Friday, April 20, 2012

Let's Deal with Facts about Taxes Paid

The Real Tax Rates of the Rich has the facts.

And to nobody's surprise, they don't resemble at all what we're hearing these days from the politicians advocating higher taxes on the rich, but only on the rich, at least for now, in the name of fairness. After all, it's an election year.

Here goes:

"That fact that America’s tax code is progressive–i.e., the wealthy pay more–has been largely a given since the first income-tax was levied in 1862.
Yet the Buffett Rule and the ensuing debate over Mitt Romney’s taxes has painted a picture of America’s tax structure as regressive. Polls show that many Americans think the wealthy now pay a lower share than the rest of America.
While this may be true for a small number of rich people, it is broadly inaccurate. According to the most recent data from the IRS, America’s tax code remains progressive all the way up the income ladder–until you get to a tiny sliver of Americans who earn more than $10 million a year (there are about 8,000 of those out of 104 million filers).
What’s more, the wealthiest earners are paying a higher tax rate than they did in 2008.
Consider the following chart, which shows adjusted gross incomes and average tax rates, i.e., total income tax as a percentage of adjusted gross income less deficit:
We all know that the one percent (those making around $340,000 a year) as a group pay a higher rate than any other income group. Yet the new IRS data show that even the $1 million-plus earners (the top fraction of the one percent) pays the highest rate.
It’s only when you get to somewhere between the $10 million-plus earners and the “Fortunate 400″–the 400 highest earners–that the tax rates paid start to dip. And when they dip, they still dip to levels far above the average rates paid by 90% of Americans. The Fortunate 400 paid a rate of more than 18% in the latest period.
This isn’t to argue against higher taxes on the wealthy. Nor does it deny that some rich people reduce their taxes to well below the official rates through tax avoidance schemes and capital gains.
Yet the charts do support the previous findings that a growing number of today’s wealthy make their money from salaries rather than capital gains. And those top earners as a group still pay the highest rates in the country.
Discussion and Analysis
How much should each category of earner pay to the government is a common question. I guess the answer depends on what we view as fairness.
If fairness depends at least in substantial part on the individual taxpayer's ability to pay, then we should first ask how much money in total we'll pay to the government. Only thereafter can we assign each category of earner the responsibility to pay his "fair share" as a percentage of that total.
At least that seems fair to me.
Of course, our politicians don't act that way. That would require being specific, something they resist in favor of emotional sound bites. But we'll pretend otherwise in the following thought experiment.
In nice round numbers, the federal government spent about $3.8 trillion last year. Yet tax receipts were about $2.4 trillion. That leaves a shortfall of $1.4 trillion, commonly called the deficit.
On the campaign trail, President Obama has proposed the "Buffett" rule which would impose an additional tax on millionaires of approximately $5 billion annually. That leaves a shortfall of still approximately $1.4 trillion. In other words, the needle doesn't move.
Would it be too much to ask the politicians how they would intend, if they so intend, to close the $1.4 trillion shortfall, or at least a major portion thereof? Of course, their answer will be to wait until the economy recovers for economic growth to allow tax receipts to grow sufficiently to solve the deficit problem.
To which I reply, ok, then let's fantasize that we'll only need to close ~50% of the shortfall with higher taxes or less spending. That's $700 billion.
Now would it be to much to ask the politicians how they would intend to do that? Of course, their answer will be a combination of both higher taxes and lower spending. To which I reply, ok, then which spending will be reduced by ~$350 billion and which category of taxpayers will pay the additional $350 billion in taxes?
See how simple this could be, at least for starters?
A Few Caveats
Of course, more money to the government will mean more spending by the government. It always does.
And taking more money from some taxpayers to enable the government to redistribute a portion of that money to others will mean less economic growth and fewer tax receipts. It always does.
And committing to reduce government spending won't mean reduced government spending. It never does.
But let's try to get the politicians to play some version of the aforementioned accountability and transparency game anyway. If nothing else, it would be fun to watch them squirm.
Thanks. Bob.