The Real Tax Debate

Posted on April 7th, 2008 by Christopher.
Categories: Current Events & Politics.

Here’s a cold reality that none of the presidential candidates want to tell you: A shrinking number of Americans are bearing an ever bigger share of the nation’s income tax burden. Is that fair? is it sticking the rich with what they deserve? Or is it a sign of a growing social problem? As you file your tax return, and as the candidates cite assorted half-truths about U.S. taxes, those questions are worth our attention - as long as we face the surprising facts.

The first surprise for most people is the large proportion of Americans who actually get money back - not a refund, but a net payment-through the income tax system is huge. In 2005 (the most recent year available for the data), the bottom 40% of Americans by income had, in the aggregate, an effective tax rate that is negative: Their households receive more money through the income tax system, largely from the earned income tax credit, than they paid.

That means that the number of people who actually pay America’s income taxes-totally almost $1 trillion in 2005-is surprisingly small. Of those who filed returns(themselves a subset of the population), just half accounted for 97% of the Treasury’s total income tax revenue. The top half’s share of total payments has been growing steadily for the past 20 years. The top 10% of taxpayers kicked in 70% of the total income tax. And the famous top %1 paid almost 40% of all income tax, a proportion that has jumped dramatically since 1986.

Wait a minute. Senators Hillary Clinton and Barack Obama rail against President Bush’s “tax cuts for the rich.” How does that square with the growing share of total tax paid by the wealthy? Are the richest Americans paying so much because they’re actually getting clobbered with a higher tax rates? No. Their effective tax rate - the total tax they pay as a percentage of their income - has declined substantially. The top 1% paid an effective tax rate of 23% in 2005, down from 27.5% in 2001.

So if the rich are paying more income tax, yet are being taxed at a lower rate, there can be only one explanation. Their incomes must be growing fast, much faster than the rest of the population’s. That is what is happening. Backing in 1985, an income of $119.000 got you into the top %1 club. By 2005 it took $365,000 to get you into the club. Those numbers are not adjusted for inflation; if corrected it turns out the price of admission still rose by 72%. By contrast the inflation adjusted definition of a median taxpayer-that is someone in the 50th percentile did not budge.

Now lets consider some of the recent heated tax controversies of recent years. Did Bush cut taxes for the rich? Yes. But he cut taxes for the poor even more. If we look at the measure that really matters, the change in effective tax rates, the bottom 50% got a much bigger tax cut than the top 1%. Did the dollar value of Bush’s tax cuts go mostly to the wealthy? Absolutely. It could hardly be otherwise. Since the well-off pay the overwhelming majority of taxes, any tax cut with a prayer of influencing the economy would have to go mostly to them. You could completely eliminate income taxes for the bottom half of the population and the Treasury would hardly notice.

The real issues here are clear. One is having a shrinking minority of citizens pay most of Washington’s bills. Social cohesion falls apart. The majority who pay nothing resent those with higher incomes; the minority who pay heavily resent those who don’t pay.

More fundamental is why some people’s incomes are growing so much faster than other people’s incomes. That, and not taxes is what the supposed tax debate is really about. Which candidate will make a substantive proposal for dealing with the issue, including how low-income citizens can get some of the earning power now going heavily to better educated. It’s a lot more complicated than changing the income tax rates.

10 comments.

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ProphetJoe the Irreverent hunt n' pecked this

You’re missing the big picture, Christopher — and I point that out because you are normally quite good at seeing it.

The “have-nots” want a bigger piece of the pie (mo’ money). We could do analysis that shows parents aren’t teaching their kids to be competitive in academics anymore, or that the education system is now focused on the “lowest common denominator” instead of striving for excellence, but the fact of the matter is this: using the tax code and moving money from the “haves” to the “have-nots” (in the form of forced income redistribution) is still the easiest and fastest way to win people’s votes.

April 7th, 2008

Christine the Lioness chimed in with

It may be, PJ… and in the short term that certainly is a means to an end. But honestly, at some point, we need to start addressing this whole attitude of entitlement that seems to prevail in the low-income population.

At the point you’re earning 400,000 a year, your lifestyle probably won’t change much if your taxes reduce you to $300,000. But if you’re earning $70,000, your lifestyle is changed by reducing that to $45,000. And what constitutes middle class exactly?

My income falls in the top 15% of the country, but living in Los Angeles, I cannot even reasonably afford to own a house here. And I work my ass off to make what I make (I literally work 50 - 60 hour weeks every week) and paid a total of $110,000 for my college education (well my scholarship and parents paid for some of that) so that I could get the career I have.

I don’t mind helping people who really need it, but I am truly sick of this attitude that everyone else should hand over money to these people so that tax-funded programs can pay for the things the rest of us have to pay for ourselves.

The “Haves” have stuff because they work for it. The “Have-nots” still have a lot of stuff that they didn’t work at all for– it was just handed to them. And yet, they still think it’s unfair that the “Haves” have more.

