Bell Curve The Law Talking Guy Raised by Republicans U.S. West
Well, he's kind of had it in for me ever since I accidentally ran over his dog. Actually, replace "accidentally" with "repeatedly," and replace "dog" with "son."

Thursday, April 27, 2006

Secrets and Tax Lies

The Economist Magazine ran an article called "Aprils' Hard Truth" in its April 15th edition that I found interesting. And last night, I heard a similar story on NPR. The upshot is that the share of income taxes paid by wealthy Americans has increased since 2001. The difference in the two stories was impressive. I highlight them both here because for starters, the Bush people are going to try and sell the idea that the Bush tax cuts need to be made permanent, something Congress is set to look at pretty soon. And if people are just listening to commentator spins without considering the implications, then they will buy into the entirely wrong idea.

The argument on NPR's Marketplace Report was that the rich pay more taxes. According to commentator and Wall Street Journal editorial board member, Steve Moore, the rich are not benefiting from Bush's tax cuts. They are earning less of total income and paying more of the total income. He sites IRS statistics that say "the percentage of federal income taxes paid by those who make more than $200,000 a year has actually risen from 41% to 47% in recent years". He says that the number of people earning over $50k a year has increased from 3 out of 10 people to 4 out of 10 people since 1990 (It only took 16 years!). All of this, he concludes is due to Bush's tax cuts that are "pumping steroids into the US economy creating 5 million new jobs".

I point this out because there are a number of things this slick commentator doesn't say. The Economist article accurately points out that measuring tax progressiveness and thus fairness by the percentages paid by each income group is unreliable. That can vary widely depending on a host of other factors such as a stock market crash, a housing bubble burst, inflation, etc. Then there is the difference between income taxes and payroll taxes, which hit the poorest 60% of tax payers the hardest.

Mr. Moore doesn't say that rising fuel prices and inflation are pushing up costs of living while slowly eating away at the purchasing power of a dollar. So people earning $50k now do not have the same purchasing power that they had in 1990. He doesn't tell you the percentage of the 5 million new jobs that are actually fair paying, full time positions with medical insurance and 401K plans. He doesn't point out that more families that are now considered "middle class" in terms of income and are getting hit with the AMT. Nor does he discuss marginal income tax rates, which haven't really changed for may people, and in some instances have actually increased.

The Economist is less concerned with promoting Bush's tax cuts and more focused on demonstrating why the US tax code needs to be overhauled. They point out the maze of temporary credits and write-offs, some that actually cause increases in marginal income tax rates for families. The number of pages in the U.S. code have increased by 40% over the last 6 years and there are now 582 different tax forms issued by the IRS.

If you have a system so complex that the citizens can't even penetrate or understand it, it is unjust by its very nature. So my advice: don't get "snowed" (by either Secretary Snow or Press secretary Snow) into believing that the tax cuts should be made permanent. We need a whole new tax system.


Anonymous said...

Great points, US West. Something I've always thought was a particularly sinister comparison was when conservatives argue that it is unfair that the top 5% of the income distribution pays more than half of the taxes. The extreme implication is that to be fair, each percentile group of tax payers should pay an equal share of the taxes. So the top 1% would pay 1% of the total taxes. No one has come out and suggested that but their logic of complaint stongly implies that is their goal.

The problem with that is that the top end of the income distribution controls much more of the total national income than the bottome end. For example, according to the CIA World Fact Book (see link to the right), the top 10% of the US income distribution accounts for about 30% of the total consumption in the country. The bottom 10% of the distribution accounts for less than 2%. And those numbers were from 1997...I'm sure the skew is much worse now. In a sense, conservatives are saying, "Why should I pay more taxes (note: in absolute terms) than poor people just because I'm rich?"

Essentially what the conservatives are calling for is a tax system in which that third of the total economy that is controled by the richest 10% of the population will get taxed at a lower rate per dollar than the rest of the economy.

The conservatives' spin is based on the fallacy that people are taxed. People are not taxed. Dollars are taxed. If there are a lot of dollars collected into one person's account, that person is going to pay a lot of taxes.  

// posted by Raised By Republicans

Anonymous said...

>Mr. Moore doesn't say that rising fuel prices
>and inflation are pushing up costs of living
>while slowly eating away at the purchasing power
>of a dollar.

This sounds like there's two separate things you're describing, but I only understand one. That is, it seems to me that rising costs of living reduce the purchasing power of a dollar right away -- the dollar buys less of the stuff I need. Is there another effect that's "slowly eating away" at the purchasing power of a dollar, in addition? If so, can one of you economically-minded types explain it to me?

Yes, the "top 5% pay more than 50%" is a statistical manipulation no matter how you cut it. If I understand the statistics correctly, a _flat_ tax rate would have the top 10% pay 30% of the taxes. (To winnow out what the percentages meant, I looked at the definition of a related statistic here .)

The sort of obvious counter-argument to the undertone of "top x% should pay x%" is "what percentage should the x% of people who make the _least_ money pay?" How can they be expected to pay the same _amount_of_money_, if they've got less income?

Incidentally, the CIA Factbook's household income or consumption by percentage share (which I think is what RbR is referring to) shows that those values don't vary as much from country to country as I'd have thought. However, there are some weird outliers: Colombia's percentages are 34.3% and 7.9%, both high (the bottom extremely so). Japan, Rwanda, Uganda, and Slovakia apparently have very uniform populations (21.7/4.8, 24.2/4.2, 21/4, 18.2/5.1), certainly more than I'd expected.

In Swaziland, the top 10% should be paying _at least_ half the taxes: they make 50.2% of the money. (The bottom 10% make 1%.) 

// posted by Bob

US West said...

You are correct Bob, that rising fuel costs contribute to the rising cost of living and will push up costs (reducing purchasing power) right away rather than slowly. But in addtion to that is the normal rate of inflation (that is higher than the standard metrics indicate) that also eats away at incomes over time. So a family of 4 earning $50K 10 years ago in the state of California was good money. Now it is barely above poverty line. So, you are correct that I was too free wheeling with my terms.

RBR makes an very good point that people misunderstand that it is dollars, not individuals that are taxed. A conservative once told me, surprisingly enough, that if I got stuck paying taxes, that was a good thing because it meant I was making money. I supposed that is one way to look at it.

The other nasty implication in most conservative arguments is that the poor should subsidize the rich. Why? Because the poor are poor because they are lazy. The idea is to use the tax code to punish the poor and reward the rich. Bush makes no bones about that.

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