%)

* However, the tax rate for the top 1% in 2005 is 122.4% of the 1986 rate when the rate was at its lowest in the data set for this group. (31.2% vs 25.5%)

* The impact of the Bush tax cuts is that the top 1% are paying a rate in 2005 that is 94.5% of what they were paying in 2000. (33% vs 31.2%) That compares to the top 20% of taxpayers paying 92.7% of the 2000 rate. So the top 1% had a slightly smaller percentage reduction.

In light of some comments, it wasn’t my intention to take a position one way or the other concerning whether the code should be progressive or whether it is progressive enough. My intention was to point out that the tax code is progressive and the recent tax cuts have made it more progressive. I think the issues surrounding what is just in terms of a progressive tax code are complex and worth considerable reflection. Thanks to all for offering some good insights.

[sbw]

Keith: The top 1% control far more than 1% of assets.

Right at the beginning, assets mischaracterizes the issue.

It's the same problem as comparing national debt to GDP. One should compare a liability to all assets, not yearly income. Similarly, one should compare tax obligation to yearly income, not all assets.

[Jeff]

Mike L.,

The discussion is about income taxes, not a tax on assets. You keep arguing that it's unfair that people with a large asset base do not pay enough income taxes.

People with a large asset base will always be able to structure their income to lower their effective income tax rate. Unless you're proposing we drop the income tax and start taxing assets, it's a pointless argument.

Jeff

[pgl]

Odd - I left a reply to Michael's rejoinder and it did show up this morning. But now it seems to be gone. Fine as I decided to do my best to repeat my three thoughts:

angrybear.blogspot.com/2008/03/tax-burden-michael-kruse-responds.html

Incidentally, comments are always welcomed over at Angrybear.

[Michael W. Kruse]

Hey pgl, is it the comment that ends with:

"(1) This does not address the deferred taxes from Federal deficits.

(2) If you wish to focus on Federal taxation - say "Federal tax burden" rather than "all taxes".

(3) Federal policy imposes certain mandates (no child left behind for example) without coughing up Federal tax revenues to compensate.

Sorry Michael - but this was a weak rejoinder."

I still see it there at Mar 3, 5:06 a.m. I hope I didn't lose any other comments.

[Christopher Taylor]

"What do they call a conservative who has been mugged by reality?"

Even more conservative, unless he starts believing in nonsense and calls it reality.

[syn]

I'm single, 46, no children, own a small business, pay all my bills, live in a city where I don't need a car, my studio apt is 20 x 20 yet what I pay in city, state and federal tax alone is enough to provide living costs for a year for a family of four living in a modest income area.

Now how fair is this?

I would be considered 'wealthy' yet my standard of living is quite modest; the disgusting aspect is if my taxes continue to increase over the years, as I near retirement age I'll be forced to go on the government dole.

[Don Meaker]

Keep in mind that the income tax only lands on some income. Drug pushers pay no tax. Increasing value of property pays no tax. Increasing stock value pays no tax.

One famous Billionaire, Warren Buffet, is famous for using such loopholes, paying himself a minimal salary, never seling stock to avoid capital gains, and he complains that the tax code is unfair.

Lee Iacocca, in the year he turned Chrysler around, was paid by Chrysler the grand sum of one dollar, plus stock options. What quintile was he in?

One of the greatest sources of unfairness in the tax code is that the wealthy can hire lawyers and accountants, and change their behavior in ways which reduce their tax liability. If the top rate was lower, there would be less incentive to finesse the code. If the tax code was simpler, there would be less opportunity to move earnings into different tax classes.

[john s]

Historically, poor and middle class people do better when they get less free stuff from the government. When Bill Clinton was in office non military government spending as a percentage of the economy drooped about 2.5%. Median wage increase averaged about $565 a year, from $26,580 to $31,098. When the first President Bush was in office non military spending grew 2.5%, while median wages dropped $825 per year. Under the current President Bush, non military spending has once again increased as a percent of the economy, about 2%. Surprise, surprise median wages are down.

In fact, since 1946, non military spending has tripled as a percent of the economy, from 9.63% to 28.62%. Most of this increase is in the form of entitlements to the poor and middle class. During that time period real GDP growth has slowed dramatically. Big government only ends up hurting the poor and middle class by slowing the wage growth they would enjoy if they stopped asking for handouts.

[Eric]

These statistics are misleading unless you include ALL taxes, including property and sales taxes. Sales taxes are very regressive and the lowest quintile will pay far more in sales taxes than any other quintile. Once you include ALL taxes and compare it to income, you'll see that the system was actually quite flat BEFORE the Bush tax cuts.

[2020 Tax Resolution]

I am not really very much particular when it comes to taxes and legal matters. but this one can help. I just hope that you make it more simply the next time. keep it up.

[FAP Turbo]

I'm planning to apply for a Green Card (EB-5), but I have two question about this.
1. If I stay on my country most of the time, do I need to pay US tax for my earnings? (My earning is from the Internet by Google Ad Sense and other US based companies.)

2. What's the minimum days I have to stay in the US every year to maintain my Green Card status?

[Renee Taylor]

I believe that no person who is a high earner is paying the high tax imposed to them. I don’t believe they are following rules because they really don't and we do not!