April 8th, 2008

ProphetJoe the Irreverent scribbled

Oh, I totally agree with you. I am reminded of a guy who’s daughter was an honor student at a liberal art college and she would come home on breaks and extoll the liberal concepts she was learning — most of which bordered on all-out socialism. Her dad was an old fashioned conservative and she saw his philosophy of small government and less taxation as selfish and short-sighted. In short, she believed he was “hurting the poor” and she let him know it on every possible occasion.

Finally, one day, he had enough and sat her down for a talk. He told her he was willing to apply her liberal social policies to HER life. From now on, he explained, your 3.98 GPA will be reduced to a 2.59 (she started to object to this illogical supposition, but he stopped her) — no, because you work hard to get the 3.98 you should have to pay your fair share to society. We’re going to take 35% of your GPA and give it to all of the “needy” students in your classes who have earned a 1.00 GPA and bring them up to a passing grade level. That way, you’ll be doing your “fair share” to aid those failing students in your college.

She understood and, while I wouldn’t call her a dire-hard conservative, she certainly looks at social policies in a different way now.

April 8th, 2008

Christine the Lioness up'n wrote this

The problem is not with the concept of liberalism in and of itself. If a person is elderly, or can’t work because of an injury or impairment, etc., then I believe the rest of society has a responsibility to take care of him/her. And because individuals cannot be counted on to simply do this themselves, we do need to rely on government to make sure that person is taken care of and the rest of us should contribute equally to ensure that happens. I’m fine with that. The problem is in the implementation by the government. The gov’t has created a system of “providing for those who needed it” that also allows people to decide on their own that they don’t feel like working or they don’t feel like getting an education or they don’t feel like earning enough to support their increasing number of children that they continue to have, and those people are now lumped into the category of the people who really do need and deserve the help. One is a leech on society, the other is in a position that they cannot reverse.

At one point in my life, I was literally working three jobs to try to pay for my college loans, my apartment, etc. The fact that some people are willing to do that and some people will sit around and collect unemployment as long as they can because they haven’t found a job that will pay them enough for what they want to do, or they aren’t actively looking for a job, or they have too many kids to take care of, or they continuously get fired from the jobs they have– or quit because they don’t like to be burdened with work, is a fact of life. Both types of people will exist. But for the first group to have to support the other group is ridiculous.

I think if you’re going to go on welfare, everyone who is still paying taxes gets to read a bio about your life and your situation, and is allowed to vote on how much money you’re going to get from the pot they contribute to every month. Some people would probably bitch and moan about privacy laws, but if I’m going to be forced to pay for child number six, I should have a right to say “If you decide to have child number seven, I’m not going to continue to pay for your bad decisions.”

April 9th, 2008

ProphetJoe the Irreverent mentioned

I agree.. with 2 minor exceptions:

Jane Welfare ain’t gonna have 6 kids before I give her the gong on welfare payments — I’m sounding the alarm at 2-3!!

While I agree with your sentiment about the government helping those who TRULY need it (the infirmed, etc.) I think the government has caused quite a bit of the problem! We have gotten to a point where we tax peoples’ retirement plans in order to pay out retirement benefits… that in and of itself is strange, but that we also have to bear the burden of (i.e. — pay for) a huge bureaucracy to implement it is fuggin’ ridiculous!

The Feds and the major multi-national corporations routinely steal borrow from retirement accounts (be it Soc Security or the Ford, GM, Chrysler retirement funds) in order to operate more “competitively” Worse yet, they underfund the retirement contributions to make the books look better which allows the CEO to get an even bigger bonus — all while the retired workers face less and less coverage from retirement plans which promised a certain level back when they were working.

I think the proper Fed involvement should be to legislate that companies (including state and fed governments) must fund retirement and health benefits BEFORE the stockholders and officers reap the rewards of a profitable year. I have nothing against CEO getting obscene amounts of money for making the company and stockholders a lot of money, but I do object to them getting rich while they keep cutting promised benefits to retirees.

April 9th, 2008

ProphetJoe the Irreverent mentioned

Hey Chris,

If you can edit that entry, would you change the ) to a > on the /strike tag. It will make it much easier to read!

Thanks,
PJ

April 9th, 2008

Christine the Lioness quibbed this

I fixed it for you, Pj. -)

April 9th, 2008

ProphetJoe the Irreverent uttered

Thank you, Chris-tine! I didn’t know you could edit my comments.

But now I’m a little worried. I’ve never had a woman so in control of my digital life before… should I be worried? )

April 9th, 2008

Christine the Lioness got all philosophical

( <img src= " class="wp-smiley" /> Anything Christopher can do, I can do better… ( <img src= " class="wp-smiley" /> -) J/k.

You should probably ask Christopher about that. hehe.

April 10th, 2008

ProphetJoe the Irreverent up'n wrote this

Christopher, care to elaborate on her claim?

April 10th, 2008

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