TAX POLICY - PERSONAL
INCOME TAXES/ WELFARE MYTHS v. REALITIES
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The Truths behind
Personal Income Taxes and
Tax "Policy" being formulated
in this section are to examine whether
(a) the rich in the U.S. are over-taxed,
(b) the poor are under-taxed, and if
(c) the 2001 tax cuts help the rich more than the poor or vice versa.
This section is probably best
introduced by this recent
the Bush administration draws up plans to simplify the tax system, it is
also refining arguments for why it may be necessary to shift more of
the tax load onto lower-income workers [our emphasis]. Economists
at the Treasury Department are drafting new ways to calculate the
distribution of tax burdens among different income classes, which are
expected to highlight what administration officials see as a rising tax
burden on the rich and a declining burden on the poor. The White House
Council of Economic Advisers is also preparing a report detailing the
concentration of the tax burden on the affluent and highlighting
problems with the way tax burdens are calculated for the poor....The
Treasury Department is working up more sophisticated distribution
tables that are expected to make the poor appear to be paying less in
taxes and the rich to be paying more [our emphasis]...Answering
critics who say the working poor do face high taxes because they pay
high Social Security payroll taxes, outgoing White House economic
adviser Lawrence B. Lindsey told the AEI tax forum that the 12.4 percent
Social Security levy should not be considered when tax burdens are
calculated. Lindsey said the Social Security tax is ultimately returned
to the taxpayer as a benefit....[hilarious isn't it!]...William
W. Beach, an economist at the Heritage Foundation think tank, said he
was sympathetic to Lindsey's argument that the Social Security tax is
not really a tax. But, he said, it was a dangerous argument for a
Republican to make. 'Do I allow
defense spending to offset my income taxes since I like to be defended?
Do I allow road taxes to offset my profits taxes because I use the
roads?" he asked. "If you do start down that road, it's hard
to see anything as taxes.'..."
1. What is the estimated Federal tax burden and the
pre- and post-tax income of individuals in the recent past?
See what the Federal
Reserve's report on Tax Rates and Income Distribution in 2001 has to
say below. According to them, the richest portion of the population saw
NO increase in the effective federal tax rates over the
period of 1979-1997, but they are the only ones who have seen a dramatic
increase in their pre-tax income and after-tax income (~157%) during the same
2. Income gains in ~2 decades, by income bracket
If the above data is confusing we recommend you review
the charts that follow, starting with this data from the
Congressional Budget Office (CBO), presented by
CBPP. It essentially highlights the seeming contradiction that
even though the effective Federal Tax rate on the rich is the highest
(not unexpected), the rich have been getting far far richer than almost
anyone else in the U.S., in the past couple of decades.
3. What about
the statement that the richest few percent pay the biggest percentage of
This seemingly "unfair" situation can be explained in various
(a) For example, as WyethWire explains:
a nation with 10 taxpayers - nine "lucky duckies" who
earn $10,000 per year and one guy who earns $100,000. And
suppose that everyone in the country pays a flat tax of 10
percent. What could be fairer?
But watch what happens. Total tax revenue in the nation equals
$19,000 (1000 each from the 9 and 10K from the top guy). So
under the fuzzy math of the Wall Street Journal, I can
breathlessly report a flat tax means that the richest 10 percent
are paying 52 percent of the taxes, and "Top 50
Percent" - five guys - are paying 73 percent of the taxes.
(b) Joel Friedman and Isaac Shapiro show
clearly that the rich pay more Federal income taxes because they earn most of the
money as well, but they have a disproportionately lower total tax burden
when all taxes are included (e.g. payroll taxes). Bold text below is our
only the percentage of income taxes that the top one
percent (or the top five percent) of the population pays,
however, overstates the degree to which these individuals are
shouldering the overall federal tax load. CBO found that
the top one percent of households paid 23.0 percent of all
federal taxes in 1997, including payroll, excise and other
federal taxes; the top five percent paid 39.1 percent of total
federal taxes....the differences reflect, in large part, the
impact of the payroll tax, which falls more heavily on lower-
and middle-income households than income taxes do. The
top one percent of the population, for instance, pays only 4.2
percent of the payroll taxes.
out why the top 5% of earners pay roughly 35% of the taxes - because they
earn 34% of the money!
4. What is the
real marginal tax rate for the poorest segment of the population?
DeLong says (bold is our emphasis),
2001 tax cut... Let me give you some marginal tax rates...
a mother with two kids earning $24000: 68% (she loses the last of
her food stamps, and her earned income tax credit phases out)...
a doctor making $200,000: 36.4%...
an executive making $1,000,000: 40%...
