Bearing the Burden
It’s no joke: Cutting taxes for the rich actually raised them
What’s the best way to raise taxes on the rich? Cut their tax rates. It sounds like a joke, but it’s the most sensible way to read the results of the past six years of U.S. tax policy. After the Bush administration and Congress reduced the top marginal rates, the people with the highest incomes shouldered a larger share of the tax burden.
It’s quite a burden, by the way: Fiscal 2006, which ended on Sept. 30, was the first year that the individual income tax took in more that a trillion dollars-$1,043,908,000, according to the latest report of the U.S. Treasury’s Financial Management Service.
Just to keep the books straight, here are the other sources of federal revenue: Social Security and related items brought in $837.8 billion: the corporate income tax accounted for $353.9 billion. Exercise taxes and customs duties- the source of most funding of the federal government for the first 150 years of the republic- brought in $98.8 billion (and wouldn’t it be nice if we had a government that only needed $100 billion to operate?).
Add in some miscellaneous revenue and the federal governments total revenue was $2.406 trillion. Fresh borrowing of $247.7 billion from the public and $186.3 billion from Social Security taxes that weren’t needed to pay benefits evened up the ledger to carry spending of $2.654 trillion.
Now who pays for this? The Internal Revenue Service takes a couple of years to analyze tax returns, and it has just ground out its report on the tax-paying patterns of 2004. With the help of analysts at the Tax Foundation in Arlington, Va., we observe that the top 1% of the nation’s 130 million taxpayers earned 19% of the nation’s income-1.3 trillion. To make it into this class required adjusted gross income of more than $328,048, and the average in 2004 income of the top 1% was $1 million. On their $1.3 trillion, the top 1% paid 36.9% of all federal income taxes-$306.9 billion. Their average tax rate was 23.49%
Compare these figures with 2001, the first year of the Bush administration, before those famous “tax cuts for the wealthy” had taken effect.
In 2001, the top 1% earned $1.097 trillion or about 17.5% of the nations total adjusted gross income. This group of 1.28 million tax filers had income of more than $292,912. Their average income was $857,000. On their $1.09 trillion, the top 1% paid $300 billion, or 33.89% of all federal income taxes. Their average tax rate was 27.5%
So there are the tax cuts for the rich: Lower tax rate, higher tax taken by percentage and by dollar amount. There have been no major tax law changes since 2004, so this trend probably has been carried forward. Two years from now, the IRS may even find that higher economic growth and lower tax avoidance are covering the simple loss of revenue from lower rates.
Lawrence B. Lindsey, a former economic adviser to President Bush, recently diagnosed the apparent paradox: “Lower tax rates, particularly on dividends and entrepreneurial income, provide incentives for people to give up some of their previous-economically distorting but tax efficient-behavior.”
More simply, high tax rates are wrong-so wrong that they cry out to be avoided. Lower rates are not so onerous, so taxpayers are more likely to go about their normal business without investing in the services of tax-sheltering paper transactions.
How high is too high?
A tax system may be too onerous when the total revenue it collects starts to decline. Arthur Laffer drew a famous curve on a napkin, showing that tax rates of zero and of 100% both collect no revenue and that maximum revenue will be collected at a rate somewhere in between. Laffer, however, provided no scale on either axis of his chart, and the U.S is still experimenting to find the tax rates that will extract the maximum revenues from the citizenry.
A better answer is that a tax rate is too high when it begins to suffer serious losses from diminishing returns. Taxes should not be used to change citizens behavior in ways that distort the economy.
The best answer is to start on the other side of the ledger. CUT GOVERNMENT EXPENSES to the bone, so that we need raise as little as possible. Although generating revenue is the function of a tax, the amount of the revenue to be generated shouldn’t be affected by the structure of the tax itself. The progressive income tax brings with it the governmental equivalent of Parkinson’s Law, by which government programs expand to consume the revenue available for them.