Any decent supply-sider would say that the real place where marginal tax
rates needed to be cut in 2001 was around the $25000 a year zone: the
place where the phase out of the earned income credit makes marginal
rates astronomical. We economist types were never able to interest
Clinton and company in such a proposal--at a gut level, Clinton simply
didn't get the importance of lower marginal rates so that people don't
get hit in the nose by a 2 x 4 when they work more hours and the IRS
snarfs most of it. Larry Lindsey is supposed to have led a charge to get
a proposal to "deal with the EITC phaseout problem" into the
2001 tax bill, but he got absolutely nowhere. Bush, Cheney, and their
personal staffs don't resonate with the problems of mothers of two
making $12 an hour... mothers of two making $12 an hour don't give big
to Republican presidential candidates, or show up at the $1000 a plate
dinners that are what presidential candidates do day after day these
days. So we got a tax cut that gives 40% of its notional dollars to
those making more than $300,000 a year whose marginal tax rates are much
lower than those of the mother of two earning $12 an hour. (Larry
Lindsey keeps saying that they'll come back to it and fix it; but the
word is that he's about to get "invited" to "spend more
time with his family.")..."
Brad says a few more interesting things about the fiscal policy and
tax/subsidy gifts to the rich in the current administration, not to
Government spending has shot up leaving our long term fiscal health in
great jeopardy. Read
more on his site.
5. How does the federal tax
rate on a median income family compare over the years?
Isaac Shapiro of CBPP shows
two interesting bits of information we need to keep in mind as we
evaluate whether tax rates are high or low. The bottomline is that a
median income family is paying a federal tax rate today that is nearly a
4-decade low. Federal tax rates of those in the middle of the income
distribution are at a > 2-decade lows.
6. The Myth of High Tax Rates
(when compared to GDP)
Isaac Shapiro of CBPP also
discusses the tax rates in relationship to GDP and how those rates
have been being cited as having hit a Post-WWII high in 2000 and above
average in 2001. He explains clearly, as Alan Greenspan (Federal
Reserve Chairman) also pointed out, why using such a measure as a tax
rate is incorrect and misleading. The reasons include:
(a) Capital gains taxes are counted as part of Federal Tax receipts ,
but capital gains income on which those taxes are based are NOT counted
in the GDP! Given the surge of capital gains taxes in the 1990s due to
the stock boom, this adds a significant distortion to the true tax rate
picture if the tax/GDP measure is used.
(b) Tax rates on higher-income people are nominally higher, and as more
income is concentrated amongst the wealthy, the tax receipts as a
function of GDP are higher. This is borne out by the data in item 1
7. Who are the
so-called experts on tax policy being cited these days?
Leavitt has done some interesting research using the above WP
article that kicked off all this. He looks at the so-called policy
experts and such the article cites, and policy talking points it cites
and finds that Conservative or Right-wing representatives drastically
outnumber any on the left. Read his article!
fundamental question: why should the rich pay more taxes than the poor?
I'm all for paying low taxes folks, but realize that the rich benefit a
lot more from Government than the poor - so there is nothing
illogical about the rich paying more taxes. Want to know why? Level
Gaze tells us some of the reasons.
And, remember, as the Federal Reserve's data shows, the richest have the
greatest proportion of pre-tax and after-tax income.
9. Whom does
the 2001 tax cuts benefit by and large? The rich or the poor?
The charts below should make that clear! The rich of course!
Tax Policy? Yes, it's possible.
Paul Krugman explains how our conservative leaders are hatching some
plans on this front. We quote:
by the midterm election, key conservative ideologues have now declared
their support for tax increases - but only for people with low incomes.
The public debut of this idea came, as such things often do, on the
editorial page of The Wall Street Journal. The page's editors, it seems,
are upset that some low-income people pay little or nothing in income
taxes. Not, mind you, because of the lost revenue, but because these 'lucky
duckies' — The Journal's term, not mine — might not be feeling a
proper hatred for the government. The Journal considers a hypothetical
ducky who earns only $12,000 a year — some guys have all the luck! —
and therefore, according to the editorial, 'pays a little less than 4%
of income in taxes.' Not surprisingly, that statement is a deliberate
misrepresentation; the calculation refers only to income taxes. If you
include payroll and sales taxes, a worker earning $12,000 probably pays
well over 20 percent of income in taxes. But who's counting? What's
interesting, however, is what The Journal finds wrong with this picture:
The worker's taxes aren't 'enough to get his or her blood boiling with